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ECONOMY | 23-04-2019 17:22

Debt ghosts return to rattle Argentina's push for shale greatness

Production is creeping up in Vaca Muerta. But fears the government is losing the battle to contain inflation and return to economic normalcy are pushing up bond yields to the highest since the country was last in default.

To replicate the kind of shale boom taking place in the Permian Basin, in the southwestern part of the United States, Argentina first needs to convince investors it can avoid another financial crisis.

Production is creeping up in Vaca Muerta formation, where about 1,000 wells have been drilled since development started more than six years ago. But fears the government is losing the battle to contain inflation and return to economic normalcy are pushing up bond yields to the highest since the country was last in default.

That’s putting off oil investors and preventing Argentina from fully exploiting one of biggest and best shale deposits in the world, according to Energy Secretary Gustavo Lopetegui.

“With yields that Argentine bonds have today it’s very difficult to justify any project, even if the quality of the resource is very good,” Lopetegui, a former airline chief executive officer who took over the energy portfolio in January, said in a Bloomberg Television interview in Buenos Aires.

Rock quality in Vaca Muerta, a Maryland-sized formation in Patagonia, is highly regarded across the industry. Engineers were recently impressed by the longest wells yet, with horizontal sections of four kilometres (2.5 miles). But it’s not enough to mitigate the cost of raising money, Lopetegui said. That’s jeopardising the government’s target for annual investment growth of 10 percent to 15 percent in shale.

Spending was by no means insignificant last year, with drillers injecting more than US$4 billion.

This year, state-run YPF SA will invest US$1.5 billion in shale oil. Exxon Mobil Corp. is also on the cusp of spending US$800 million a year to ramp up development, Lopetegui said. That’d come after it bought a 21-percent stake in November in a pipeline that transports crude from Vaca Muerta.

“They are very, very excited – they say the quality of the rock is much better than what they have in the Permian,” Lopetegui said.

Exxon declined to comment.

Lopetegui acknowledged that US$800 million a year is “peanuts” for an oil major like Exxon. But if Argentina could lure several similar investments, he said, that’d be enough to help transform Vaca Muerta into a rival to US shale plays.

A few hundred million dollars a year can make all the difference. If drillers spend US$5 billion a year in Vaca Muerta, production in five years can soar to more than the equivalent of a million barrels of oil a day, according to Houston-based consulting firm Wood Mackenzie. If they spend just US$3 billion, output would stall at around 400,000 barrels.

Permian fields in western Texas and southeastern New Mexico produce about four million barrels of oil a day.

Enough light oil is already being produced in Vaca Muerta to turn Argentina into a regular exporter in the second half of the year, Lopetegui said.

There are also big plans afoot for exports of shale gas.

Pan American Energy Group, whose owners include BP Plc and China’s CNOOC Ltd., is mulling construction of a liquefied natural gas plant in neighboring Chile, Lopetegui said. After sending the gas across the Andes through existing pipelines, it’d be liquefied and shipped from the Pacific.

A Pan American spokesman didn’t immediately respond to a request for comment. YPF is also searching for partners to build an LNG terminal on Argentina’s Atlantic coast.

Currently, Argentina buys LNG to meet high demand in winter months. But if Vaca Muerta grows as planned, in 2021 the nation will no longer need to import tankers, Lopetegui said.

by by Alix Steel and Jonathan Gilbert, Bloomberg

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