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

Like countries in Latin America, Argentina has been hit hard by the COVID-19 pandemic. Infection and death rates have risen despite the Buenos Aires government implementing a strict lockdown. These events have hit an already fragile economy and a struggling government hard. In 2020, Argentina’s gross domestic product shrunk from a stunner 9.9%. Despite the impressive rebound in GDP growth of 10.2% in 2021, Argentina finds itself mired in a new economic crisis. Inflation is spiraling out of control and weighing heavily on an already strained economy and weak public 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 driver of these headwinds is Argentina’s growing energy deficit, which in 2022 is expected to reach up to 6 billion dollars, more than triple a year earlier. These developments are occurring despite the successful exploitation of the Vaca Muerta shale formation, which has long been seen by Buenos Aires as a silver bullet to Argentina’s economic woes. At the heart of the brewing crisis is runaway inflation, which government data for August 2022 shows has reached a disheartening 78.5% annualized rate, the highest level in three decades. There are signs that inflation continues to spiral out of control despite aggressive attempts by Argentina’s central bank to rein in soaring prices. These measures include raising the global interest rate to 75%, which is the highest in two decades and the main official interest rate in the world. Economists predict that inflation in Argentina will reach an annualized rate 90% rate by the end of 2022, which will drive up poverty and put extreme pressure on an already weak economy and public finances. Argentina’s risk of default on its sovereign debt, which has already occurred nine times since its independence from Spain, continues to rise. A series of recent events indicate that this risk continues to increase. Soaring local bond yields, where the headline rate has exceeded 70%, and large debt maturities in 2022 coupled with dwindling US dollar reserves are putting considerable pressure on the government’s ability to meet its financial obligations. The growing shortage of foreign currency reserves is so severe that Buenos Aires is considering limiting imports.

A runaway energy deficit is fueling inflation to decades highs and increasing fiscal pressures affecting Argentina’s economy. This comes despite the ongoing success of mining the vast 7.5 million acre Vaca Muerta shale formation that Buenos Aires has long considered to be a silver bullet for Argentina’s economic difficulties. The geological body, located in the Neuquén Basin in northern Patagonia, 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, the production of oil and natural gas in Argentina, due to drilling in the Vaca Muerta, continues to climb to record highs. The growing volume of activity in the hydrocarbon-rich geological formation is supported not only by rising oil and natural gas prices, but also by tax and regulatory reforms implemented by the Argentine national government.

In July 2022, Argentina’s hydrocarbon production hit another record, surpassing that set a month earlier, pumping 577,446 barrels of crude oil and 4.95 billion cubic feet of natural gas per day, production total hydrocarbons reaching 1.46 million barrels of oil equivalent per day. These figures highlight that a notable growth in production of 13%, 7% and 9%, respectively, year over year has occurred. It is the surge in shale oil and gas production in the Vaca Muerta that is driving these big gains. Argentina’s unconventional oil production in July 2022 increased 47% year-over-year to 247,007 barrels per day, representing 43% of the country’s crude oil production, up from 33 % one year earlier. Unconventional natural gas production for the same month jumped 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 essential to reduce Argentina’s energy deficit. Soaring natural gas prices, which have soared 117% since the start of the year, mainly due to the war in Ukraine and a lack of industrial investment during the pandemic, exacerbate the energy deficit of Argentina. The country ravaged by the economic crisis is heavily dependent on energy imports, with one-fifth of the natural gas consumed locally coming from Bolivia and the international liquefied natural gas market. In 2021, Argentina almost imported 23 million cubic meters of natural gas per day, an increase of nearly 14% over 2020, with demand for fuel increasing sharply as the economy reopens and recovers from the pandemic. Argentina experienced an energy deficit of $1.7 billion in 2021 and this will increase significantly in 2022. A combination of soaring energy prices, mainly caused by Russia’s invasion of Ukraine, and Argentina’s growing demand for natural gas could see its energy deficit soar to $6 billion. , for 2022, more than triple that reported a year earlier. This will weigh heavily on a fiscally troubled economy that is already experiencing significant stress and turbulence if it happens. There is speculation that an energy crisis in Argentina would tip the country’s crisis-prone economy into a financial catastrophe that would wreck already fragile public finances, triggering another sovereign debt default while provoking a surge. skyrocketing poverty and civil unrest.

Even the successful exploitation of the vast Vaca Muerta, English dead cow, shale formation, has done little to reduce the bloated energy deficit. This is surprising because the development of the geological body leads to a strong growth in the production of oil and natural gas in Argentina. For July 2022, total hydrocarbon production reached a new record of 1.46 million barrels per day, an increase of 9.4% compared to the same month of the previous year. This notable expansion in production can be attributed to crude oil production which jumped 12.8% to a new monthly record of 577,446 barrels per day, with petroleum liquids production accounting for 39.6% of oil production. of Argentina, against 38.4% a year earlier. A solid increase in natural gas production, which jumped 7.2% year-over-year to a record 140 million cubic meters or 4.9 billion cubic feet per day, is the another driving force behind the rapid increase in hydrocarbon production in Argentina.

The rise of 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 shale oil production reached 247,007 barrels per day for July 2022, which was 47% higher than the 167,994 barrels per day pumped for the same month a year earlier. Shale gas production, which is very important, reached a record of 79.7 million cubic meters or 2.8 billion cubic feet per day, a notable increase of 28% per year. As a result, shale oil now accounts for 43% of Argentina’s total oil production compared to 33% a year earlier, while shale gas is responsible for 57% of total natural gas production compared to 49% for the same period in 2021.

There are signs of solid growth in Vaca Muerta production. Drilling activity is on the rise, with the Baker Hughes number of platforms indicating that there were 53 active platforms at the end of August 2022, two more than a month earlier, seven more than the same period in 2021 and four times more than in August 2020. Fracking activity is growing at a notable rate and data from the Ministry of the Economy shows a marked increase in the volume of completed wells. In July 2022, the volume of completed exploration wells increased 34% from June 2022 to 4,229, while service wells drilled more than tripled month-over-month to 10,767 Argentina’s focus on attracting new investment and significantly increasing hydrocarbon production. A new gas pipeline linking Vaca Muerta to Buenos Aires, the most populous city in the country, has recently been commissioned. In August 2022, Argentina’s controversial new economy minister, Sergio Massa, said he would implement tax and customs benefits for energy companies to attract new investment and accelerate the development of Vaca. Mute.

By Matthew Smith for Oilprice.com

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