Argentina’s natural gas production declines

Natural gas production in Argentina decreased 11.1% to 115Mm3/d (million cubic meters per day) in the first two months of the year compared to the 129Mm3/d recorded in the same period of 2020, despite the implementation of Gas Plan 4.

The fall was due to the poor performance of state-owned oil company YPF, which saw output plummet 23.3% to 29.2Mm3/d in January-February compared to 38.1Mm3/d in the same period last year, according to data from the country’s energy department.

“Even if oil prices return to US$60, gas prices to US$3 [thanks to Gas Plan 4 and state subsidies], and the return to 700 unconventional fracking operations per month and fuel demand recovers strongly, it is difficult to find a positive outlook for the Argentine oil industry. The damage suffered [by the industry] in the last year cannot be reversed simply by prices returning to their previous levels,” said Daniel Dreizzen, an associate at the Ecolatina consultancy, in a report.

The data that most concerns the industry and the government is that natural gas production fell 1.01% in February compared to January, when Gas Plan 4 had already been active for two months. This offset the increase of 1.21% that was registered the previous month compared to December.

“The Gas Plan is a good idea that started very late. We will be shielded from the winter demand until July and next year it will be better. Due to the lack of output, the teams of operators had to be disassembled and reassembled to start production and this has caused delays,” former secretary of hydrocarbon resources, José Luis Sureda, told BNamericas.

The worst performance was recorded by the Neuquén basin, the main one in the country, where production was down 14.9% to 68.8Mm3/d in the first two months compared to 80.8Mm3/d in the same period of the previous year.

This was due to the decline in the performance of unconventional wells drilled until 2019, given the sector’s inactivity throughout 2020.

The Cuyana basin followed with a 12.4% drop to 127,190m3/d, while the Noroeste saw a decrease of 10.7% to 2.06Mm3/d, with Golfo de San Jorge posting a decline of 9.12% to 10.9Mm3/d, and Austral reporting a fall of 1.15% to 30.9Mm3/d.

Some encouraging data came from the increase in the number of fracking operations in Vaca Muerta with 685 in February, up 6.70% from January, according to calculations by Luciano Fucello, who is country manager of NCS Multistage. It represented the second biggest increase ever in the Patagonian reservoir.

The fall in the production of natural gas is a major concern for the government since it will have to make up the shortage with imports and this will negatively impact the already scarce reserves at the central bank (BCRA).

According to the energy department's own estimates, state company IEASA will have to set aside some US$1.86bn to import the 8.124Mm3/d it will need to cover the shortfall this year.

Of this amount, US$1.03bn will be used to import 3,674Mm3/d of LNG through regasification ships anchored in the Buenos Aires ports of Escobar and Bahía Blanca, at US$7.80/MMBTU (million British thermal units), and US$834mn for purchases of 4,450Mm3/d from Bolivia (at US$5.21/MMBTU).

A company in trouble

The main responsible for the fall in reserves at BCRA is the production decline that YPF has suffered and that has not been able to be halted even with the implementation of Gas Plan 4, which was especially designed by energy secretary Darío Martínez to help the company boost its output.

YPF’s production plummeted 23.3% to 29.1Mm3/d in January-February at the fields in which it is listed as an operator compared to the 38.1Mm3/d it had recorded in the same period of 2020.

The figures that most concern the industry is that YPF not only produced 0.99% less (29.1Mm3/d) in February compared to January, when it registered 29.4Mm3/d, but its production in the first month of the year had already fallen by 0.84% compared to December.

The biggest decline in the first two months occurred in the Neuquina basin, where output fell 24.4% to 25.8Mm3/d, followed by Golfo de San Jorge with a decrease of 14.9% (2.15Mm3/d). Austral saw a drop of 12.4% (1.19Mm3/d) while production at La Cuyana was down 9.77% (109,789m3/d).

As a result, YPF lost for the second consecutive month its long-standing position as the number one player among the country’s largest natural gas producers to Total Austral, the local unit of France's Total.

YPF's production decline was driven by the 11.6% decrease in its main area, Loma La Lata - Sierra Barrosa, in Neuquén province, where it reported 9.68Mm3/d in the first two months compared to 11Mm3/d in the same period of 2020.

Added to this was the 37.1% output drop at its second most important block, Rincón del Mangrullo, in the same province, where it registered 2.52Mm3/d compared to 4Mm3/d in January-February last year.

To reverse this situation, YPF plans to drill 31 wells as part of its 2021-2024 commitment to the government in Gas Plan 4.

In partnership with local company Pampa Energía it saw a 20.1% decrease in Río Neuquén, where it produced 2.41Mm3/d in the first two months compared to 3.01Mm3/d in the same 2020 period.

The companies’ Gas Plan 4 commitment to the energy department is to drill 36 wells in this area in the next four years to boost production.

In Río Negro, the biggest decline took place in conventional block Fernández Oro Station, where output fell 33.9% to 1.85Mm3/d in the first two months from 2.79Mm3/d a year before.

Not even its partnership with US firm Chevron allowed YPF to reverse the negative performance in unconventional area Loma Campana, where production fell 22.4% to 1.74Mm3/d from 2.24Mm3/d in the same comparison.

