Publish in Perspectives - Wednesday, November 28, 2018
Thanks to Vaca Muerta, Argentina's state oil and gas company is seeing sustained output growth a d will continue to do so, experts say. (Photo: YPF)
Despite Argentina’s crisis, YPF seen boosting production.
BY ENERGY ADVISOR
Argentine state-controlled oil company YPF plans to invest between $4 billion and $5 billion annually until 2023 in an effort to boost crude oil and gas production by 5-7 percent per year, with a special focus on the country’s Vaca Muerta formation, one of the world’s largest shale oil and gas reserves. How likely is it that YPF will be able to carry out its investment plan given the economic turmoil Argentina is currently facing? Will the increases in investment be enough for output to reach the company’s targets? What else can YPF do to take full advantage of the South American country’s huge shale reserves?
Gerardo Rabinovich, second vice president at Instituto Argentino de la Energía “General Mosconi” in Buenos Aires: Argentina went through a severe economic crisis this year that forced it to agree on a stabilization plan with the IMF in exchange for access to $57 billion until 2021, restoring calm in the markets and the stability of the government. In this context, YPF presented its 2018-2022 strategic plan foreseeing a total investment of $30 billion and increasing its production by 5 percent based on the growth of shale oil in Vaca Muerta, where it is expected to increase current production by 150 percent. After almost 20 years of falling production, this year marks a turning point for YPF. The results show a recovery, supported by Vaca Muerta: YPF produces a total of 240,000 barrels per day, of which 45,000 come from there. The production of shale grows at a rate of 36 percent per year. YPF’s strategy rightly points at obtaining exportable oil surpluses, and its success will depend on international oil prices, the decrease in operating costs that make oil competitive in the markets and the success of the stabilization plan agreed with the IMF. If these factors are verified, announced investments can achieve the company’s targets, and if the environment is even more favorable, larger investments could even surpass them, because the Vaca Muerta resources have been confirmed and its high quality reassured. The country has implemented a strong commitment to the industry in order to obtain ambitious results in the exploitation of these resources.
Amanda Kupchella, upstream Latin America research analyst at Wood Mackenzie: YPF first laid out its five-year plan in October of last year, when it announced a 5 percent annual production growth target. The national oil company provided an update on its progress over the past year and announced it is now targeting 5-7 percent annual production growth through 2023. The upside will come from oil, as the company will focus on developing the shale acreage adjacent to its star Loma Campana project. The area is the most de-risked in Vaca Muerta and contains the vast majority of the country’s shale wells. The blocks will also benefit from access to infrastructure that is being built out as more projects move into full development. Shale is crucial to YPF’s production growth strategy. Its 2022 unconventional production target is over 400,000 barrels of oil equivalent per day, 30 percent higher than the goal announced last year. The target is aggressive but achievable as long as the local supply chain grows to accommodate increasing demand for rigs and completion crews. There is little risk in below ground potential, and upside exists from the development of multiple zones. YPF’s projected $2.5 billion in upstream unconventional spending per year will be sufficient to meet shale production targets, provided the company is not constrained by supply chain or pipeline capacities.
This year’s macroeconomic instability is a reminder of the country’s history of political and economic volatility, but it has not materially impacted oil and gas operations or development plans. The currency devaluation lowered upstream costs, but the effect is expected to be temporary.
David Goldwyn, chairman of the Atlantic Council Global Energy Center’s Energy Advisory Board: YPF is fully capable of deploying its investment program despite Argentina’s challenges implementing the IMF standby arrangement. The company has access to capital, ample undeveloped acreage and capable and experienced partners.
The major factors affecting their success will be whether they make progress on the infrastructure required to evacuate oil and gas production to markets and the potential softening of oil prices in 2019 due to rising production and weakening demand. With an election coming next year, there is reason to be concerned that the government may revert to the kind of price controls that killed investment in prior administrations. The recent cap on gasoline prices is a serious red flag. But this time may be different. The continued liberalization of electricity prices is an important signal for investment in natural gas. And the IMF standby arrangement allows the government the flexibility to ameliorate the inflationary impact of reducing energy subsidies. If the government can target that relief to those most in need, time limit the gasoline cap and provide clear policy signals of what the investment framework would look like under a second Macri administration, YPF and its partners will weather the storm.
Isabella Alcañiz, associate professor at the Department of Government and Politics of the University of Maryland: YPF will have to deliver on its multibillion-dollar investment promise under an increasingly deteriorating economy, which under President Macri’s leadership is caught in an inflationary process and a depreciating peso. The recession in the country is severe: the IMF forecasts a loss of over 2.5 percent of the country’s gross domestic product this year. Given the economic crisis, it is unclear how the state-owned company will manage.
Uncertainty rules the future of the country, especially considering that next year is a presidential election year. The challenge for the Argentine government and YPF is to secure the extraordinary levels of investment needed to access the country’s unconventional natural gas reserves that fall under the label of ‘technically recoverable resources.’
International natural gas prices, which are projected to rise over the next two years, may help YPF keep its promises because high prices can help attract much needed international investors. Nevertheless, the general economic and political state of affairs will restrict any YPF investment plan.