Against the backdrop of tumbling gas prices around the world (FT), Argentina’s Yacimientos Petrolíferos Fiscales (YPF) increased its shale oil production from the Vaca Muerta fields over the last year from 44,000 to 50,000 barrels per day. As the Wall Street Journal pointed out, Argentina’s domestic oil prices are at $67 a barrel versus the international price that hovers around $40 per barrel (WTI 39.91 and Brent $40.54 on 21 March), shielding YFP and its partners from the effects of the global dip in prices. In 2015, YFP increased spending by 4 percent instead of cutting spending -- other international companies cut as much as 20 to 40 percent.
While these domestic policies have incentivized further production as well as prevented the loss of several thousand jobs, these artifacts of the Kirchner regime have come at a cost. Oil and gas subsidies to cover the gap between frozen consumer prices and costs have snowballed from 0.02 percent to 4 percent of Argentina’s GDP (from 2003 to 2014). Since 2012, YPF’s debt jumped from US$2 billion to US$7 billion. Argentina is starting to feel the pinch, as YPF posted its first loss in a decade for the fourth quarter of 2015, and it plans to curtail spending by as much as 25 percent in 2016.
Argentina has done an “about-face” within the first one hundred days of President Mauricio Macri’s tenure, removing capital controls, negotiating with the bond hold-outs, and opening up Argentina to make it more market friendly. The energy sector, and more specifically the oil and gas sector, are no exception and are a part of Macri’s revamp.
Not long after the 2015 quarter four results were posted, CEO Miguel Galuccio announced his resignation on 9 March 2016, which will go into effect in April. According to La Nación, Galuccio clashed with the new government and new Energy Minister Juan José Aranguren. His position will be split into separate CEO and Chairman positions; former Telefonica CEO and current Rohatyn Group Partner Miguel Gutierrez will become the new Chairman, while YPF CFO Daniel Gonzalez Casartelli is at the top of the short list to hold the interim CEO position, while a full search is conducted for the permanent CEO. This news was followed by YPF’s announcement on 18 March of the sale of new five-year bonds amounting to US$1 billion at an 8.5 percent yield; YPF intends to use the sale to cover its financial needs for 2016.
Argentina has exceptional oil and gas resources (Neuquén Basin, Golfo San Jorge Basin, and the Austral-Magallanes Basin), but politics always hindered its development. With Macri at the helm, it appears politics are in step with resources and industry interest. Additionally, as pointed out by Jed Bailey during the Inter-American Dialogue event on Energy in Argentina, regional competition from Brazil and Venezuela is low given their embroiled political and economic situations, and even Mexico poses little threat as Pemex struggles to balance its books. However, several challenges ahead remain for Argentina and the revitalization of its oil and gas sector.
Argentina’s first challenge is productivity. Even though the Inter-American Dialogue reports Argentina is producing commercial quantities of oil from shale, it still does not have the capacity to meet domestic energy demands -- Argentina has a US$400 million debt with Bolivia for gas imports. While high domestic barrel prices (for the moment) might encourage production, Argentina must recuperate from the years where this subsidy coupled with erratic policies disincentivized foreign investment in the oil and gas sector. YPF does not have the capacity on its own to increase production to meet and exceed domestic demand. Not only are there capital issues, the necessary infrastructure is non-existent for large scale production. High levels of productivity will require additional partners to develop and execute short, medium, and long term exploration and exploitation plans. Macri must continue to create favorable conditions to attract foreign investment. Also, labor restrictions make it difficult to attain high levels of productivity, as workers are not permitted to work around the clock and the labor environment in some areas is considered conflictive.
As highlighted in the Atlantic Council’s recent event, Argentina’s government is based on a federal system, where the provinces have the rights over the resources in their territory. While the federal government can create some regulations and act as a mediator, this can create tensions with provincial governments, making it difficult for incoming oil companies discern the rules of operation. Furthermore, incoming investors might be required by provincial governments to have joint-ventures with state owned companies, possibly making investments less attractive. However, provincial control can have its advantages, as it is easier to change and implement regulations and different policies can be tested in different provinces to determine the best approach.
Macri’s policy shifts certainly open up several opportunities in the energy sector, finally creating an alluring environment for oil and gas companies. However, Argentina still faces the challenge of rectifying the decoupled domestic barrel prices as well as several other internal issues to generate policy stability, which companies prize above all when making investment decisions. Furthermore, the current atmosphere of cost-cutting due to low international prices paired with uncertainty about the future of (strong) prices and demand, especially with the advent of cost-efficient renewable energy options, may also pose a challenge to long term the development and profitability of the oil and gas sector. Yet, for the moment, optimism about the sector’s potential is barely containable.