Argentina Is On The Cusp Of A Shale Boom

  • Date: 22/02/18

Argentina is on the cusp of emerging from decades of economic instability and is in the process of shedding its status as a pariah state among investors to become one of the hottest destinations for foreign energy investors as the business-friendly policies of Macri gain greater traction.

The end of the Peronist hold on Argentine politics and rise of pro-business president Mauricio Macri has heralded in a new age for what was long regarded as one of the most economically unstable nations in Latin America.

The former Buenos Aires mayor and businessman won the presidency in 2015, ousting his mercurial populist Peronist predecessor Cristina Fernández de Kirchner. Since coming to power, Macri has worked to restructure a shattered economy ruined by decades of market warping tariffs and subsidies, protectionism, heavy handed regulation, rampant inflation and unsustainable fiscal policies.

The center-right president has been able to achieve what no one thought possible: halving inflation from what independent sources claimed had reached as high as a mind-boggling 40 percent to near a more manageable 20 percent. This helped stimulate economic growth by stabilizing the financial system and allowing the middle-class to borrow again. This, along with Macri dismantling stringent currency exchange and capital controls, has reinvigorated the interest of foreign investors in the Latin American nation.

This helped power the biggest stock market boom in the world, with the Argentine bourse rising by an incredible 77 percent in value during 2017. That trend should continue as Macri focuses on rebuilding Argentina’s energy industry and seeks to capitalize on the nation’s enormous unconventional oil and gas potential.

One of Macri’s most significant achievements was ending the complex system of domestic oil tariffs and subsidies introduced by the Kirchner administration. These distorted local prices, led to considerable underinvestment in the energy industry and saw Argentina become a net energy importer despite its tremendous unconventional oil and gas resources.

The rewards are substantial, considering that Argentina’s technically recoverable shale oil reserves come to 27 billion barrels, which is 60% of the country’s technically recoverable crude. The Vaca Muerta formation is rated by the U.S. EIA as having the second-largest unconventional oil and gas reserves globally. This resource’s potential becomes real as oil majors such as Royal Dutch Shell (NYSE:RDS.A) and ExxonMobil are rushing to scoop up the best acreage. A top ExxonMobil executive believes once the prolific Vaca Muerta shale reaches peak production, Argentina and the U.S. will be responsible for around a third of global natural gas production.Related: Clean Oil That Only Costs $20

Argentina’s largest energy company YPF (NYSE:YPF) has committed to investing $30 billion over the next five years as it moves to exploit the potential of the Vaca Muerta and attempts to emulate the U.S. shale oil and gas boom domestically. That won’t be enough, however, because YPF on its own lacks the expertise, capital and workforce to access Argentina’s vast reserves, making foreign investment particularly important if Argentina is to realize its full energy potential.

To attract that much-needed investment, Macri has reduced labor costs and implemented favorable price subsidies for natural gas obtained from unconventional sources. Prices for natural gas obtained from unconventional production have a guaranteed price floor of $7.50 per million British thermal units (MMBtu) for 2018, with them winding down by $0.50 annually to $5 per MMBtu by 2021. That’s more than double the current spot price, and in a market where natural gas prices have been depressed for years, it’s attracting significant interest from international energy companies.

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