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Argentina oil producers could step up
long-term production in gas

Daniel Jayo / La Nación

Sean Rooney, head of Shell in Argentina, said said the company plans to increase its share of gas in
its production mix to meet the expected rise in demand for gas.

- Vaca Muerta can supply global gas demand
- Companies waiting for improved conditions before investing

By Charles Newbery
/ Platts

Petroleumworld 10 06 2021

Oil producers in Argentina are considering stepping up natural gas production to eventually increase exports, buoyed by high prices and rising demand for the resource during the global energy transition to net-zero carbon emissions. Still, huge investments must be made in infrastructure first, according to two executives speaking at the Forbes Energy, Oil & Gas Summit in Buenos Aires Oct. 5.

"Gas is the energy of the transition and it will go hand in hand with the growth in renewable energies in a world that is going to use more and more electricity," according to Tenaris Southern Cone president Javier Martinez Alvarez. "Gas is a phenomenal opportunity."

Tenaris is a global maker of steel pipes for the energy industry.

However, the development of Argentina's Vaca Muerta, a huge shale play in northern Patagonia, has been largely focused on oil thus far, given that more pipeline capacity is available for crude than for gas. But with global oil demand seen waning in the coming years as part the a transition toward renewables, companies in the Vaca Muerta are starting to put more attention on their gas assets.

"The window of opportunity is not too big for oil, but it is much more generous for gas," said Martinez Alvarez, whose company is associated with Tecpetrol, one of the biggest gas producers in Vaca Muerta.

An incentive for investing in gas production is the price of LNG, which has shot up to record levels this year as a global economic recovery from the COVID-19 pandemic pushes up demand. At the same time, Brazil, the biggest economy in Latin America, is seeking more gas supplies as a drought has reduced its hydropower output.

S&P Global Platts assessed FOB US Gulf Coast LNG cargoes at $37/MMBtu Oct. 5, up from just under $4/MMBtu this time last year.

Sean Rooney, head of Shell in Argentina, said said the company plans to increase its share of gas in its production mix to meet the expected rise in demand for gas.

Big challenges

Argentina has potential to meet this global gas demand from Vaca Muerta, yet there are challenges, Rooney said.

"We will need large investments in infrastructure, in pipelines, in plants," Rooney said.

To do this, companies must be "confident" about investing over the long term in Argentina, requiring clear rules and conditions that allow them to make a profit, he added.

Mired in a financial crisis since 2018, the country is struggling to contain 50% inflation as the economy bounces back from a recession in 2020 after the onset of the pandemic. This makes it difficult for the government to pull back the capital, currency and trade controls in place to protect its dollar reserves and often discourages companies from investing.

The government hopes to improve conditions for oil and gas investment through a proposed law currently under review in Congress. The bill calls for providing long-term exchange rate stability and incentives for oil and gas production, investment and exports in Vaca Muerta and other formations, including by allowing them to export more crude and freely use some of the proceeds as they wish, instead of having to repatriate everything. Gas producers also will be able to enter into sales contracts of at least three years.

Martinez Alvarez said the bill provides solutions for the three hindrances for increasing investment in Vaca Muerta: stable rules and the freedom to enter into long-term sales contracts and use export proceeds freely.

Export potential
Rooney said another challenge is the dimension of the development of Vaca Muerta.

If the play is only to supply gas to Argentina, then it will be "underdeveloped" in relation to its capacity, Rooney said.

But if the play is developed to export gas to a world that is going to need more supplies and over a longer timeframe than for oil, then massive amounts of investment will be needed, he added.

The construction of LNG export facilities, for example, will be a trigger for Shell to step up its investment in Vaca Muerta's gas potential, Rooney said.

"When the export business is developed in Argentina, Shell will certainly be part of this," he said.


By T Charles Newbery from S&PGlobal Platts /10 06 2021



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