Can Argentina’s Dead Cow Shale Patch Save Its Economy?

Like countries across Latin America, Argentina has been hit hard by the COVID-19 pandemic. The infection and death rates rose sharply, even though the government in Buenos Aires imposed a strict lockdown. These events have severely impacted an already weak economy and a fiscally challenged government. Argentina’s gross domestic product in 2020 shrunk by an anesthetic 9.9%. Despite GDP growth rebounding by an impressive 10.2% in 2021, Argentina is mired in yet another economic crisis. Inflation is spiraling out of control, weighing heavily on an already strained economy and weak government finances. For these reasons, there are fears that Argentina is on the brink of an economic collapse that will force another sovereign debt default. A key reason for these headwinds is Argentina’s mounting energy deficit, which is expected to widen throughout 2022 reach up to $6 billion, more than triple a year earlier. These developments are taking place despite the successful exploitation of the Vaca Muerta shale formation, long viewed by Buenos Aires as a silver bullet to Argentina’s economic woes. At the heart of the looming crisis is rampant inflation, which has risen to a staggering annualized rate of 78.5% for August 2022, the highest level in three decades, according to government data. There are signs that inflation continues to spiral out of control despite aggressive attempts by Argentina’s central bank to curb rising prices. These measures include raising interest rates to 75%, the highest in two decades and the world’s leading official interest rate. Economists predict inflation in Argentina will reach annualized levels rate of 90% by the end of 2022, which will lead to a rise in poverty and put extreme pressure on an already weak economy and public finances. The risk of Argentina defaulting on its sovereign debt, which has happened nine times since independence from Spain, continues to mount. A number of recent events suggest that this risk continues to rise. Soaring local bond yields, where the all-in rate has surpassed a whopping 70%, and high debt maturities to 2022 combined with dwindling US dollar reserves are putting significant pressure on the government’s ability to meet its financial obligations. The growing shortage of foreign exchange reserves is so serious that Buenos Aires is planning to restrict imports.

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A galloping energy deficit is fueling inflation to a decade high and adding to the fiscal pressures that are hurting Argentina’s economy. This comes despite the successful ongoing exploitation of the massive 7.5-million-acre Vaca Muerta shale formation that Buenos Aires has long contemplated a silver bullet for Argentina’s economic problems. The geological body, located in the Neuquen Basin in northern Patagonia, has been technically estimated recoverable resources 16 billion barrels of shale oil and 308 billion cubic feet of shale gas, making it the second largest shale gas deposit in the world. Since the pandemic, oil and natural gas production in Argentina has continued to climb to record highs due to drilling in the Vaca Muerta. The increasing volume of activity in the hydrocarbon-rich geological formation is being supported not only by higher oil and natural gas prices, but also by tax and regulatory reforms being implemented by the Argentine government.

In July 2022, Argentina’s hydrocarbon production set another record, surpassing the figure set a month earlier by pumping 577,446 barrels of crude oil and 4.95 billion cubic feet of natural gas per day, bringing total hydrocarbon production to 1.46 million barrels of oil equivalent per day. These numbers underscore that there has been notable year-on-year production growth of 13%, 7%, and 9%, respectively. It’s the rising shale oil and gas production at Vaca Muerta that is driving these strong gains. Argentina’s unconventional oil production in July 2022 rose a whopping 47% year-on-year to 247,007 barrels per day, accounting for 43% of the country’s crude oil production, compared to 33% a year earlier. Unconventional natural gas production for the same month rose a remarkable 24% year over year to 2.8 billion cubic feet per day, meaning shale gas now accounts for 57% of Argentina’s total natural gas production.

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A significant increase in natural gas production is key to reducing Argentina’s energy deficit. Soaring natural gas prices, which have soared 117% year-to-date, largely due to the war in Ukraine and a lack of industrial investment during the pandemic, are exacerbating Argentina’s energy deficit. The economically troubled country is heavily dependent on energy imports, with a fifth of the natural gas consumed domestically coming from Bolivia and the international liquefied natural gas market. In 2021 Argentina almost imported 23 million cubic meters of natural gas per day, a nearly 14% increase from 2020, with demand for the fuel rising sharply as the economy reopened and recovered from the pandemic. Argentina recorded an energy deficit of US$1.7 billion in 2021, which will widen significantly throughout 2022. A combination of skyrocketing energy prices, driven largely by Russia’s invasion of Ukraine, and rising natural gas demand in Argentina could push the energy deficit to $6 billion by 2022, or more than triple what it was a year earlier was reported. Should this occur, it will weigh heavily on a financially troubled economy already experiencing significant stress and turbulence. There is speculation that an energy crisis in Argentina will plunge the country’s troubled economy into a financial catastrophe that would wreck already fragile government finances and trigger another sovereign debt default, while also sending poverty and unrest skyrocketing.

Even the successful exploitation of the giant vaca muerta, the dead cow in English, shale formation, has done little to stem the skyrocketing energy deficit. This is surprising given that geological body development is driving strong growth in oil and natural gas production in Argentina. In July 2022, total hydrocarbon production reached a new record of 1.46 million barrels per day, up 9.4% from the same month last year. This notable expansion in production was driven by a 12.8% increase in crude oil production to a new monthly record of 577,446 barrels per day, with petroleum liquids production accounting for 39.6% of Argentina’s hydrocarbon production, compared to 38.4% a year earlier. A solid increase in natural gas production, which rose 7.2% year over year to a record 140 million cubic meters, or 4.9 billion cubic feet per day, is the other driver of Argentina’s fast-growing hydrocarbon production.

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Increasing unconventional oil and natural gas production due to the successful exploitation of the Vaca Muerta is responsible for this rapid expansion of Argentina’s hydrocarbon production. Government data shows that shale oil production reached 247,007 barrels per day in July 2022, an impressive 47% more than the 167,994 barrels per day pumped in the same month last year. All-important shale gas production surged to a record 79.7 million cubic meters, or 2.8 billion cubic feet per day, a whopping 28% annually. As a result, shale oil now accounts for 43% of Argentina’s total oil production, compared to 33% a year ago, while shale gas accounts for 57% of total natural gas production, compared to 49% for the same period in 2021.

There are signs of solid production growth for Vaca Muerta. Drilling activity at Baker Hughes is increasing number of rigs This suggests that there were 53 active rigs at the end of August 2022, or two more than a month earlier, seven more than the same period in 2021 and four times the amount in August 2020. Fracking activity is growing at a remarkable rate and Data from the Department of Commerce shows a significant increase in completed drilling volume. In July 2022, the volume of completed exploration wells increased 34% compared to June 2022 to 4,229, while service wells drilled more than tripled month-on-month to 10,767. Argentina is focused on attracting more investment and further expanding hydrocarbon production significantly. A new natural gas pipeline has recently been put into operation, connecting Vaca Muerta with Buenos Aires, the country’s most populous city. In August 2022, Argentina’s controversial newly appointed economy minister, Sergio Massa, said he would introduce tax and tariff breaks for energy companies to attract more investment and accelerate the development of the vaca muerta.

By Matthew Smith for

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