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Argentina Shale Gas and Oil Summit 2015 presented an interview with Juan Cruz Diaz – the Managing Director at the international corporate advisory firm Cefeidas Group on the state-of-play of the budding Argentine shale gas industry.

The interview started on a more precarious and cautionary note and follows the flood of global commentary scrutinizing the current and future viability of oil and gas exploration projects. Cost viability of shale exploration and production projects have been questioned heavily in response to a new lower oil price floor. Confidence in the short-term for new exploration projects seems to be dimming. Recent reports of $1trillion expenditure cutback for new oil and gas field projects serves an example of the oil and gas industry belt tightening to maximize efficiency and leverage high production and exploration risk across their global portfolios.

Oil price “shock”

Diaz provides a more bullish take on Argentina’s nascent shale industry against the backdrop of a plummeting oil price due to the global glut in the oversupply of oil. OPEC’s non-decision to cut oil production output in November compounded the slide since June 2014 and brought with it a new oil price floor with oil prices currently at $40-a-barrel for the U.S. crude benchmark. Diaz though offers a more long-term view about the confidence flowing out of Argentina.

“We believe that the long-term development of Argentina’s unconventional resources is unlikely to be dramatically affected by the recent drop in oil prices. Firstly, given the significant economic potential of Argentina’s shale resources – and the prevailing financial difficulties – maintaining the industry’s attractiveness to international investors remain important to the current government and is likely to be a key focus in the next administration,” Diaz said.

Maintaining the industry’s attractiveness

“Secondly, long-term investments, such as the exploration and exploitation of unconventionals, are usually made with various price scenarios in mind. As such, despite the current situation, companies have demonstrated their commitment to investing in Argentina’s shale reserves. In fact, several deals have been struck with international operators in recent months. In December 2014, Malaysia’s state controlled oil company Petronas and YPF ratified a $ 550 million agreement that had been signed in August to develop an area in Neuquén Province, and in November 2014 German energy giant Wintershall agreed to launch its first pilot project this March,” Diaz said.

Diaz continues on a more upbeat outlook on Argentine shale citing the favorable foreign investment conditions Argentina has taken the necessary steps to encourage.

Promoting direct foreign investment

“The changes to the Hydrocarbons Law, approved by Argentina’s Congress in October 2014, seek to promote foreign investment in the country’s oil and gas sector by reducing existing regulatory complexities and providing several ‘carrots’ for energy companies. The principal changes include the creation of a specific concession for unconventional projects with a 35 year term (as well as a 10 year extension), nationwide caps on both royalties and provincial gross taxes, the removal of the controversial ‘carry’ system (whereby exploratory companies were required to partner with provincial companies that shared in the profits but did not help fund projects) and the right for companies that invest more than $ 250 million over a five-year period to export 20 percent of their oil and gas production without paying export taxes,” Diaz said.

Providing several ‘carrots’ for energy companies

As a whole, Diaz went on to say that “the private sector seems broadly pleased with the reforms, particularly that the amended law includes definitions for the various types of resources, including offshore; companies had been concerned by initial suggestions that a more restrictive, shale specific law would be passed. Moreover, recent studies have argued that the law will lead to concrete outcomes, boosting both oil and gas production and thereby enabling the country to achieve energy self-sufficiency within the next decade.”

“We then posed the question on what effect removing regulatory and import restrictions could potentially have on the investment environment. The Hydrocarbons Law is significant and very encouraging to expedite shale related activities. Diaz went further and suggested that there are several other changes the government could make that would be helpful to attract further investment to the shale gas industry,” Diaz said.

Government potential to ease current barriers

“For one, the government could ease current barriers to the repatriation of profits, a key issue for multinational oil and gas operators. Secondly, companies would be more likely to invest in the country’s shale reserves if they could more easily import the requisite highly specific equipment, technology and personnel; at present, there are several import restrictions that affect essential equipment and capital goods. Thirdly, investments would be more likely if companies did not face the forceful repatriation of export revenues, an issue that was only partially addressed by the changes to the Hydrocarbons Law,” according to Diaz.

