Thomas White Global Investing
Argentina Stamp
September 9, 2011
A Postcard from the Americas
Argentina: New vigor for a flagging energy sector?

Oil driller in Argentina

Large shale deposits in Argentina’s Neuquen province have reignited foreign investment in the country’s oil and gas exploration space and could potentially help its flagging energy production.

Argentina’s Neuquen province was once known for the fossilized prehistoric dinosaurs and birds discovered there, such as the Neuquensaurus and the Neuquenornis. But Neuquen has not just put Argentina in the archaeological hall of fame; it has also given the country an added practical gift.

Apparently, there is much more than just prehistoric dinosaur bones buried underground in the province. Not only have large deposits of conventional fossil fuels been found there over the past several decades, but now, sizable deposits of oil shale have been unearthed in Neuquen. Shale deposits, which yield unconventional gas and oil, are being viewed as a new and valuable source of energy.

A relatively newer resource, shale-related energy has taken the spotlight on the global stage as fresh deposits have been discovered worldwide. And the discovery of shale deposits in Argentina could add new vigor to the country’s flagging energy sector.

Half of Argentina’s energy demands are met by natural gas and the remaining balance is largely met by oil. But, over the past few years, gas and oil production have been falling. A natural reduction from older fields has led to oil production declines, while price caps have reportedly deterred natural gas production. With an economy that grew 9.2% last year, domestic demand for energy has been on the rise and production has been unable to keep pace. Recent developments in the Neuquen province could just turn around the fortunes of Argentina’s energy sector, and at the same time, boost the country’s economy as well.

This May, 150 million barrels worth of shale oil was discovered in a Neuquen conventional natural gas field. And last December, 4. 5 trillion cubic feet (tcf) of unconventional shale gas was uncovered in the same field. Oil and Gas Journal statistics seen by the U.S. Energy Information Administration (EIA) reveal that Argentina had proven gas reserves of 13.4 tcf and 2.5 billion barrels of proved oil reserves last year. This implies that last December’s shale gas find of 4.5 trillion cubic feet equaled a third of Argentina’s proven gas reserves; while May’s 150 million barrel shale oil discovery equaled 6% of its oil reserves.

Argentina’s shale discoveries — which were made by its largest oil and gas company, YPF — have sent global players rushing to its shores to leverage the potential of this energy cache. For a long time, Argentina’s heavily regulated energy sector and tight economic policies kept major investments in oil and gas exploration, commonly known as the upstream component, at bay. When global energy prices surged during the first few months of this year, Argentina decided to ease price caps on fuel to create a more favorable environment for energy companies. This, along with the shale discoveries, seems to have put the country back on the upstream investment radar.

Only last week, the largest U.S. oil company — ExxonMobil— announced its re-entry into the Argentine upstream after a 30-year gap. Joining hands with Canada’s Americas Petrogas Inc., Exxon and its partner are slated to spend around $76.3 million on this venture. What’s more, Houston-based Apache Corp. has been exploring for shale gas in the Neuquen region, and French energy company, Total, upped its stakes in the shale-rich Neuquen region this January.

To add to Argentina’s advantage, Chinese companies have also invested in the country’s conventional oil and gas sector. Last year, China Petrochemical Corp said it would buy all of American Occidental Petroleum Corp’s Argentine assets for $2.45 billion. In a similar move, China’s state-owned energy firm, CNOOC, took a 50% stake worth $3.1 billion in Argentina’s oil and gas firm, Bridas.

With Argentina’s oil and gas production declining last year, according to an EIA report, it has perhaps never been more crucial for the country to focus on its energy sector. Adequate power supply is crucial for any economy; probably more so for an economy that is yet to throw off the last vestiges of a massive debt default. In Argentina, energy does not impact industrial development alone, but also the agriculture sector, which powers its economy. Power shortages caused by declining energy production have imposed challenges on both the industrial and agricultural sectors in the country.

However, there are certain challenges that Argentina will need to overcome along the way. The biggest obstacle, of course, is the actual extraction of shale gas and oil, a complex task to say the least. The process is also considered to be harmful to the environment and is more costly than the extraction of conventional resources, such as crude oil. Benefits from the Neuquen shale deposits are also unlikely to be experienced in the short term as the process of exploration and development could take years. Higher extraction costs also make it unviable for oil companies to sell shale oil when global oil prices fall. A decline in oil prices, therefore, might also delay Argentina’s shale development.

Still, with foreign investments beginning to flow back into the energy sector – the oxygen for any economy – the power shortage issues faced by Argentina’s industrial and agricultural sectors might also end in the long term. Once the shale discoveries cross the exploration stage and start producing commercially-viable energy, oil and gas production might get a boost in Argentina and thus reduce the country’s dependence on energy imports.

What’s also encouraging is the EIA report that shows that the country holds enough shale in its rocks to make it the third largest shale gas player in the world. According to this report, the technically recoverable shale gas resources in Argentina are 774 tcf higher than those of all the European countries put together.

Already, Chinese and Indian companies have been snapping up interests in U.S. shale deposits, driving up the price of shale assets and making the country one of the major global developers of shale gas. And the investments by Chinese CNOOC and Sinopec show that Chinese firms are also interested in the Argentine energy sector, adding to the prospects of the shale discovery. So it appears that in the long term, the Neuquen province could, after all, take Argentina into yet another hall of fame altogether.


Image Credit: nestor galina under Creative Commons license

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