Investors Accept Argentine Risk

This article is featured in NGW Magazine Volume 2, Issue 18

By Sophie Davies

Investors are still coming to Argentina, even from countries with reputations for ethical behaviour to defend. But a co-ordinated campaign from the capital could shine an unwelcome spotlight on their upstream activities to make a political point.

Last month Norway’s Statoil agreed a deal to jointly explore for oil and gas with Argentina's YPF in the Neuquen Basin, joining a growing list of companies that are keen to take a bet on the Latin American country’s newly opened up resources.

Investors have piled into Argentina since its president, Mauricio Macri, began opening up the country to international markets in 2015. But analysts warn of the significant operational risks that foreign majors face in entering what is still a nascent market – especially in some remote regions.

“Growing social unrest risks destabilising the Macri administration, while investors must prepare for more disruption around extractive sites,” said Michelle Carpenter, an analyst at the consultancy Verisk Maplecroft, in a research note published in mid-September. “The recent disappearance of an indigenous rights activist is drawing unwanted attention to indigenous rights and land conflicts,” which will likely place additional due diligence burdens on investors, she added.

“Vaca Muerta investors should prepare for a potential increase in disruption because indigenous grievances could gain national and political support from Buenos Aires,” she said.

Statoil’s deal, which marked the Norwegian major’s entry into the Latin American country, was for the Bajo del Toro block in Neuquen Province in the central part of the Patagonia region, which is also where the vast Vaca Muerta shale formation is.

One of the largest shale deposits in the world, Vaca Muerta contains around 308 trillion ft³ of shale gas and 16.2bn barrels of shale oil, according to the US Energy Information Administration.

Earlier this year, the South American country signed a deal for exploration at the formation with a group of companies that included state-run YPF alongside the international oil companies: US Chevron, French Total, Anglo-Dutch Shell and Pan American Energy, a unit of UK BP and Argentina's Bridas. The companies agreed to collectively invest $5bn in the formation this year and $15bn/year beginning in 2018.

However, while Macri’s efforts to ease labour unrest in the oil and gas sector have already borne fruit, issues surrounding indigenous land grievances have not yet eased, said Carpenter. Earlier this year, the country’s trade unions said they would accept clauses in their collective bargaining agreements, in an effort to make contracts more flexible and improve productivity. The energy sector was responsible for 3.7% of all strikes nationwide in the first quarter of 2016, compared with 0.4% in the same period in 2017, Carpenter said.

Experts say there are persistent issues with the rule of law in a country that until very recently was isolated for years from global financial markets. “Protests, land grabbing, and violence are common in Patagonia,” she said. Nonetheless Argentina’s energy minister Juan José Aranguren said recently that a number of measures have been take in the past several months to ensure the energy supply of a “country that is still developing.”

“In order to reactivate oil and gas production, we have completed production agreements with stakeholders in the sector – including trade unions, companies and provincial governments ­– Aranguren said, at a Council of the Americas conference in Buenos Aires, which was streamed online.

Argentina also plans to “soon launch” an offshore exploration programme to increase the local production of oil and gas, he added. Macri has said he wants to replace imported LNG with domestic production by 2022. However, as Argentina opens up new areas to investors, it may also face an increase in community unrest.

“The potential for conflict is not isolated to Vaca Muerta. A significant proportion of extractive deposits are located in indigenous areas,” said Carpenter. “With the weakening of legal protections from eviction, we expect a rise in land grabs,” she added. The Tierra del Fuego archipelago in the far south of the country, which is traditionally also an indigenous area, has attracted some investors in recent years, but is still relatively undiscovered.

However the region is thought to have very strong potential for increasing Argentina’s offshore gas production. The Austral Basin – also known as the Magallanes Basin – contains some of the largest gas reserves in the country. Last year Aranguren said the first offshore auction to be held will be for licenses in Tierra del Fuego.

German independent Wintershall is already active in a “key project for Argentina” in the country’s waters off the coast of Tierra del Fuego, company spokeswoman Ulrike Sasse told NGW. The firm has been producing from the Vega Pleyade gas and condensate field since February 2016, alongside partners Total and Pan American South, Sasse said.

The field “is the southernmost platform in the world,” she added, but was unable to comment further on the operational status quo in the area. Total, which operates the field, was also unable to comment.

Vega Pleyade, one of the largest offshore fields in Argentina, has a production capacity of 10mn m³/day. It is in the Cuenca Marina Austral 1 (CMA-1) concession. Through the CMA-1 concession, Total also operates the onshore Ara and Canadon Alfa fields and the offshore Hidra, Kaus, Argo, Carina and Aries fields – all in Tierra del Fuego. Total’s total output from the region is estimated to be 22mn m³/d.

Nonetheless, capacity in Tierra del Fuego is constrained by pipeline bottlenecks. One main pipeline, which transports gas to market in Buenos Aires nearly 3,000 miles away, is reportedly already running at full capacity. 

Infrastructure deficiencies, alongside the potential for social protest, are two areas that threaten to hold back Argentina’s progress. The country’s energy industry has come a long way in the last two years, but it still needs to consolidate some key areas to be able to move forward with confidence.