Monday, January 19, 2015

‘Oil price fall, lack of clear rules cast a shadow on Vaca Muerta’

Pumpjacks at the Vaca Muerta shale oil and gas field in the Patagonian province of Neuquén.

By Guillermo Háskel
Herald Staff

In 2010 Argentina lost energy self-sufficiency and has since spent US$50 billion in oil and gas imports amid its steepest and longest energy decline

Argentina boasts some of the largest shale oil and gas potential in the world but the current plunge of global crude prices, coupled with the country’s lack of legal security, raise serious questions about its possibilities to tap into an energy source the development of which is much costlier than conventional hydrocarbons, experts say.

The exploitation of the Vaca Muerta shale oil and gas field in the province of Neuquén, in Patagonia, could require between US$100 billion and US$200 billion in investments and it is highly unlikely that many large players will come in the face of Argentina’s feeble institutional framework, experts told the Herald.

The outgoing administration of Peronist President Cristina Fernández de Kirchner has made a lot of fuzz about Vaca Muerta (which means "Dead cow") but conventional oil and gas still account for 98 percent of all the oil and gas in the country, which has lost energy self-sufficiency a few years ago.

"Vaca Muerta is a hope to revive Argentina’s energy sector. Oil and gas account for 85 percent of it.

"But this field has been blown out of proportion for political reasons. It accounts for just between 2 and 2.5 percent of the total hydrocarbon output," said Jorge Lapeña, former head (1987-88) of the now renationalized oil company YPF.

"Back in 1989, Argentina achieved energy self-sufficiency but, regrettably, it lost it in 2010 and has since spent US$50 billion in oil and gas imports, the worst scenario for a country whose Central Bank reserves have fallen to about US$30 billion. In addition, it is locked in a legal battle with vulture (hold out) creditors about US$1.5 billion," Lapeña said.

Since 1998 Argentina’s oil output has been declining steadily, and since 2004 less gas was produced — the deepest and longest decrease since oil was discovered herel in 1907. In this context, the government has mistakenly has made all its energy strategy bets on a single number: the partial nationalization of YPF and the development of these non-conventional fields, Lapeña said. "The development of Vaca Muerta is much costlier than conventional sources. It is still incipient and if crude prices stay for long around the current levels of US$50 per barrel, it would not be viable."

Emilio Apud, a former Energy Secretary (2001), blamed the energy crisis on "the government’s populist policies that arbitrarily froze wellhead prices, and clamped oil duties.’"In 2007/8, when the international price of crude was US$130 per barrel, the government issued a resolution setting it at US$43,’ Apud said.

"The same happened with gas and electricity. Fees were frozen to keep users happy. But the consequence is that there is not enough energy, distribution is awful and blackouts persistent," he added.

Argentina has the second largest non-conventional gas resources in the world and the second largest non-conventional oil resources.

"But it all comes to a cost issue and costs are linked to technology to a large degree,’ Apud said.

"Only in 2016 there may be a clearer notion of the development costs of Vaca Muerta. Some companies already know these figures, but refrain from revealing them in the face of the poor legal security offered by this government. Let’s recall that the company that discovered Vaca Muerta was Repsol," he said.

Repsol bought YPF after then-president Carlos Menem sold it in 1989. But the Fernández de Kirchner administration expropriated YPF from the Spanish company in 2012.

Chevron

The government last year announced — with great fanfare — an accord with Chevron. However, the accord covers just a very small area of the non conventional field. The whole Vaca Muerta field has 30,000 square kilometres and the contract with Chevron envisages an investment of US$2 billion in an area of just 20 square kilometres. If successful, it could be extended to US$16 billion and 400 square kilometres.

"(The accord with Chevron means) Argentina has signed in a large player. But the country has no money to pay and still lacks the other ten players," Lapeña said.

Energy consultant Francisco Mezzadri said, "Argentina is the possessor of a gem, but the question is how to exploit it. Even if oil prices today were US$300 per barrel, nobody would come if the country had no clear and stable rules, if it is not foreseeable for the next 40 or 50 years, because very huge investments are required. Traditionally, Argentina doesn’t get US$20 billion a year in investments. This amount is almost the country’s whole fixed gross investment.

