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ECONOMY | 25-04-2020 11:32

Pandemic, plunging oil prices and default – a killer combo for Vaca Muerta

Halt in activity and slump in prices is having a negative impact on the potential “gold mine” which is Vaca Muerta shale.

With world oil prices at their lowest in 21 years for lack of storage, a barrel of WTI, the Texas oil which is the benchmark for the United States, has quoted negative for the first time in history this week, falling 37 percent in a single day. 

A barrel of Brent, the global benchmark also followed by Argentina, was US$25 midweek but also trending downwards as envisioned by representatives of the local industry. By Thursday, it was just US$21.78.

Such prices continue to have a negative impact on the potential "gold mine" which is Vaca Muerta shale, an impact compounded by lockdown and the possibility of default.

The plunge in world oil prices is explained by the fall in demand and by storage capacity reaching its limits. The generalised isolation generated by the advance of Covid-19 has halted the main consumers: the industry itself, aviation and other means of transport. While the fall of Brent is less steep, the production cuts by OPEC (Organization of the Petroleum Exporting Countries) to sustain the price did not bring the expected relief.

"Daily world demand is 100 million barrels but demand has shrunk by 30 million. OPEC cut production by 10 million but it should have been 25 million to be significant," a local oil company recapitulates.

Investment need

Vaca Muerta would need to put together US$ 20 billion of investments annually in order to be able to generate the shale oil and gas which feeds the illusion of administration after administration of correcting Argentina’s current account deficit. T

Today’s perspectives of a possible default on the foreign debt following the presentation of a debt-restructuring offer by Economy Minister Martín Guzmán, make it difficult to attract investments in a scenario hit by the fall in prices.

“This is a cycle which will last while the pandemic is not brought under control,” says former Energy Secretary Jorge Lapeña. “Today’s prices are illogically low but on the basis of day-to-day transactions. The worst thing we can do is take a long-term view with the prices of today’s cycle.”

And amid the pandemic, compulsory social isolation joins that combo – due to falling fuel consumption but also the sector’s negotiations with the trade union to reach a wage agreement which enables workers to survive.

"They are 60,000 people and what they’re seeking is to avoid dismissals,” said a source in the sector.

"The Vaca Muerta project is dead in the water. We don’t know the costs and the oil corporation has overacted those costs. If they ask for US$54 a barrel, we are in default because that price cannot be guaranteed – it will have to be totally re-evaluated,” adds Lapeña.

At the level of production, the main companies have their refineries working at 50 percent of capacity, which in some cases fall to 35 percent. Meanwhile petrol sales have fallen 80 percent, diesel by 40 to 50 percent and jet fuel for aircraft by up to 95 percent. The dream of Vaca Muerta fades with these falling oil prices.

‘Barril criollo’

In recent weeks the oil companies have requested a support price – a “barril criollo” at US$54. In Lapeña’s view, that is "exorbitant" and the government should fix emergency regulated crude prices which remunerate the real costs of extraction per basin.

"Otherwise it’ll be like the spaghetti (referring to the recent overpriced purchases of foodstuffs by the Social Development Ministry). The State has to avoid the oil industry going bust but should seek a fair price, not guarantee extraordinary profits," he adds, thus permitting petrol prices to be lowered.

Meanwhile, exports are in line with the falling demand and the price war to sell. Within that context of falling prices, there is a request by the oil-producing provinces to lower the export duties on crude to zero. Those export duties are eight percent and in some cases the final price of sales abroad end up being US$10 or less.     

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Patricia Valli

Patricia Valli

Editora de Economía y 50y50 de Diario Perfil.

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