Argentina’s complex foreign exchange regime

“More broadly, Argentina’s complex foreign exchange regime – including the current black market for foreign exchange in which the dollar is traded well above its official value – continues to act as a deterrent to foreign companies. These foreign exchange regulations have created additional costs for shale projects in particular, due to the substantial amount of technology and material that needs to be imported,” Diaz said.

Geological and technical challenges of Argentine shale

Diaz also provided an overview of the short term challenges citing the fact that foreign companies seeking to invest in Argentina face some short-term regulatory and financial challenges but offers a more long-term view of shale operators’ risk in respect of the geological and technical challenges.

“The principal, long-term risks for operators are geological and technical. While there have been a number of encouraging studies to date, companies, including YPF, are still engaged in conducting preliminary investigations of the country’s formations. As such, it remains unclear whether the sizeable gas deposits in the well-known Vaca Muerta formation in Neuquén Province in Argentina’s west, as well as other formations across the country, will be capable returning profits equivalent to those in the United States. Argentina will also continue to face considerable technical challenges on the road to creating a profitable industry. Companies will need to import costly machinery and keep up-to-date on ever-changing technologies specific to shale. Vaca Muerta and the country’s other formations also require a substantial expansion of support infrastructure assets, ranging from pipelines and roads to power-generation plans and housing. Moreover, companies will face the technical challenge of analyzing their respective areas of the formation and identifying the best areas to drill, known as ‘sweet spots’,” Diaz said.

Diaz believes that these challenges are surmountable and ultimately, unlikely to prevent the industry’s growth. With sufficient levels of investment and the right technological capabilities,

“We believe that the shale industry could take off in Argentina within the next decade”

“Argentina is home to the second largest shale gas and fourth largest shale oil deposits in the world there are several elements that could slow the growth of the industry. Firstly, there is the issue of infrastructure. Vaca Muerta and other formations require additional connecting roads for trucks to support the supply of goods and services, pipelines to deliver and dispose of water used during fracking and facilities for those working on site, all of which will increase the burden on the province’s existing infrastructure. Moreover, the construction of this infrastructure will be more costly due to the area’s remoteness, requiring equipment to be delivered from regional hubs. That being said, these services will not be required for the development of companies’ fracking wells for the next four to five years, allowing time for more advanced technology to be developed. Moreover, many companies are already in the process of addressing these issues.

“Argentina is home to the second largest shale gas and fourth largest shale oil deposits in the world”

Secondly, Neuquén and other provinces will also need to bolster both their workforce capacity and shale-specific infrastructure. For one, there are few existing shale specialists in Argentina. As experts are difficult to source from abroad – and because the equipment is highly specialized – Argentina will continue to require assistance from international contractors to up skill its local workforce. However, while the budding industry currently relies heavily on engineers and contractors from overseas, within the next decade Argentina is likely to have a number of well-educated, highly-skilled and experienced professionals.

All of the presidential candidates to date have publicly indicated their support for the budding industry. Buenos Aires Province Governor Daniel Scioli, one of the most promising candidates, is very supportive of the oil and gas industry and has publicly stated his desire to improve the current business climate in order to encourage investment. Moreover, Scioli’s very close relationship with the head of YPF, Miguel Galuccio, has helped him to gain a good understanding of the shale industry. In fact, Scioli has openly stated that he would maintain Galuccio as YPF’s CEO were he to be elected president.

“Presidential candidate Scioli very supportive of shale”

Massa, meanwhile, has stated that energy is essential to Argentina’s growth and development and as such, there should be a federal policy that encourages long-term investment in energy as a way of achieving self sufficiency. Massa raised the possibility of creating a national agency for hydrocarbons that would audit oil reserves, plan the energy matrix and fix the parameters for environmental sustainability. Macri is also keenly interested in the subject of hydrocarbons and investments that could solve Argentina’s problem of greater fuel production. In September 2013, he emphasized that to solve the energy problem in Argentina the country requires important investments, citing Galuccio’s statement that ‘many Chevrons’ are needed with transparent contracts,” Diaz said.

The article was provided by the Argentina Shale Gas & Oil Summit 2015.