Flogging a Dead Cow

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Amir Richani is the author of today’s blog post. Amir is a geopolitical analyst at ClipperData, with a voracious appetite for studying political, economic and social developments in Latin America. He holds a BA in Political Studies, his favorite thing to eat is seafood soup, and his most treasured place in the world is Angel Falls in Venezuela. 

Seven years after the discovery of Vaca Muerta in Argentina, one of the largest non-conventional oil and gas formations in the world, the project is nowhere near reaching its full potential due to a lack of foreign investment.

The government’s latest policies¸ along with mounting fiscal headaches, will likely further complicate its development. Mauricio Macri, Argentina’s president, has to restore trust and overcome social unrest if he is to secure loans from the International Monetary Fund to avoid Argentina’s default. 

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One of Argentina’s key problems is its lack of foreign currency. Hit by multiple economic crises throughout its history, Argentinians have come to learn that the peso is at the mercy of international markets. So far this year, the Argentinian peso has lost more than half of its value.

Inflation has soared to 30 percent, and Argentinians see their purchasing power dwindle on a weekly basis. This has sparked unrest across the country, especially following the announcement of a new fiscal shock that will reduce public spending by half, cut subsidies, and increase export tariffs. 

The weakness in the peso is reflected in the disparity between crude denominated in US dollars and Argentinian pesos. The price of Argentinian heavy sweet Escalante in US dollars has risen nearly 16 percent since the start of the year, but in peso terms, it has basically doubled.

This is one of the silver linings of currency devaluation…IF the country were being for its crude exports in pesos. On the flip side, if Argentina is paying for its crude imports in pesos, costs have doubled in the past eight months.

Escalante $ pesos

Argentinian labor unions have scheduled demonstrations and a national strike on September 24 in protest of the government’s policies. These labor unions and syndicates have a lot of sway in Argentina and their opposition to Macri’s efforts could paralyze the country, including the oil sector. 

Monday’s announcement of new taxes on exports was Macri’s last lifeline as he tries to meet demands from the International Monetary Fund and bolster the Argentinian peso. With frustrations growing, however, the government should brace itself as citizens take to the streets as the gap between prices and salaries continues to widen.  

Meanwhile, the oil and gas industry is not shielded from the effects of new economic policies. Macri’s export tariffs extend to oil and gas exports, which could serve as a mechanism to guarantee the influx of US dollars into the economy.

Hence exports of Argentina’s heavy sweet Escalante grade, which will be in high demand due to the introduction of IMO 2020, are vital to the country’s economy. Argentina has already exported more Escalante barrels than in all of last year by shipping 50,000 bpd through the first eight months of 2018. 

Escalante crude exports ClipperData

So far, Vaca Muerta’s oil production is consumed by Argentina’s domestic market. Its potential is reflected in its reserves: 308 billion cubic feet of shale gas and 16 billion barrels of shale oil, which account for 38 percent and 60 percent of Argentina’s total reserves, respectively.

With the government’s pockets empty, Vaca Muerta needs much greater foreign investment to reach its full potential, but the lack of trust in the Argentinian government continues to leave it hamstrung.

Another recent decision could further slow progress at Vaca Muerta. President Macri has decided to scrap the Ministry of Energy, leaving major decisions about the oil and gas sector to be made by the Ministry of Economy, likely leading to further delays when it comes to decision-making.