Dead ‘cash’ cow

Vaca Muerta shale deposit in Argentina could become a stranded asset rather than a cash cow.

Argentina’s government recently launched the so-called Gas Plan, the primary objective of which is to reactivate the Vaca Muerta shale project, which has been losing production for the last 2 years. Market observers estimate that full reactivation would require USD 5 to 10 billion annually.

An industry executive stresses the importance of the project, “Vaca Muerta’s reactivation is not an opportunity, it is a necessity. It is a world class asset and without it Argentina only has reserves for the next 10 years.”

“Vaca Muerta’s reactivation is not an opportunity, it is a necessity.”

Energy Industry Executive, Argentina

Argentina is facing a competition for capital against Brazil, Guyana and Suriname. To compete, Argentina needs a stable, predictable and transparent political, regulatory and tax environment. Additionally, market-based pricing is essential as is access to foreign exchange markets for investors to repatriate cash to pay loans and dividends.

Industry specialists believe that the Gas Plan may be overly ambitious and difficult to deliver. A market observer comments, “The plan expects production to increase before next winter and the breakeven costs to fall (currently USD 50 per barrel), neither are clear to me. Also, the government is trying to price more of the market in pesos rather than dollars, this won’t work, especially when political interventions can manipulate this.”

A former government adviser on energy policy agrees with the last point, “If domestic prices are decoupled from international prices, for cheaper local consumption, this will be a disincentive for investment and in turn an incentive for importing. This ends up demanding more dollars, energy will need to be imported, with the loss of foreign exchange that this entails. And therefore, more public spending and more fiscal deficit. In this way, a good energy policy has a direct impact on the country’s macroeconomic results. And vice versa.”

There are also doubts that the plans do not go far enough. A former energy secretary told us, “If you really want to reactivate the deposit and benefit from exports, you need long-term investment from the private sector to boost exports. This plan only aims to sustain production to avoid imports, not to boost exports which is the main opportunity.”

“If you really want to reactivate the deposit and benefit from exports, you need long-term investment from the private sector to boost exports.”

Former Energy Secretary, Argentina

An entrepreneur in the energy sector in Argentina agrees, “Energy plans should be made for 30 years, not one or two governments. We need fiscal stability and clear rules to make such long-term investments. Every so often there are signs that we’re moving in the right direction but then the government shift to the short-term and major decisions are postponed.”

Finally, other critics have focussed on the lack of interest in clean energy, “Argentina should take advantage of all the potential it has in renewable energies. Arriving late to these technologies means we can take advantage of the knowledge curve of others, which translates into lower costs, but we need to invest at some point. We have the best solar and wind resources in the world, throughout the entire territory.”


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