Reform Minded
Is Argentina the Next Shale Darling?

Did you know that Argentina has the world’s second largest reserves of shale gas, beaten only by China? Thanks to its Vaca Muerta shale formation, Argentina sits on quadrillions of cubic feet of untapped natural gas, but thus far it has been unable to replicate or even offer up a pale imitation of the extraordinary energy renaissance that has occurred in the United States over the past eight years.

But YPF, Argentina’s state-owned oil company, intends to change that, as it introduces a number of reforms aimed at attracting the kind of foreign investment necessary to get the ball rolling in this “dead cow” field. Bloomberg reports:

The reforms, including talks with unions and contractors to help reduce costs, may attract some $5 billion to $10 billion in additional investments into the country’s oil and gas industry through the end of next year, YPF SA Chairman Miguel Angel Gutierrez said in an interview Wednesday at Bloomberg headquarters in New York. YPF has also had conversations with “middle-market” energy producers and equity firms as it seeks to pull in even more money, the chairman said.

“We need to demonstrate to the world that we are able to reduce costs.” Gutierrez said. “With the right set of conditions, I think the investment will come.”

Argentina passed a raft of oil and gas reforms two years ago aimed at this same target, but those efforts haven’t paid off in the way Buenos Aires hoped they might. That’s because, as we noted at the time, those reforms actually strengthened the stranglehold YPF had on the country’s oil industry.

However, if YPF is serious about making meaningful market reforms and lowering the price of entry for investors, Vaca Muerta could fulfill its potential and become, as one roughneck predicted, “better than Texas.” That would be a game changer for Argentina, whose oil and gas production has fallen off a cliff recently, recently making the country a net energy importer. The new Macri government seems willing to do away with costly fuel subsidies that the FT says “[boost] demand while creating a disincentive to supply.” But while these reforms would undoubtedly be a positive step forward for Vaca Muerta production, they’re predictably creating a popular uproar:

The tariff structure for domestic energy that Macri’s government inherited was only covering about 10 per cent of generating costs, [energy minister Juan José Aranguren] says. “Argentina got used to basically having energy that was next to free.” But his attempts to change the situation have already brought severe protests that show the size of the task confronting the government. Vocal opposition to his tarifazo — his attempt to raise domestic energy prices by several hundred per cent — are already showing that energy is an important battleground for the government if its reform agenda is to be cemented and implemented.

Shaky regimes around the world rely on fuel subsidies to keep a restive citizenry docile, but these government supports are harmful for both the long-term energy security of the countries implementing them, in addition to the environment. Phasing them out is easier said than done, but should nonetheless be a priority for greens as well as national leaders.

We’ll keep an eye on Argentina’s progress—if it can pull this off, the world will get yet another flood of hydrocarbons. So much for an age of energy scarcity…

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