In Argentina, excitement abounds but confidence is king. And such confidence can only be obtained through a policy path with clear and consistent rules. In a country known for its love of beef, that its energy future might be defined by an oil and gas field known as Vaca Muerta, or dead cow, is delightfully appropriate.
The true linchpin of energy sector optimism in Argentina, however, is based on the US Energy Information Administration’s analysis that indicates the country contains the world’s second largest shale gas resource and fourth largest shale oil. Add a presidential election in October that will bring a change in government to this world class energy resource and you have the recipe for a potential national resurgence. Many have argued that the market fundamentals for a lift off also appear strong.
After what can only be described as a rocky decade for the Argentine economy and energy sector, Vaca Muerta and the nation’s unconventional resource potential has greatly revived attention and hope. But as elsewhere in the world, it is critical for Argentina to distinguish between what the energy industry calls a resource and what is considered a reserve. Simply put, reserves are by definition economic or bankable while resources are a more optimistic and less tangible assessment and not entirely bankable.
Argentina’s national oil company, YPF, has set forth a clear strategy focused on reversing the trend of declining oil production, with Vaca Muerta at the core of its efforts. Production of roughly 40,000 barrels per day of oil equivalent from Vaca Muerta is an important milestone for Argentina and also marks the first unconventional resource production in South America.
Representatives from YPF, local economists, and international players gathered at the Institute of the Americas Argentina Energy Roundtable on March 19 to debate the sustainable development of the country’s unconventional resources, the energy sector and regional integration more broadly, and particularly the challenges facing the energy sector as an economic driver. The direct linkage between energy and economy in Argentina cut through all the panels and discussions.
At the core of YPF’s efforts to recover production for the country and a sustainable development framework are two pillars: increased productivity of resource extraction and reduced well costs.
Managing the complexity of Argentina’s unconventional resource and adapting technology and innovation to local conditions enhances productivity. These measures will aid the effort to find the sweet spots that are key to high production and at which point the so-called factory drilling approach can be most efficient. Factory drilling is synonymous with a large-scale drilling campaign far outpacing the 300 or so wells drilled in Argentina’s unconventional fields in 2014, and will bring both overall production and drilling productivity more in line with the amount and quantities in the United States’ most prolific shale plays.
For many years, the high cost per unconventional well in Argentina has cast a dubious shadow over the potential of the resource. As recently as 2011, the cost per well was around $11 million. YPF aims to almost halve that figure to $7 million by the end of this year. Reducing these costs by enhancing local know how as well as efforts such as developing a local sand source for use in drilling are a huge challenge that must be overcome to seize the opportunity that Vaca Muerta and the rest of the nation’s unconventional resource potential holds. Reducing costs will also allow for a greater number of wells to be drilled and boost progression up the local learning curve.
Long a major energy exporter and pioneer in the development of natural gas and regional integration, Argentina currently has an energy deficit on the order of $6 – 8 billion per year as a result of energy imports. These include natural gas by pipeline from Bolivia, LNG tankers at spot market prices and oil.
The energy deficit as well as pervasive energy subsidies are the result of thorny policy choices made over the last several years by the national government and in the wake of a major economic crisis. One noted economist likens the current situation to the game of “Jenga,” in which a tower of blocks easily collapses if you pull out the wrong piece.
How to best unwind the subsidies and reduce the energy deficit are sure to be significant features of the electoral season and figure prominently in each candidates’ platform. Moreover, both subsidies and the import imbalance are policies that must be addressed by the next administration.
A final piece of good news rests in the opportunity for reigniting regional integration. Dating to massive infrastructure investments made in the 1990’s, coupled with LNG infrastructure in the 2000’s, the major pieces of the regional integration puzzle remain in place. Despite disuse, they can easily be dusted off. Moreover, the international agreements to provide a new phase, call it regional integration 2.0, are in place.
More must be done to move to a new, integrated regional reality including use of energy swaps, as well as reversing long-held views over issues such as natural gas being shipped east from Chile and potentially onward to Brazil, and Chilean electricity generated from LNG imports destined for Argentina’s power market.
But, unlike how successfully Vaca Muerta and Argentina’s other unconventional resources are developed, the future for a new regional integration paradigm does not entirely depend on what type of national energy policy each country chooses, only that each nation sets a path with clear and consistent rules that provide confidence and stability.