There is no exaggeration about the quality of Vaca Muerta and other fields. The problem is that Argentina lacks the funds needed to turn that into reserves. The exploitation of non-conventional resources is highly expensive as it requires a lot of new technology, whicht must necessarily be purchased, Mezzadri added.

Apud said, "Furthermore, Argentina, isolated from international markets, has no easy access to credit . It is almost impossible for new investments to come as long without legal security. At most, some may come under the same conditions of Shell and Exxon Mobil, that is, to make 15 or 20 prospective drillings. Beyond its enormous potential, Vaca Muerta is a new thing and a fantasy dreamed out by politicians who think they will be able to go around spending money just like that."

Price war

Lapeña said that the current drop in global prices is not just circumstantial — it responds to a decision by the OPEC exporting countries organization. "Some say this is a price war between large conventional oil producers, that is, the OPEC countries, particularly Saudi Arabia, versus producers of non-conventional oils, namely the US. "If it is so, the price fall may last longer than a year."

"It is hard to assess whether the OPEC may make another decision. Now, if we do not know how long the fall will last, we do know something for certain: the low prices are raising a gigantic question mark on the future of Argentina’s energy strategy and on YPF itself."

YPF shares have dovetailed brutally both in New York and Buenos Aires in spite of the government coming to its rescue at the expense of consumers. Even though the price of gasoline has been lowered by five percent, today, oil in Argentina is selling at a price higher than the international market, Lapeña said.

"If YPF owns such extraordinary riches, how is it possible that the company’s value should be declining steadfastly? A year ago, Argentina paid US$5 billion for 50 percent of the company, even if the total figures was actually US$6 billion because it was paid in bonds. That is, a year ago the company was worth about US$10 billion and US$12 billion and today it has fallen between 30 or 40 percent below that. Just since the beginning of the year the company price has fallen between 12 and 13 percent in dollar terms.

Contrary to other world markets, the oil market does not operate freely, it is cartelized, handled by the 13 OPEC countries which, together, account for 80 percent of crude reserves, also setting quotas and production levels.

Exporters such as Russia and Venezuela are suffering enormously while others — namely the US and the European countries, and even Argentina — are benefiting from lower prices. In 2013, Argentina spent US$12 billion in energy imports and a slightly lower figure in 2014, and, with prices at 50 percent of what they used to be, it will pays less, Lapeña said.

Geopolitics

Asked how much the US shale oil production had influenced the decline of the world’s crude prices, Apud said, Nottoo much. The US continues to be an oil-importing country. Today, it imports 2.5 million barrels per day, although five years ago they imported seven million. Also, the demand from Europe and even China has declined, while the Russian production has increased. Lybia, which was out of combat, is producing again and Iraq, and the Arab Emirates, which has always acted as moderator to prevent prices from oscillating too much, let the market set the prices.

"I have my doubts whether that decision was autonomous from Saudi Arabia — the leading world producer — or whether it was consulted it with the US. However, I can assure that, contrary to what Russia, China and Venezuela say, it was not a conspiracy orchestrated by the US. At most, the US did nothing to prevent the fall. But that’s it. It suits the US perfectly. From a strategic point of view, at almost no cost, the US put countries such as Russia, Iran and Venezuela on their knees. In my view, at some time, the US and its Arab allies are likely to prevent prices from falling further."

Mezzadri said that there are two theories about the oil price decline. According to a purely economic one, the market balance is attained by reducing the supply. "The Arab countries many times cut production to support prices. But this time they say ’let the newcomers (the US) lower their production. The US is exploiting oil at high costs and there is no reason for us to subsidize them’."

But some say there is no such dispute between the US and Arab countries but rather a political understanding that suits both parties. Saudi Arabia, Qatar and the Emirates, all under Sunni governments, benefit from the crude price fall because it affects Shiite producers such aa Iran and Iraq, and also this new “Caliphate,” even if it is not selling oil legally. In turn, the US benefits because the price plunge means trouble for countries such as Russia and Venezuela, Mezzadri said.