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Challenge to Develop Fossil Fuels in Argentina Could Make or Break Macri’s Legacy

Challenge to Develop Fossil Fuels in Argentina Could Make or Break Macri’s Legacy

In 2015, centre-right candidate Mauricio Macri defeated the heir of former president Cristina Kirchner, thus ending almost 12 years of leftist rule. One of its initial promises was to attract foreign investors back to Argentina’s shore. However, over a year has passed and the new government seems to be having problems fulfilling its election promises.

In 2011 scientists discovered that Argentina holds massive reserves of shale gas rivalled only by China’s; however, to tap into the country’s fossil fuel potential requires an enormous amount of investment that the government cannot currently provide.

Once a natural gas exporter, Argentina now imports around 25% of its needs, including some costly liquefied natural gas imports - a major contributor to the country’s fiscal deficit. This was a result years of stagnant production and high levels of energy consumption.

 “The cap on oil prices, the lack of investment in transport and infrastructure, the currency restriction, export retention - all of these factors contributed to the stalling of energy production” Eric Ritondale, Chief Economist at Econviews, explained.

This is why it is vital for Macri’s government to revamp this industry, not only because it will help tackle the current energy deficit in Argentina, but because it will contribute to save its ailing economy and open up new channels of foreign investment - something the country desperately needs.

Early this year Macri took the first step to boost the oil and gas industry when he sealed a deal with unions and oil companies, including oil giants Chevron and Shell, in which they guaranteed investment in exchange for labour flexibility and price subsidies.

During a meeting with oil producers in Houston, Macri announced that they would also implement a new framework to regulate imports of goods required by the energy industry to function, including lowering the border tax for equipment to 7% from 35%.

So, far Argentina received between US$8bn and US$9bn from Vaca Muerta’s shale reserves, located in the province of Neuquén, and in 2018 it expects a further US$12-15bn, with the figure is set to rise to US$20bn a year from 2019 onwards.

The state owned company YPF currently holds a 40% stake in Vaca Muerta - which is roughly the size of Belgium - however, it lacks the resources and the expertise to able to fully realise its potential.

This is why YPF needs to align itself with international companies in order to exploit the resources at Vaca Muerta.

The most significant ventures currently underway include YPF -Chevron, with the latter set to invest US$1.5bn, Shell-YPF , worth US$300mn, and Pampa Energia’s US$300mn solo venture.

Also, Pluspetrol, the third-biggest oil producer in Argentina, plans to invest US$160mn in a pilot project for the Centenario Centro, targeting natural gas in the Vaca Muerta shale play, which was announced by the province's governor earlier this year.

Pluspetrol started testing the potential of the field in 2016 and is expected to complete the 35-well pilot project by 2020.

Currently 18 project are underway in Vaca Muerta. However, of those, just two - the joint venture of YPF and Chevron, and another one between YPF and Dow Chemical - have proceeded into the development stage, with a pilot project by Tecpetrol SA said to reach that stage soon.

Good Results, but not Soon Enough

For Ritondale, so far, the results of these endeavours have been encouraging and represent an exciting opportunity for Latin America’s third largest economy, even if the amounts of money are still miniscule compared to what country requires to tackle its deficit and become an exporter once again.

“These investments will have significant ramifications for the economy; even if it is the case that this sector might not create a lot of jobs directly, it would still have a positive fiscal impact,” Ritondale explained.

Besides, the economist continued, the projects are already an economic success.

“The projects are proving to be hugely profitable: even with the current oil prices the companies are making a profit.”

However, for Macri, faced with mid-term elections at the end of the year, the cash flow is not coming quickly enough, especially after the first year of the conservative government was tainted by painful cuts and social upheaval.

“The government overestimated the pace at which the foreign investment would pour into the country, especially because this is not something that is going to be felt right away by the population,” Ritondale said.

And it is imperative for Macri to win a legislative majority in November, with the Congress in now control of the opposition, not only for the sake of continuing with the economic reforms, but also because many investors are not willing to bet on Argentina unless they feel the country has a stable political outlook.

“The November elections will determine if companies will continue to invest in Argentina,” Ritondale concluded.

Oil and gas could become a shining light in Argentina - once a buoyant economy, that after years of mismanagement has fallen behind its neighbours Brazil and Chile. The success of this endeavour might also “make or break” Macri’s legacy.

 

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