Argentinian Provinces Compete for Vaca Muerta Investment

Just ahead of a halt on government announcements in the campaign for the 11 August primaries, President Mauricio Macri inaugurated a 140km section of road in the western province of Mendoza on 15 July. The road is intended to improve logistics for developing the province’s section of the Vaca Muerta shale play.

Standing next to the outgoing local governor, Alfredo Cornejo, Macri said that the new paved Route 40, which allows travelers to save up to 100km on their way from the provincial capital to the southern district of Malargue, was “the type of infrastructure that the province needs in order to grow and develop.” Macri and Cornejo are allies in the ruling Cambiemos coalition.

Notably, Mendoza has been speeding up its effort to kick-start E&P on its side of Vaca Muerta. Of the shale play’s roughly 36,000 square kilometers, its northern 8,700 square kilometers are in the southern part of Mendoza. This portion of Vaca Muerta is rich in shale oil; accordingly, Mendoza is believed to house roughly 8 bcm of oil.

The local authorities acknowledge that they are lagging behind in the development of unconventional resources compared to their neighbors to the south, Neuquen. Just over a year ago, in March 2018, Governor Cornejo signed a decree setting the regulatory and environmental conditions for fracking in the province. However, he also said that the province needed to improve infrastructure and services in its scarcely populated southern region.

The person tasked with bridging the gap is provincial Energy and Mining Secretary Emilio Guinazu Fader. “Our main objective is to attract investors and to provide help from the government with the necessary infrastructure,” says Guinazu Fader.

One of the main projects is a 3,500-hectare service hub in the hamlet of Pata Mora in the district of Malargue, right on the border with Neuquen. The provincial government has already obtained the land and expects to make progress in the project by the end of 2019.

Mendoza has a tradition of E&P, but activity has declined over the last decade. The province currently accounts for around 15% of the country’s total oil production. Mendoza is known globally for its production of wine, most notably malbec, a trademark for Argentina. Governor Cornejo, however, has said that “more people can make a living out of energy than wine.”

In April 2019, Mendoza granted its first concession to explore and develop shale oil to Phoenix Global Resources. Then, in May, YPF announced the development of 34 wells for a total investment of $100mn. In both cases, in order to encourage the investments, the provincial government granted a reduction in the royalties that companies must pay. The province has said that it will consider these benefits on a case-by-case basis.

Like almost all provinces in Argentina, Mendoza is electing a new governor this year. With no re-election allowed, Cornejo will seek a seat in Congress instead and has picked Mendoza City Mayor Rodolfo Suarez as his candidate for succession. In the primaries held on 9 June, Suarez won the nomination of the ruling Mendoza Cambia coalition, whose three candidates totaled 43% of the vote versus 35% for the Peronist opposition. This positions the ruling party well to win the gubernatorial race, which is scheduled for 29 September. A victory for Suarez would mean a continuation of pro-investment policies. The opposition candidate is Senator Anabel Fernandez Sagasti, a supporter of former President Cristina Kirchner’s, but at this stage she has only a 25% chance of winning, in our view.