The economic and financial crisis in Argentina is creating a lot of new headwinds for the country’s aggressive push into the Vaca Muerta shale. A new report says that the crisis offers an opportunity for a course correction.
“A silver lining to Argentina’s financial crisis is an opportunity to rethink its faltering energy plan,” Tom Sanzillo and Kathy Hipple wrote in a report for the Institute for Energy Economics and Financial Analysis (IEEFA). The country’s strategy is “now overly dependent” on fracking in the Vaca Muerta.
Argentina’s strategy laid out last year calls for doubling oil and gas production within five years, mainly from the Vaca Muerta, in an attempt to offset declines from aging conventional fields. A surge in output would meet domestic needs, with growing volumes destined for exports. Against the backdrop of an economic and currency crisis, export sales become all the more important as a source of hard currency.
“The plan, however, is failing to meet its goals and has become a drag on Argentina’s economic recovery,” IEEFA analysts wrote. “The Vaca Muerta asset is at risk of becoming an Argentine liability.”
As they point out, the whole concept of economic development via the shale business rests on faulty logic. The U.S. has added millions of barrels of daily oil production over the last decade, and is now the largest producer in the world. Yet, the shale industry has been burning through cash since its inception.
In the second quarter of this year, the industry collectively posted a small positive cash flow number, which is actually one of the best results on record. Prior to that, mountains of debt have been the main theme for U.S. shale drillers.
There are plenty of ways to measure this phenomenon. Nine in 10 U.S. shale companies are cash flow negative. Since 2012, despite dramatically ramping up production, North American shale companies have totaled roughly $200 billion in negative cash flow. More than 190 North American oil companies have declared bankruptcy since 2015. And yet, it arguably took until this year before Wall Street really fell out of love with the industry.
A further reckoning looms just over the horizon. As of July, only about $9 billion in shale debt is set to mature in the remaining part of 2019. But around $137 billion in debt comes due between now and 2022, which means that many more bankruptcies are likely. On Thursday, Alta Mesa Resources became the latest victim, declaring bankruptcy “amid collapsing finances and an SEC investigation into possible fraud,” according to the Houston Chronicle.
It is from this story that Argentina is drawing its inspiration. However, Argentina could make a plausible case that it will learn from the U.S.’ mistakes. As of now, the oil majors are increasingly dominating the shale industry, with ExxonMobil, BP, Chevron and ConocoPhillips set to account for the lion’s share of production growth in the Permian going forward. They make the case that they will use their scale to finally make shale a profitable endeavor. That remains to be seen.
In Argentina, there is overlap in the cast of characters. Exxon and Chevron have a large presence, along with Royal Dutch Shell and a handful of other multinationals. Partially state-owned YPF is leading the way. They have succeeded in ramping up shale gas production in the last year or so, after more than a half-decade of disappointing results. Gas output in Argentina recently hit a 14-year high.
But the gains have tracked below targets, averaging around 5 percent growth per year, compared to the country’s national energy plan of around 15 percent per year. “The design of the plan is unachievable, having failed to account for high production costs, unavailable technological assets, unstable policies, weak foreign partners and a changing global market,” IEEFA analyst said in their report. “Current conditions do not support such aggressive production goals.”
In any event, the degree to which the Vaca Muerta has been a “success” has been the result of heavy state subsidization. Argentina’s government said a floor price of Vaca Muerta shale gas at $7.50/MMBtu last year, which increasingly put stress on government budgets as production continued to climb. That forced the government to backtrack on some of its price supports, which angered the oil industry.
Moreover, Argentina’s shale development is concentrated in Neuquén, far from the coast. There is inadequate infrastructure to support a large-scale ramp up in production. IEEFA estimates that the capital needed to both drill and develop oil and gas reserves and also build out the necessary infrastructure could total as much as $50 billion. “At this time, there is no money to support such infrastructure expansion,” IEEFA analysts wrote.
Private companies are unlikely to pick up the tab, especially with capital controls, fuel price controls, inflation and a country in economic crisis. And with the government in danger of default, it too cannot afford the outlays.
Finally, it is probably the worst time to be trying to build an economy based on shale. For one, oil prices are low and are unlikely to rally for the foreseeable future. As a high-cost player, there is little room to edge into an oversupplied market. Moreover, over the long-term, peak demand looms.
“The unconventional oil and gas model has not produced profits in the United States,” IEEFA concluded. “Financial success from unconventional production in Vaca Muerta is even more remote.”
“There may be more opportunities in renewable energy than when Argentina's energy plan was crafted two years ago,” IEEFA concluded. Renewable energy is deflationary, the analysts argue, which would help to offset Argentina’s rampant inflation.
For now, there is little sign that Argentina is slowing down. On Thursday, the U.S. government threw its support behind the Vaca Muerta, with the Overseas Private Investment Corporation (OPIC) approving $300 million in financing for Vista Oil and Gas Argentina, a small shale company in the Vaca Muerta.
Political support, to date, is also widespread. Developing the Vaca Muerta has been a signature agenda item for President Mauricio Macri. But Alberto Fernández and Cristina Fernández de Kirchner are also on board. Just days ago, Cristina (as she is known in Argentina) shot down notions that she is against multinational oil companies. “It was me who made the contract between YPF and Chevron,” she boasted at a public forum promoting her book.
By Nick Cunningham of Oilprice.com
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