Argentina’s hydrocarbons bill: Major oil rush seen as unlikely

Argentina’s hydrocarbons promotion bill may raise national oil production, but not by much, BNamericas was told.

The country sits on a wealth of oil and the government bill is chiefly designed to get more of it flowing and exported to help bolster central bank reserves.

But local market conditions, combined with regional and global factors, as well as the scope of the incentives in the draft legislation, could dampen expected results.

Elevated levels of political and economic risk, as well as the associated issue of unfavorable credit costs, has weakened appetite for hefty investment in Argentina, while new oil production is coming online elsewhere and the energy transition will eventually erode global demand.

The hydrocarbons bill contains incentives to encourage companies to ramp up activity, such as the granting of export rights on additional production and an easing of capital controls on revenue raised from this output. 

Saverio Minervini, a senior director at rating agency Fitch, told BNamericas that, as it stands, the bill would unlikely result in a significant increase in production.

“The hydrocarbon bill, as proposed, is not expected to materially impact the cash flow profile of our rated energy companies,” Minervini said. “I don’t expect them to increase production, materially, because of the law. For the broader energy sector, I don’t think it moves the needle much.”

Argentina exported 2.69Mm3 of crude oil last year, up from 2.52Mm3 in 2019, according to data from local hydrocarbons association IAPG.

Among companies offering oil for export this month are Pan American Energy, Pluspetrol, Enap Sipetrol, and Pampa Energía, according to federal energy department data. 

State energy company YPF – a net buyer of oil – was Argentina’s biggest producer in July, accounting for 37,000m3/d, followed by Pan American Energy with 15,884m3/d and Vista Oil & Gas with 5,045m3/d. 

The bulk of E&P firms produced less than 1,000m3/d.

Unconventional crude oil production has been trending up in Argentina, driven by producers, chiefly in Neuquén province, tapping the Vaca Muerta shale play, while output of conventionals has been dropping. 

A key concern of provinces that extract conventional hydrocarbons and do not serve the export market is that any fresh investment would flow into Vaca Muerta, a potential source of political friction as the bill winds its way through congress. The bill is also long and complex, indicating that passage may take some time.

Meanwhile, the natural gas sector is seen as the real jewel in Argentina’s hydrocarbons crown. And that potential – at least in the medium term, in the absence of an LNG liquefaction plant – rests on the country’s ability to pipe natural gas to neighbors Chile and Brazil, the former currently dependent on LNG and the latter suffering from a drought that is impacting hydroelectric output and, in turn, pressuring thermoelectric plants.

Argentina wants to keep ramping up Vaca Muerta gas production, with a view to substituting winter imports and building a year-round exporting industry, but transport infrastructure would need building out in parallel, including a duct to help dispatch Vaca Muerta output.

National gas production for January-June was 21.3Bm3, or 118Mm3/d, down 5.8% year-on-year, according to data compiled by IAPG. July output was higher, at 131Mm3/d, according to federal energy department data. Production was up 2.9% month-on-month and 3.0% year-on-year. 

Argentina already has a pipeline linking the country to Chile, which buys Argentine gas in the Southern Hemisphere’s warmer months, when Argentine domestic demand drops. In terms of exports to Brazil, infrastructure would need building in Argentina, while Brazil would need to build a duct from Uruguaiana, on the Brazil-Argentina border, to the coastal city of Porto Alegre. 

Cash-strapped Argentina is mulling ways of financing gas transport infrastructure and has been in talks with China over the biggest planned pipeline, the so-called Néstor Kirchner duct. 

A key non-financial challenge for Argentina is regaining the confidence of its neighbors after the country halted gas exports to Chile in the mid-2000s when its own supplies ran low. An associated risk factor is the increased demand being placed on thermoelectric plants in Argentina – also suffering from lower-than-normal precipitation – and how that may impact availability of energy exports. 

Argentina’s hydroelectricity production in June was 1,818GWh, down 48.7% year-on-year, according to wholesale power market administrator Cammesa. Thermoelectric generation in July was 8,431GWh, up 21.0%.