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Although the world is still grappling with COVID-19 and its
consequences on economies and societies, there are indications that
increasing demand and higher oil prices are resulting in greater
production. In Argentina, production has been on the rise in recent
months with output climbing to 496,000 b/d in March 2021, up from
445,000 b/d in April 2020. Argentina's government is stepping in to
incentivize hydrocarbon production with gas price subsidies, export
programs, and proposed reforms to energy policies. Although some of
these measures have helped revive production, much work is left to
be done for the oil and gas market in Argentina to fully recover.
IHS Markit Companies and Transactions and Cost and Technology teams
have taken a look at the obstacles that still remain to the
formation's full-scale development.
To download the detailed report, please, click here.
Potential Challenges Facing the Vaca Muerta's Further
Development
The successful derisking and full-scale development of the
formation will require significant investment over the next decade.
Although the prospective shale resource base in the region is
prolific—holding the second-highest technically recoverable gas
reserves and fourth-highest technically recoverable oil reserves
worldwide according to the US Energy Information
Administration—there are numerous challenges. Among them are
pipeline constraints, aboveground risk, and the low-carbon energy
transition.
Pipeline Constrains
Although there is a significant prospective resource base in the
Vaca Muerta formation, infrastructure constraints could limit the
area's production potential. Arguably the most critical is the gas
outflow capacity from pipeline capacity and local demand for gas.
There are three gas pipelines able to export gas from Neuquén,
yielding a volume of approximately 92.9 MMcmd. In 2019, production
in the basin averaged 84.2 MMcmd, peaking at 94.2 MMcmd in the
winter months, when seasonal demand increases. Without the
construction of new pipelines, additional gas output may only
increase as much as local demand warrants.
Should sufficient infrastructure be in place for gas, it could
be transported to meet seasonal domestic demand as well as demand
in neighboring countries. A few options have been on the table for
pipeline capacity expansion. There was a 2019 proposal to construct
an $800 million, 500 km pipeline (first stage of 15 MMcmd capacity)
connecting the Neuquén Basin with Buenos Aires; however, the
project has faced a series of setbacks and continues to be on hold
owing to the pandemic. In 2020, the federal government also pitched
to Brazil a $4.9 billion, 2,000 km pipeline (initial capacity of 15
MMcmd) that would connect the Neuquén Basin with Porto Alegre.
Initial discussions on the latter pipeline are ongoing.
Aboveground Risk
A second factor that could undermine resource development is
ongoing concerns regarding the aboveground risk in Argentina. For
much of the last decade, the government's policies to promote
hydrocarbon development have been inconsistent across three
presidential administrations. Moreover, the specter of sovereign
default, capital controls, and export taxes have deterred companies
from making more significant investments in Argentina. The current
administration hopes to address some of these market challenges
with a forthcoming bill that would improve the investment
environment for oil and gas companies in Argentina.
In addition to concerns regarding the government's economic
policies, trade unions are well-organized with ample influence over
the government and the capacity to disrupt operations in the oil
and gas sector. Groups of "piqueteros" often resort to the tactic
of roadblocks as a means of increasing their bargaining power over
items such as spending programs and worker compensation. The most
recent example came in April 2021 when healthcare workers blocked
roads near the Vaca Muerta formation in an effort to secure higher
compensation. Although the blockade has since been lifted, the
prospect of similar protests is a recurring threat that impedes
work and transportation in and around the area. Last month's
episode resulted in output being cut by 10,000 b/d and 120 MMcf/d
from normalized levels.
Energy Transition
A final but emerging obstacle of note to production in the Vaca
Muerta formation is the transition to lower-carbon energy sources.
With this in mind, for some companies, there could be the potential
of a diminishing long-term role for oil and gas within their
portfolios. Although costs are coming down and production is going
up, there are concerns about the level of emissions that would
emanate from the large-scale development of the formation. Indeed,
critics contend that methane emissions represent a major issue at
oil and gas installations across the formation. Going forward,
companies operating there will need to mitigate emissions as a
project's carbon intensity becomes increasingly relevant not just
to oil and gas companies, but to the financial institutions that
back them.