A worse performance could be seen in unconventional area El Orejano, which YPF operates in a joint venture with Dow Argentina, the local unit of US company Dow Chemical. Here production plummeted 54.8% to 1.20Mm3/d from 2.66Mm3/d in the two-month comparison.

YPF also reported a 41.6% drop in the Aguada de la Arena shale gas area to 932,166m3/d compared to 1.59Mm3/d in the same period of 2020.

To meet the objectives set out under the Gas Plan 4 in December, YPF’s pledge is to drill 36 wells in Aguada de la Arena. 

Finally, the company saw a production decline of 37.2% to 569,666m3/d at La Ribera I compared to 907,564m3/d in the same two months of 2020.

In this shale gas block, YPF has proposed to the government to drill at least three wells over the next four years to meet the Gas Plan 4 objectives.

Among the few blocks that showed a positive performance in January-February, were the unconventional La Amarga Chica and Bandurria Sur, both located in Neuquén.

In the first, which YPF operates in partnership with Malaysia's Petronas, shale gas extraction grew 30.8% to 516,040m3/d from 394,540m3/d.

In the second, where the NOC is leading a consortium made up of Anglo-Dutch Royal Dutch Shell and Norway’s Equinor, production grew 18.5% to 262,394m3/d from 221,487m3/d in the same comparison.

YPF has said it will invest US$500mn this year to meet the Gas Plan 4 objectives and increase production in the Neuquina basin. This is part of the US$1.5bn that it will invest in the program over the next four years and the US$2.7bn of capex that it has announced for 2021.

The company’s CFO, Alejandro Lew, told investors during the Q4 results presentation that YPF lacks the necessary funds since it will only be able to cover US$2bn of the investment goal with its own cash flow and the rest must be obtained from the capital markets.

The big challenge will be to find a way to cover its capex gap given the lack of access to international markets that it will have after a failed debt swap at the beginning of the year and Argentina's rising country risk, which already exceeds 1,500 points.

A sector in crisis

YPF's poor performance at the beginning of this year was in line with that of the rest of the industry. 

Argentine company Tecpetrol saw output fall 12.9% to 12.9Mm3/d at its Fortín de Piedra area (Neuquén) from 14.8Mm3/d in January-February of 2020.

Pan American Energy’s production was down 7.07% to 12.4Mm3/d in the areas it operates from 13.3Mm3/d in the same comparison.

In the Austral basin, local firm Compañía General de Combustibles (CGC) saw its unconventional production in Santa Cruz decrease 12% to 4.95Mm3/d from 5.63Mm3/d a year ago.

A similar performance was seen at Argentina's Pluspetrol, which recorded an output drop of 10.5% to 3.95Mm3/d in the blocks it operates, compared to 4.41Mm3/d in the same months last year.

Chilean company Enap Sipetrol reported a January-February decline of 11.6% in the Austral basin, to 3.47Mm3/d. Last year’s production in those months was 3.93Mm3/d.

Local firm Capex saw its output plummet 22% to 1.49Mm3/d from 1.92Mm3/d in the same comparison.

The ranking of the 10 largest natural gas players in Argentina ends with Mexican Vista Oil & Gas, which reported a drop of 24.5%. Miguel Galuccio's company produced 1.36Mm3/d compared to 1.80Mm3/d in last year’s January-February period.

Total Austral was one of two firms among the 10 largest that reported an increase in natural gas production in the first two months. It registered growth of 4.93% to 32.3Mm3/d in the areas it operates compared to 30.8Mm3/d in the same period of 2020.

The growth posted by Pampa Energía was 2.82%, increasing to 6.06Mm3/d from 5.89Mm3/d.

The other companies recording output increases were local player Oilstone (7.83%), Shell (31.5%) and President Energy (127%) from the UK.

A new regulation

To improve the current situation in the industry, the energy department plans to accelerate the implementation of a new hydrocarbons law, which it will send to congress with the goal of attracting investment to local exploration and production of both gas and oil.

"We must create a legislative tool that allows [the country] to attract the necessary investments to do what needs to be done, now that we know what the outlook is, and that generates confidence in the industry," said Martínez in a statement.

“To achieve the objectives set out by the President [Alberto Fernández], it is essential that the hydrocarbon investment promotion law provides a framework of predictability, clear and stable rules, as we have already done when we launched the Gas.Ar Plan as a central tool of the development of Argentine natural gas production," he said.

For this law, the energy department is analyzing the inclusion of a promotion system for foreign sales of natural gas with the possibility of including restrictions during the winter months, those with the highest local consumption (May to September), as reported previously by BNamericas.

At the same time, it seeks to add tax benefits and special authorization for the purchase of dollars in the official market and allow the payments of dividends and international loans for those companies that make foreign-currency investments in the country.

“There is talk of a new law that shields the oil sector from the macro economy since the sector has the ability to generate foreign exchange and production. Thus the industry could enjoy benefits in relation to international currency flows. It sounds difficult in this context of elections and of recession and crisis. But you never know, we could be facing a ‘temporary fix solution’ which we are already so familiar with," said Dreizzen.