WSJ / Argentina’s Vaca Muerta shale field / Sleeping energy giant in South America .............................
Dec. 21, 2023
Global Conflicts Stir Sleeping Energy Giant in South America
Argentina’s Vaca Muerta shale field is among the megaprojects ramping up around the region
By Kejal Vyas
AÑELO, Argentina -- South America has long been the world’s sleeping energy giant, with massive oil-and-gas reserves still untapped. Now it is rumbling awake, with huge implications for the global market.
From the deep waters off the northern shoulder of the continent down to Patagonia, a number of countries in the region are ramping up oil-and-gas production even as developed economies race to cut carbon emissions and reduce their dependence on fossil fuels.
And South American companies are fast trying to position themselves to become new global suppliers as Western governments and energy majors are increasingly looking at the region to diversify away from conflict-ridden choke points of the Middle East and Russia.
“What we know is that Europe and the Western world is never going back to depending on Russian gas,” said Marcelo Mindlin, president of Buenos Aires-based Pampa Energía. “This is a big opportunity.”
His company is among a number that are increasingly active in Argentina’s large oil-and-gas patch called Vaca Muerta -- which means dead cow in Spanish.
Sitting on arid, windswept terrain as big as Belgium near Argentina’s border with Chile, the shale field has potential output comparable to the Permian Basin, long the most prolific region in the U.S., according to Rystad Energy.
Chronic economic crises and rigid currency controls have long hindered infrastructure development in Argentina, economists say, leaving trucks slowly plying dirt roads around rigs while companies struggle to import drilling equipment amid dollar shortages.
But thanks to a new political landscape in the country, Vaca Muerta could soon turn into a cash cow, say government officials and oil executives.
The country’s new libertarian President Javier Milei is promising a sweeping deregulation and privatization of the industry, sending local energy stocks soaring since his victory in November’s elections.
“Argentina is starting a new stage of history in the energy sector,” said Eduardo Rodríguez Chirillo, the new government’s energy secretary.
At a U.N. climate conference in Dubai earlier this month, 190 countries agreed for the first time to transition away from fossil fuels but essentially allowed governments to choose their own paths to get there.
The recent activity in South America indicates countries in this region don’t intend to dial back soon.
Steadily rising output from non-OPEC countries in the Americas, excluding the U.S., is set to add 1.3 million barrels a day of new oil supply in 2025, more than covering the 1 million barrels a day of new demand that is projected for that year, according to J.P. Morgan.
Brazil, which posted record oil-and-gas output of 4.7 million barrels a day in September, is slated to overtake Canada as the world’s fourth-largest producer when it pumps 5.4 million daily by 2029, according to the energy ministry. President Luiz Inácio Lula da Silva has heralded the developments and has said that while his government wants to join OPEC+ next year as an observer, it doesn’t want to be bound to the cartel’s production limits.
Jean Paul Prates, chief executive of Brazilian state oil company Petrobras, said the increase is a recognition that the global economy will need oil for decades despite projections that fossil-fuel demand could peak by the end of this one. His company plans to funnel more than 70% of its $102 billion investment plan over the next four years into production and exploration.
Offshore drilling in Brazil’s smaller neighbors, Suriname and Guyana, is also contributing to the regional production boost. The latter has become one of the region’s hottest energy frontiers with Guyana’s production, via an Exxon-led consortium, slated to top a million barrels a day by 2027.
In Venezuela, which sits on the world’s largest oil reserves, President Nicolás Maduro recently said his country was ready to re-enter global energy markets after it reached a deal with the Biden administration in October that temporarily lifted oil-sector sanctions. Lobbyists for oil companies -- from U.S. giant Chevron to Indian refiner Reliance -- had pushed Washington for more than a year to ease the sanctions, arguing that restarting Venezuelan energy exports would help mitigate the disruptions in global markets caused by Russia’s invasion of Ukraine.
This week, the U.S. and Venezuela agreed to swap prisoners, in a sign that thawing relations between both sides could keep economic sanctions out of the picture.
But political risk will continue to weigh on Latin American oil prospects. The U.S. has said sanctions could be reapplied on Venezuela if Maduro’s authoritarian government fails to organize free and fair elections next year. Venezuela is also threatening to annex most of Guyana’s land.
In Argentina, despite the leadership change, the economy remains hamstrung by galloping inflation and severe restrictions on companies’ access to U.S. dollars, stymying foreign investment. The currency controls were applied by the previous left-leaning government but Milei pledges to dismantle them as part of his broad pro-business agenda.
On Wednesday, the self-described anarcho-capitalist decreed a series of economic measures that aim to remove the role of the state in key economic sectors. The announcement followed on his campaign promises to slash taxes and dramatically cut spending by eliminating half of government ministries and eventually privatizing state-run energy firm YPF, which controls about a third of Vaca Muerta’s production.
Milei’s plans, which are expected to face significant pushback from rival lawmakers and powerful unions in this politically polarized nation, already triggered thousands of demonstrators in the capital to hit the streets banging pots on Wednesday in protest.
Milei also aims to move ahead with big cuts to public works projects around the country, stoking some concerns among economists and oil workers over the future of state-backed initiatives like roads and pipelines that were meant to benefit Vaca Muerta.
“Privatizing and leaving workers out on the streets is going to generate widespread civil unrest, especially in this area,” said Fernando Banderet, a councilman in Añelo, which sits at the gateway to the Vaca Muerta region, where foreign and local oil companies have set up offices.
Banderet said his small town in a remote corner of Patagonia lacks basic infrastructure. Scant public transportation leaves many workers in YPF coveralls hitchhiking for rides back to the closest city of Neuquén, a two-hour’s drive from Añelo along a one-lane road that is sometimes cut off by indigenous protesters.
Facing housing shortages and shoddy road maintenance, Banderet, who had supported the previous Peronist government, said his town has struggled to keep up with a population that has grown about 10-fold to 10,000 in the last decade with workers from around the region flocking to the town seeking employment.
Despite the obstacles for the Milei administration, hope is rising across Argentina’s political spectrum that Vaca Muerta’s oil-and-gas deposits could boost the crippled economy.
“When you need scale and hard dollars rapidly, you have one button: Vaca Muerta’s shale oil,” said Miguel Galuccio, chief executive of Vista Energy and a former president of YPF who ran that company for four years after it was nationalized by Argentina in 2012. “Vaca Muerta is part of the solution. It can contribute to Argentina’s macroeconomic stabilization.”
Increased energy production could redraw much of the regional energy map and help eliminate Argentina’s need for gas imports during the winter, which came as a hefty burden to the state last year due to the Ukraine war. The Center for Political Economy, an Argentine policy group, estimates that replacing gas imports could generate $3 billion in annual savings.
Much depends on the country’s macroeconomic situation and whether contractors can resolve bottlenecks and unpaid import bills caused by currency controls, said Mindlin, the Pampa CEO.
Pampa holds concessions covering 8% of Vaca Muerta, but the company has only drilled 46, or about 2%, of the nearly 2,000 wells they believe they could exploit.
“We have a super aggressive plan,” said Mindlin. “With a country that is more stable, it could be something we’d be able to do.”
-- Silvina Frydlewsky, Samantha Pearson and Luciana Magalhaes contributed to this article.
Write to Kejal Vyas at kejal.vyas@wsj.com
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