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OPINION AND ANALYSIS | 16-11-2019 10:00

Vaca Muerta waits for Alberto’s calling

Vaca Muerta is no longer a dream, but by no means is it the only solution to Argentina’s chronic economic problems.

We find ourselves in the tough situation of looking for rational reasons to be optimistic about the future of Argentina, and among the eternal potentialities of this troubled land is its opportunity in the energy sector. Not only was Argentina an early player in the world of oil and gas, founding state-owned energy firm YPF in 1907, but in recent years it has confirmed its potential with the world’s second-largest shale gas reserves and the fourth-largest shale oil reserves, concentrated in the Vaca Muerta formation.

It has become commonplace to refer to the “opportunity” of Vaca Muerta. Pretty much every politician speaks about it, while most economists close to either president-elect Alberto Fernández or the outgoing Mauricio Macri put together projections regarding the possibility of reverting the country’s historical dollar deficit through energy exports.

Vaca Muerta is no longer a dream, but by no means is it the only solution to Argentina’s chronic economic problems. Those, of course, are a consequence of our political class and their incapacity to come together and address structural problems from a long-term perspective. Yet, Argentina does have an enormous economic opportunity to become a global exporter of oil and gas because of Vaca Muerta, which at the same time would cause troubling consequences for the environment. As journalist Uki Goñi has reported for The Guardian, local and indigenous populations have begun to feel the collateral effects of fracking, the methodology used to fracture the shale rock and extract hydrocarbons. These include ill health for people and livestock, water pollution, and the possibility of accidents such as well explosions. One such recent one lasted 24 days, spewing gas into the air, forcing a team of experts to fly in from Houston with 56 tons of equipment to put it out.

While there is a debate about the use of hydrocarbons in a world where climate change is accelerating, Vaca Muerta is indeed a reality that Argentina is trying to exploit, and one that has the capacity to generate some US$10 billion a year in exports by 2014, according to YPF’s estimates, a number that could rise to US$20 billion by 2029- 2030, providing much needed hard cash. Yet, by no means are these figures a done deal, as they are based on a series of factors that the Fernández administration needs to get right. At current rates of investment of some US$5 billion to US$6 billion a year, it would take some 100 years to extract the shale oil and gas, according to Pan American Energy CEO Alejandro Bulgheroni. Sources in the industry suggest some US$15 billion to US$20 billion are needed yearly to fully tap into its potential.

In a brilliant column by Perfil CEO Gustavo González titled “Alberto, the hyper-polyglot,” the former director of Noticias magazine notes that Alberto seems to have inherited the Peronist gift of telling everyone exactly what they want to hear in order to get them on board with his project. Alberto, of course, must figure out how to keep together a motley crew of Peronists from across the political spectrum, including conservatives and left-wing Marxists. And, of course, the vice-president-elect herself, Cristina Fernández de Kirchner.

With regards to his energy policy, Alberto has done the same thing he has with the general management of the economy, which is to allow a bunch of different advisors to speak for him without having any indication as to whether they will end up having a post in his government. The oft-mentioned Guillermo Neilsen was an early mover in the energy sector, but seems to have oriented his focus to the coming debt restructuring. Former Neuquén governor Jorge Sapag, who led the oil-rich province during the Kirchnerite years, has also been snooping around. Lawmaker Diego Bossio, a former Kirchnerite who left the bloc and aligned himself with Sergio Massa, is another candidate for either YPF or the Energy Secretariat. Yet, continuing to speculate with names is nothing more than mental masturbation, as Alberto will surely continue to play his cards close to the chest.

The much-maligned nationalisation of YPF by Cristina’s government was, unfortunately, a necessary move in order for Vaca Muerta to truly become a proven opportunity. Repsol, the Spanish firm that was a majority shareholder in YPF, had led a policy of profit extraction given Kirchnerismo’s regulated energy markets. With YPF back in expansion mode, both Cristina and Macri sought to put in place the conditions for the state oil firm to figure Vaca Muerta out. Argentina’s opportunity lies in replicating the US shale boom, where fracking was developed at an economically sustainable cost. Argentina’s shale rock is more promising than the United States’, despite it being some 3,000 metres below the ground. The challenge in Argentina is to be competitive with US prices, which means natural gas should be sold for less than US$3 per million BTU, while a barrel of oil has to be competitive below US$40.

Anyone interested in understanding the future prospects of Argentina’s energy industry opportunity needs to fly to Añelo, in the Patagonian province of Neúquen, the epicentre of our fracking boom to understand the process. While conventional oil and gas extraction requires finding the right place to drill, with fracking a drilling company needs to go three kilometres deep and then another two to three horizontally, then generate a series of small explosions throughout the whole distance of the pipe, fracturing the rock to inject sand or other products that will keep the rock separated. After which an enormous amount of fluid needs to be pumped in, which will help the hydrocarbons find their way out. The process is, of course, substantially more costly than conventional exploration.

Only four percent of the acreage is in production phase, and still the infrastructure is insufficient. With Vaca Muerta, Argentina has the capacity to cover internal energy demand, but the real opportunity is in exports. The problem is that while crude oil can easily be stored, natural gas needs to be liquefied in order to be shipped out of the country, which requires an US$800-million pipeline and a US$5-billion processing plant which takes five years to put into production.

Macri put in place a series of policies that contradicted his intention to incentivise the development of Vaca Muerta. The first was Resolution 46, with which his government limited subsidies for shale gas producers, to the detriment of Tecpetrol, firm owned by billionaire Paolo Rocca’s Techint, which cut its investments in greater production. Another was the implementation of capital controls, which of course make it impossible for major firms to withdraw their profits. Finally, Decree 566 capped fuel prices, meaning international prices cannot be passed on to production, and consumers.

Whether we want to be net exporters of hydrocarbons at a global scale is a separate issue, but if Alberto is expecting it to be an integral part of his economic policy, then he has to move fast. Already, the Justicialist Party put out a paper outlining its macroeconomic vision of the country that was ill received by the industry, as it included issues such as “de-dollarising public service costs.”

As with most things related to Alberto, we have no idea yet as to what his plans for the country will be, beyond typical rhetoric. For my own personal wellbeing, I will continue to try to rationalise some optimism.

Agustino Fontevecchia

Agustino Fontevecchia


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