The continuing plunge in crude oil prices globally has led to concern locally about what that could mean for the future prospects of developing the promising Vaca Muerta shale formation, considering the continuing high costs of unconventional production locally.

Wednesday, October 15, 2014

Cheaper crude oil could hurt Vaca Muerta profits

An aerial view is seen of a shale oil-drilling rig in Neuquén.

By Ignacio Portes
Herald Staff

Formation mostly located in Neuquén seen as losing appeal below US$80/barrel

The continuing plunge in crude oil prices globally has led to concern locally about what that could mean for the future prospects of developing the promising Vaca Muerta shale formation, considering the continuing high costs of unconventional production locally.

Oil plunged more than US$4 per barrel yesterday, the largest drop in more than two years, with Brent crude falling below 85 dollars a barrel for the first time since 2010, after mounting evidence of slackening worldwide demand and increased international output.

Argentina’s Vaca Muerta reserves are believed to be viable only if prices don’t get too close to the US$83-per-barrel barrier, according to international consultancy agency Wood Mackenzie.

The drop in oil prices is believed to be at least partly a result of the way in which some of the largest producers in the world are believed to be maximizing oil output in an effort to dent prospects for continued shale oil expansion, which depends on higher international prices due to higher production costs.

Industry analysts and experts yesterday cautioned that Argentina’s shale oil reserves aren’t the sure thing people are taking them for, explaining that they are only categorized as “prospective and contigent” reserves, a category that does not guarantee that extraction is viable if prices keep plummeting.

Shale oil drilling is far more expensive than conventional output, meaning that a fluctuation in prices could affect its viability as a future source of energy.

If oil prices fall below US$80 a barrel, companies will be reluctant to invest in the country, according to PRO party think tank Pensar Foundation economist Sebastian Scheimberg.

“The thing with shale oil is that these reserves are not new, they were already there, what changed was that a technology revolution has made them viable,” Scheimberg added.

Yet companies do not necessarily look at daily fluctuations, other economists insist, noting that a shale project requires a decades-long commitment.

“It remains to be seen to what point these downward trends are structural, because shale projects are planned with a 30-year horizon in mind, they don’t depend on a six-month or year-long fluctuations,” Diego Mansilla, an economist with the Movement for the Restoration of National Energy (Moreno), told the Herald.

In addition, Vaca Muerta is most promising for Argentina in terms of shale gas rather than oil and that could still be profitable regardless of oil prices.

“Vaca Muerta has a massive gas potential, bigger than oil, which means that energy development is going to be more related to the price of gas,” noted Mansilla. Gas prices are much more local, and regional. After keeping gas prices frozen for years, the government recently instituted a programme that more than tripled the price of gas for unconventional production.

“Natural gas is sold in the US at US$4 per million BTUs, it has been also going down. If a price like that were to be applied in Argentina’s market shale gas would be totally out of the question, not viable at all,” explained former energy secretary, and frequent government critic, Jorge Lapeña. “The government is setting gas prices at US$7.5 per million BTUs now, this is what makes gas extraction still feasible in Argentina.”

OPEC FEARS

Reuters and Bloomberg reported yesterday that Organization of Petroleum Exporting Countries (OPEC) countries were developing a strategy to maximize oil output so as to drive prices down and create doubts in the minds of potential investors as to the shale oil market, a direct competitor of their production.

If OPEC countries coordinate their actions, they have sufficient clout to affect international markets directly.

“Experience has shown that increasing output quantities by only a little can bring prices down a lot. I personally can’t confirm that this is the current OPEC strategy, but if they wanted to pursue this road, it would complicate Argentina immensely,” Lapeña explained.

OPEC claims to possess as much as 80 percent of proven oil reserves worldwide, although these numbers haven’t been certified internationally, leading some to believe the estimates are exaggerated.

Some OPEC countries are believed to be following an “anti-shale revolution” strategy, trying to stop growing shale output in Canada, the United States and elsewhere by expanding supply to push prices down enough that further investment in these more costly mode of oil production becomes less attractive.

Venezuela is considered the only OPEC country opposed to this strategy, fearing the consequences that a downturn in oil markets could have for its highly oil-dependent domestic economy, whose struggles make expanding production capabilities highly unlikely for the moment.

@ignacioportes

Herald staff member Fermín Koop contributed to this report