Argentina offers one of the few places on earth where oil companies are
not suffering from the full force of the collapse in prices.
Argentina regulates oil prices, a policy originally intended to insulate
the public from the whims of the market, protecting people from triple-digit
crude prices. But with the crash in prices since mid-2014, the effect of the
regulation has reversed: motorists are now effectively subsidizing the oil
industry.
Prices for light oil are set
at $67 per barrel and natural gas prices fixed at $7.50 per million Btu
(MMBtu). That means consumers are not reaping the benefits of cheap fuel. The
higher prices they pay offer a huge lifeline for the oil industry.
From the consumer's standpoint, that may not sound like a great deal. But
it may help Argentina's shale industry keep their momentum going. Argentina
holds some of the largest shale potential outside of the United States.
According to the EIA,
Argentina has over 800 trillion cubic feet of unproved technically
recoverable shale gas reserves (more than the 622 tcf located in the U.S.)
and 27 billion barrels of shale oil, which is less than only the U.S.,
Russia, and China.
The bulk of Argentina's shale reserves are located in the Vaca Muerta, a
vast shale basin in central Argentina. The Vaca Muerta has attracted
companies from around the world, including ExxonMobil, Chevron, Royal Dutch
Shell and Gazprom.
Drilling activity has continued to grow, but high costs and infrastructure
constraints have prevented production levels from rocketing skywards as they
did in places like Texas or North Dakota.
But regulated oil prices could also prevent Argentina from suffering the
effects of the bust that are now clearly visible across the well-known shale
areas of the United States.
"This is so important, strategically," said the outgoing CEO of
state-owned YPF, Miguel Galuccio, referring to regulated prices, according to
the WSJ.
Last week, Galuccio announced
that production from the Vaca Muerta continued to inch upwards, having
reached 50,000 barrels of oil equivalent per day (boe/d), up from 44,000
boe/d last year.
But Argentina faces profitability challenges even with regulated oil
prices. Galuccio said that the profit from YPF's shale oil and gas production
was "marginal." YPF announced spending reductions as well as the
decision to reduce its rig count. The company spent only $4 billion in 2015,
down from the original $6 billion it had planned on spending. YPF will trim
another 25 percent from its budget for 2016.
Galuccio argued, though, that the economics will improve as drilling
scales up, techniques are refined, and operators learn more about the basin.
He said that YPF has already reduced costs from the average shale well from
$16 million to $13 million a piece. He expects that costs will decline to $10
million per well in 2016.
Regulated oil prices can buy YPF - and other companies, including YPF's
joint venture partner, Chevron - some space to continue to drill and bring
costs down. "We are doing this to sustain activity and employment,"
said Argentina's labor minister, Jorge Triaca, referring to artificially high
prices.
"You've got to incentivize people to do exploration and development,
especially when prices are low," said Ali Moshiri, the top Chevron
official in Latin America said. "If Argentina carries on with these
incentives, it will encourage others to come to the country."
Meanwhile, a corporate makeover is also underway. Argentina's new
President Mauricio Macri pushed YPF's CEO Miguel Galuccio out the door last
week. The FT reported
that Argentina's new energy minister, Juan José Aranguren, was not fond of
Galuccio. In particular, he was critical of ballooning debt levels that took
place under Galuccio's management. Galuccio will be succeeded by a former JP
Morgan executive.
But Galuccio is also credited with turning YPF's fortunes around. Since
taking the helm in 2012 after the government of former President Cristina
Fernandez de Kirchner nationalized YPF, he improved the company's operations
and achieved production increases.
President Macri and the new YPF CEO hope to keep the momentum going.
Whether or not having the Argentinian public subsidize oil prices is smart
policy, it offers the shale industry a rare bright spot for the energy
industry.