The million-dollar question surrounding Argentina’s billion-dollar gas pipeline

The next few months may be critical ones for Argentina’s hydrocarbons industry – particularly natural gas – and indeed for the country’s sputtering economy.

Market observers should get signals of what’s ahead. 

GAS PIPELINE

All eyes are on the government’s flagship project, the Vaca Muerta gas pipeline, designed to ease a dispatch bottleneck at the Neuquén basin and, in turn, support higher production. This increased output would substitute dollar-devouring winter LNG imports and raise the prospects of an increase in firm, year-round exports to Chile and reignite discussion about the possibility of liquefaction.

First-phase work is estimated to ramp up Neuquén basin transport capacity by 10Mm3/d. In a planned second phase, capacity would grow a further 30Mm3/d in 2024, taking overall basin dispatch capacity to 115Mm3/d.

A tendering process for the first phase is underway. Officials have already awarded a contract for the pipes and decisions are pending for its construction and other components, including valves.

With an eye on the October 2023 general elections, President Alberto Fernández's administration wants the first phase completed by then. But laying, testing and commissioning over 600km of pipe in a year is no mean feat for any country. Indeed, doubt has been cast on the feasibility of hitting this deadline, with former energy minister Juan Aranguren last month arguing the tendering process should have started earlier.

And then there is the key issue of financing. The US$1.6bn first-phase price tag disclosed last year has surely climbed. Officials have previously said funds would come from a wealth tax, direct financing from the treasury and budget allocations. 

The bipartisan political will and macroeconomic incentives are there. But circumstances – such as soaring LNG import costs and skyrocketing inflation – have conspired unfavorably for the country’s finances. Taking everything into consideration, if you were a gambler, you probably wouldn’t bet the farm on the duct entering service on time. Nevertheless, the project will likely get built come what may, even if it takes longer than planned.

Amid this uncertainty, the government has said it would launch the fourth round of production incentives program Plan Gas, to secure the gas needed to fill the pipeline. Launched in 2020, Plan Gas bolsters producer cash flow stability via supply contracts, which upstream companies bid for in an auction process.

Monitoring this process, along with the volumes sought and the timing, would appear key. If the process is indeed launched and upstream players place offers, this may constitute a positive signal and indicate what the outlook is in terms of a commissioning date. 

Given the importance of the oil and gas industry to the country, it seems unlikely the government would launch a process to secure large amounts of additional gas if there is no possibility of the duct being completed on time. Of course, some output could potentially be pumped to Chile.

Argentina has 10 export pipelines connecting to Chile, Brazil and Uruguay. Seven run to Chile and have a combined capacity of 13.2 billion cubic meters per year (36.2Mm3/d), with three in the far south and two in the far north.

OIL 

On the oil front, the government has said it would decide in August-September whether to extend the concession contracts of midstream players Oldelval, Oiltanking and Otasa.

The extensions are likely, given the firms have outlined investment plans that would support greater oil output. In addition, state oil and gas firm YPF, the country's biggest oil and gas producer, is a stakeholder in all three companies. 

Pipeline operator Oldelval has indicated that, if granted a 10-year extension, it would invest in a new pipeline to dispatch Vaca Muerta output. The company recently presented a US$1.7bn spending plan for 2022-37. 

Otasa, which is bringing its Argentina-Chile export pipeline back online, said outlay could reach US$82mn over the period, with around a quarter earmarked for recommissioning-phase work. Storage player Oiltanking envisages outlay on five tanks of 250,000m3 and a pumping station.

Argentine upstream firms are targeting the export market, with appetites whetted by more favorable prices they can obtain for their oil abroad and limited domestic refining capacity.

CLIMATE 

Events this week in Europe – extreme temperatures and deadly wildfires – have brought into sharp relief the impacts of climate change and the need to slash emissions.

This, combined with the energy crisis stemming from the Russian invasion of Ukraine, may accelerate the energy transition and nudge oil and coal even further into kryptonite territory.

Oil will always be needed – even if eventually only for petrochemical and other limited applications – but shareholder and political pressure will surely build for low-carbon production. In terms of gas, the level of aversion is not as great, given its supporting role in the transition and cleaner credentials, but upstream environmental footprints will likely be more closely scrutinized in the future too.  

Even though Argentina is a small polluter when compared with larger economies, foreign majors looking to enter or grow their footprint in the country will likely do so armed with mitigation plans. 

Events over the coming months – with respect to the gas pipeline and the midstream oil concession contracts, and indeed to climate change – may indicate where production and investment are heading. 

Another scenario to consider is that foreign investors may hold fire on – or at least limit – spending until the general election to see whether the Peronists retain power or the center-right regains the helm. In the latter case, and if the macroeconomic situation and financing conditions improve, more opportunities in renewables and green hydrogen could potentially flourish and attract chunks of foreign players' spending pots.