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Montevideo, February 25th 2017 - 23:10 UTC

Macri announces program to boost development of Vaca Muerta shale formation

Wednesday, January 11th 2017 - 08:29 UTC
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YPF, BP-controlled Pan American Energy, France's Total, Shell, Chevron and US Dow, pledged to invest a combined US$5bn this year in Vaca Muerta YPF, BP-controlled Pan American Energy, France's Total, Shell, Chevron and US Dow, pledged to invest a combined US$5bn this year in Vaca Muerta
“We knew we had to give guarantees and certainty in order for investments to arrive,” President Mauricio Macri said in announcing the agreement “We knew we had to give guarantees and certainty in order for investments to arrive,” President Mauricio Macri said in announcing the agreement
“These measures will allow us to boost development of unconventional resources and promote investments” YPF chief executive Miguel Angel Gutierrez said. “These measures will allow us to boost development of unconventional resources and promote investments” YPF chief executive Miguel Angel Gutierrez said.

Argentina's government has agreed to extend a natural gas wellhead price subsidy until 2020 and reduce labor costs in a bid to jumpstart investment in the Vaca Muerta shale formation. The agreement, reached between the national government, the provincial government of Neuquen, industry and labor unions, comes at a time of lackluster upstream activity, reflecting an uncertain price environment and cost concerns.

 Under the new pact, the government will maintain the subsidy that pays as much as US$7.50/mn Btu for new gas production. The subsidy had been scheduled to expire this year.

One of the key costs dissuading investors in Argentina's emerging shale patch is labor. Under the agreement, the government appears to have negotiated with the unions to limit benefits in exchange for fresh investment.

Companies that already have a presence in Vaca Muerta—mainly state-controlled YPF, BP-controlled Pan American Energy, France's Total, Shell, Chevron and US Dow—have pledged to invest a combined US$5bn this year in the shale formation with a goal of reaching US$15bn/yr in 2018.

“We knew we had to give guarantees and certainty in order for investments to arrive,” President Mauricio Macri said in announcing the agreement, which has yet to be signed.

The wellhead price support, put in place by Macri's predecessor, flies in the face of the administration's efforts to re-introduce market prices across the energy chain. The process has run into headwinds, not least from the oil and gas producers, who say market-based prices would spark layoffs and bankruptcies.

“These measures will allow us to boost development of unconventional resources in the country and promote investments to generate the energy that Argentina needs to grow,” YPF chief executive Miguel Angel Gutierrez said.

The deal to extend the subsidy coincides with a gradual increase in wellhead prices for all gas production earmarked for residential users. That price currently averages US$3.42/mn Btu, almost three times the previous prevailing price. The plan is to reach US$6.80/mn Btu in October 2019.

On the oil front, Macri confirmed that Argentina would no longer charge export taxes on crude, reinforcing a policy of scrapping almost all duties on overseas sales. The main beneficiary is PAE, which exports 24°API Escalante crude that is too heavy for local refiners.

The agreement came after “three or four months of hard work,” said Neuquen governor Omar Gutierrez, who qualified the measure as “historic.” As part of the deal, Neuquen agreed to keep its provincial taxes steady.

The US Energy Information Administration (EIA) ranks Argentina second in the world for gas and fourth for oil in terms of potential shale resources, in large part thanks to 30,000km2 (11,583mi2) Vaca Muerta, which is mostly in Neuquen.

Top Comments

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  • Tarquin Fin

    Well, 30% increase is just about right considering inflation over 40%.

    Jan 11th, 2017 - 05:47 pm +1
  • Marti Llazo

    “Argentina's government has agreed to extend a natural gas wellhead price subsidy until 2020 and reduce labor costs....” “ .....the government appears to have negotiated with the unions....”

    In other words, make massive use of public monies through heavy taxation of competitive industries and domestic commerce, to supply costly price supports for a habitually low-efficiency and featherbedded industry.

    Lower labour costs? Didn't YPF workers get a 30 percent wage increase just a few months ago? Hello ?

    Didn't the head of the petroleum-products transport union just announce “No fooking way we are going to accept salary reductions” ?

    One has to wonder what Macri is smoking, and how gullible real investors might be.

    Jan 11th, 2017 - 03:31 pm 0
  • Marti Llazo

    Yup, congressional IPC showed 40.3 percent annual inflation for the country in 2016.

    And all that rah-rah about how much the Argentine economy is going to achieve astronomical growth this year? They're starting to back-pedal already. World Bank is confessing unsubstantiated optimism now. They were forecasting 3.1% GNP growth earlier and now are backing off to 2.7 % - still wildly high but in a few weeks they'll see more of the error of their ways. The government budget here of course is counting on 3.5% GNP growth, but their numbers are the stuff of smoke, myth, and legend. There will be some, um, adjustments.

    Speaking of YPF, the funniest (or the most absurd) event last year was when the Macri government invited Repsol to return to invest in Argentina, this not long after the previous government had done it enormous harm by expropriating its holdings here.

    I want to know what Macri is smoking.

    Jan 11th, 2017 - 07:38 pm 0
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