Argentina was poised to fix local oil prices at $45 a barrel on Thursday, almost 30 per cent higher than Brent crude prices, in an attempt to rescue one of the government’s great hopes for the country’s economic recovery — its giant Vaca Muerta shale field.
The executive decree, expected to be signed as soon as Thursday, is aimed at propping up production and investment in one of the world’s largest shale deposits, where Argentina has long hoped to emulate the US shale boom. It comes as Argentina’s economy buckles under the weight of an impending debt default and the continuing fallout from the coronavirus crisis that contributed to a collapse in international oil prices.
“If we let investment fall, we run the risk that when [international] prices rise again, we will not be producing enough oil and gas,” said Matias Kulfas, minister for productive development.
“The impact of the quarantine has been very serious,” he added, pointing out that local demand for petrol fell by 80 per cent immediately after Argentina’s lockdown was implemented in mid-March.
The new price will be maintained until the end of the year, unless international prices rise to $45 a barrel beforehand and remain at or above that level for 10 days, in which case the price floor will be eliminated and the use of international prices will resume, according to the ministry.
Once an exporter of oil and gas, Argentina was close to recovering energy independence last year and reversing a deficit that has hobbled the economy for more than a decade. A hefty energy import bill has drained scarce foreign currency, helping to push the country towards what many fear could be its ninth sovereign debt default later this month.
Oil companies welcomed the ability to sell their oil at more than double the current market rate for local crude, at around $20-$25 a barrel, while prices at the pump have remained stable in recent months. But many said they would prefer to operate in a free market in the longer term.
Miguel Galuccio, chief executive of Vista Oil & Gas, one of the top producers in Vaca Muerta, warned that without the new price regulations, Argentina risked a mortal blow to the future of the Patagonian shale field.
“We are facing an abyss or a great opportunity, with nothing in between,” he said. “That bridge [provided by higher local oil prices] is essential. If we lose equipment and knowhow we won’t be able to restart, and in that case it wouldn’t just be a case of Argentina losing a few companies, it will have lost a great opportunity to become a net exporter of energy, instead forced to import it.”
But Francisco Monaldi, a fellow in Latin American energy policy at Rice University’s Baker Institute in Houston, doubted whether Vaca Muerta, which means “dead cow” in Spanish, will ever achieve its full potential, even though he considered it to be an even better resource than the highly productive Permian shale field in Texas and New Mexico.
“Vaca Muerta might not be dead, but it is a zombie for now,” he said, arguing that fixing local oil prices at $45 is “unlikely to attract significant investment” given the current environment of massive spending cuts by international companies. “There has already been a tremendous collapse in drilling activity [in Vaca Muerta],” he added.
Oil executives insisted that factors affecting global competitiveness — such as the stability of laws and infrastructure, which are problems in Argentina — are more important than short-term prices for the long-term fortunes of Vaca Muerta. “It’s not what’s below the ground, but what’s above it,” said one industry representative.
A further concern is what would happen if Argentina defaults on its sovereign debt, given the impact it could have on companies’ ability to finance projects.
“A default would be important but not definitive,” said Daniel Gerold, who runs G & G Energy Consultants in Buenos Aires, pointing out that state oil company YPF, a bellwether for the economy, was able to issue debt when Argentina was last in default from 2001-16.
“The good news is that Vaca Muerta is much easier to restart than other [energy resources],” said Mr Monaldi, pointing out that shale fields are quicker and cheaper to reactivate than traditional oilfields, as shown by US shale production’s sharp recovery after the collapse in prices in 2014.
So if oil prices rebound, as he expects, “that would be a great opportunity for Vaca Muerta”.