Vaca Muerta Investment Gains Momentum

In the last few weeks, several major developments have bolstered the government’s vision for the energy sector – particularly Argentina’s world-class shale resources – to help drive the nation’s economic recovery. Announced reductions in subsidies and price distortions have supported the early 2017 agreement between oil majors, the government and unions to boost shale investment, particularly in the Vaca Muerta play. There have also been significant drilling advances at YPF, as well as announcements of key private sector infrastructure investments.

Upon assuming office in December 2015, President Mauricio Macri inherited a nation replete with economic woes, market distortions and an inability to tap international financial markets. His populist predecessors had left the energy sector debilitated, with shortages, plunging domestic production and a huge increase in imports – particularly natural gas bought at expensive international spot prices. The country had long ago lost its energy independence and pioneering role in natural gas development in the 1990s and early 2000s.

Many of Macri’s measures to redress these economic distortions are now starting to show positive results. Indeed, many of the highly touted shale plays in Argentina are experiencing an increase in investment and production. According to some estimates, the output from Vaca Muerta and a few other unconventional deposits are beginning to offset the country’s declining conventional oil and gas production that had cost the country its energy independence. This was largely due to the critical deal facilitated by the Macri administration earlier this year, in which Pan American Energy, Chevron, Dow Chemical, Shell, Total and YPF commit to invest a combined $5bn in 2017, with the intention to double that investment level in the coming years. More recently, the Techint Group announced that it will invest $2.3bn in Argentina’s unconventional plays.

Amid this investment wave, there have been notable efforts to address two key challenges: high drilling costs and insufficient infrastructure. IOCs have repeatedly noted the high costs of drilling unconventional wells as perhaps the key challenge for making Vaca Muerta economically viable. Thus, in the early pilot projects, YPF and its partners have focused on reducing drilling and completion costs. According to presentations by YPF officials, the company has been able to halve its drilling costs from $16mn per well when the first unconventional ones were drilled in 2013. Drilling costs are likely to continue decreasing, given YPF’s continued efforts and IOCs’ new commitments.

Separately, pipeline capacity has emerged as a possible bottleneck for the ramped up shale output, particularly natural gas. The Techint Group, owner and operator of pipeline company TGN, has discussed building new pipeline infrastructure and capacity. More importantly, Pampa Energia – owned by Marcelo Mindlin – announced this week that its gas distribution company TGS will build an $800mn pipeline and gas treatment plant to transport output from Vaca Muerta.

All of these developments clearly support the government’s efforts to boost output and address key barriers. In turn, the level of investment commitments – both international and domestic – to Argentina’s energy sector have buoyed the Macri administration. Indeed, the latter was confident enough to announce the liberalization of the oil market only weeks before the 22 October midterms (please see our 5 October Latest Analysis). The nation is now focused on the looming electoral battle between Macri-ally Maria Cristina Vidal and former President Cristina Kirchner, which is being touted as a de facto referendum on the administration’s pro-market economic model. However, in our view, energy developments will be of even greater importance when Macri is up for re-election in 2019.