Contents

Introduction

In early January, Argentine President Mauricio Macri announced an agreement to promote development of the Vaca Muerta shale formation in the Neuquén basin.

The agreement took months of negotiation and involved various actors in the oil and gas industry  - including the national government, the government of Neuquén province, oil and gas unions, and operators such as national oil company YPF, Total, Pan American Energy, Chevron, Shell and Dow Chemical.

The agreement is seen as crucial because to properly unearth the vast potential of the deposit - Argentina has the second largest base of technically recoverable shale gas reserves on earth - these various actors need to work in conjunction towards the same goal.

Though the obstacles are numerous - low international hydrocarbons prices, distrust on the part of investors, poor productivity and insufficient infrastructure - Argentina's energy matrix relies heavily on natural gas and demand is forecasted to soar. Essentially, there is both a political and economic incentive in place to develop the deposit.

Through the agreement, the oil firms said they will invest a combined US$5 billion in the unconventional formation during 2017, and US$15 billion/year starting from 2018. In exchange, the national government will extend incentivized wellhead pricing for unconventional gas until 2020, as well as invest in vital infrastructure such as roads and railways.

YPF will now direct US$2.3 billion to Vaca Muerta in 2017, 20-30% more than the company might have without the deal, the company's chairman, Miguel Gutiérrez, told reporters after the announcement.

Is this type of deal a sign of a reversal of fortunes in Argentina, a country that has gone, in the past decade, from being a net energy exporter to one heavily dependent on imports? Or is this yet another swing in the pendulum of the hydrocarbons business in Argentina that will prove temporary before another swing in the opposite direction?

This report will explore this question, and offer a roadmap of where the upstream natural gas industry, driven by unconveontial resources, is headed.

Figure: Argentina Natural Gas Production
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