Unconventional oil and gas operations drive energy growth

Unconventional oil and gas operations drive energy growth

According to the Argentinean Institute of Energy, both oil and natural gas output rose in yea-on-year terms in April, by 4.3% and 1.8% respectively.

Analysis

Despite positive aggregate growth, the underlying trends in energy production raise some concerns. Production of conventional oil and gas, which accounts for more than two-thirds of total output, has maintained a steady decline since 1998. Poorly implemented energy policy by successive governments—characterised by price regulation and inadequate investment in energy infrastructure—led to a sharp decline in exploratory activity over the years. Theadministration of the current president, Mauricio Macri, has made efforts to correct this trend: in May, it awarded permits to begin offshore hydrocarbons exploration in 18 areas off the coast of the Buenos Aires province—the largest such tender in nearly three decades. However, these blocks are likely to come online only in the medium term.

As a result, improved output in the energy sector is due largely to unconventional hydrocarbons production. The development of the Vaca  Muerta shale play, which holds the world's second-largest unconventional gas deposits and the fourth-largest unconventional oil deposits played a key role in this result. Investment in Vaca Muerta has been fairly resilient in the face of turbulent macroeconomic conditions; in May the Anglo-Dutch oil giant, Shell, announced a US$3bn investment, over a five-year period, to develop three blocks in Vaca Muerta.

Nonetheless, other challenges for the sector persist. High costs of production for shale oil and gas keep firms highly reliant on government subsidies: energy subsidies rose by a whopping 270% year on year in January-April. In order to reduce costs firms would have to scale up operations considerably, which would require them to expand to new markets owing to the small scale of domestic consumption. Argentina took a promising first step in this direction, with the state-owned oil company, YPF, making its first liquefied natural gas (LNG) export in early June to the US-based Cheniere Energy. Argentina has also resumed some pipeline exports of natural gas to Chile and Brazil.

In the short-to-medium term, prospects for Argentinean energy exports will depend largely on demand from within the Western Hemisphere. However, the long-term outlook is better, as Argentina's geographical location and the seasonality of its domestic demand position the country as a natural supplier of LNG to Asian markets.

Impact on the forecast

Notwithstanding some downside risks, we continue to expect the energy sector to contribute positively to Argentina's overall growth outlook.

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