Vaca Muerta and its huge potential

Argentina is taking steps to rebuild its oil and natural gas production after a year of decline, but if it wants to make Vaca Muerta, one of the world’s largest shale plays, a global exporter, Latin America’s third-largest economy must create the conditions to attract investment.

President Alberto Fernández appears to be taking a shot at this. In his first year in office, he suspended the 8% tax on oil exports, temporarily propped up crude prices, and introduced an incentives program for boosting gas output. His energy team is now working on legislation to provide tax stability and loosen restrictions on accessing foreign currencies and moving money in and out of the country.

The goal, his team has said, is to rebuild confidence in the business, which has dimmed since a worsening financial crisis now in its third year deepened capital and price controls from August 2019 and led to tight controls on accessing dollars to finance investments and pay debts.


Global Competition

For Argentina to compete for capital against Brazil and Guyana, the other large oil resources in the region, Eric Dunning, managing director of Chevron in Latin America, said at the event that Argentina must provide a stable, predictable and transparent regulatory and tax environment, market-based pricing, access to foreign exchange markets, the ability to repatriate cash to pay loans and dividends, and automatic and transparent rules for oil exports.

If it can, production could surge, he said.

“With the right investment climate, we believe Vaca Muerta could double Argentina’s crude oil production in a few years and generate crude oil exports of half a million barrels per day,” Dunning said.

A Focus on Efficiency

José Luis Manzano, chairman of Integra Capital, an investment fund with interests in Vaca Muerta, said Argentina faces no choice but to improve its investment conditions to bring down financing and operating costs if it wants Vaca Muerta to be developed.

“In a world that is moving to renewables, expensive oil and gas has no room,” he said. “Unless you are producing cheap oil and cheap gas in 2040, you will be out of the picture.”

From Permian to Argentina?

Despite its uncertain conditions, Argentina could see an increase in shale investment from an unexpected source: the US.

Vera De Brito de Gyarfas, an energy expert at Mayer Brown, a law firm in Houston, said the decline in global oil prices and demand has pushed many independent companies to file for bankruptcy protection in the US, leading to a consolidation of that shale market. At the same time, US President-elect Joe Biden has suggested that he could stop issuing drilling permits for federal lands.

Lisa Viscidi, an energy expert at the Inter-American Dialogue, an international affairs think tank in Washington, is not so certain. If Biden restricts new licenses on federal lands, that would affect acreage that accounts for about a quarter of US oil and gas production, but not the big shale area in Texas, she said.

“There are still lots of new opportunities for drilling on non-federal lands” in the US, she said, adding that she doesn’t think there could be a “sudden flight” of shale investment to Argentina.

The issue is more whether Argentina can address its own bottlenecks in investment like price controls, restrictions on the repatriation of profits, and the general lack of uncertainty about future energy and economic policies,” she said. “Those will have more of an impact on Vaca Muerta than what happens in the US.”