Vaca Muerta: Argentina's ticket to energy independence?
Vaca Muerta: Argentina's ticket to energy independence?
The history behind Vaca Muerta and future potential
Hello Avatar! Today we will be doing a deep dive into the Vaca Muerta oil and gas reserves, together with Argentina’s current and possible future energy landscape. The current macro backdrop of high energy prices is a window of opportunity for Argentina to transform Vaca Muerta into a global production and export hub. In the middle of this potential energy renaissance, it looks like CCP China has already honed in on the opportunity to plant some (military) flags in the Southern Hemisphere. Let’s dig in.
What are these dead cow reserves?
Vaca Muerta (literally "Dead Cow") is a sedimentary formation deposited in a Jurassic sea in the Neuquén Basin in Argentina.
This geological formation of shale oil and shale gas is located on the Argentine side of Patagonia. The Vaca Muerta deposits span the provinces of Neuquén, Río Negro, La Pampa and Mendoza. The total surface is about 36,000 square km:
The origin of the name Vaca Muerta is not clear: some maintain that it was baptized in 1931 by the American geologist Charles Weaver after the Sierra de la Vaca Muerta mountain range, while others claim the name was given by the Pehuenche people, who named the entire Neuquina basin after a dead cow.
A third version affirms that the name is due to the fact that the formation on the map resembles a cow lying on its side.
Preliminary findings
In 1946, other scientists agreed with Weaver on the significance of this formation when they conducted a geological survey of the northwestern region of Zapala and verified that all of the Fossils (ammonites) found in the Vaca Muerta formation sediments were of Jurassic age.
Thanks to these sediments, Argentina has a strong potential for unconventional hydrocarbon exploitation.
Argentina is the fourth and second country in the world in terms of unconventional oil and gas resources (27 billion barrels and 802 billion cubic feet, respectively), accounting for 8 and 11% of the total.
Along with the United States, Canada, and China, Argentina is one of only four countries that produce this sort of hydrocarbon.
Argentina's main source of unconventional hydrocarbons is Vaca Muerta. Its resources are projected to be 16 billion barrels of oil and 308 trillion cubic feet of gas.
This implies that if explored, Argentina's proved reserves would expand by more than eight times and the country’s oil and gas consumption would be guaranteed for the next 85 and 150 years, respectively.
Extraction feasibility and reserves
Shale gas and shale oil extraction are the main extraction processes in much of this enormous area of the Vaca Muerta subsurface.
Despite reaching the provinces of Mendoza, Ro Negro, and La Pampa, the Vaca Muerta map shows that the biggest reserves are in the province of Neuquén.
In 2019, the Neuquén unconventional deposits accounted for 26.3% of Argentina's total proven oil reserves and 45% of its gas reserves.
The reserves enable the government to manage internal supplies and set energy policy. We all know Argentina is in dire need for more US token inflow, and the vital importance of Vaca Muerta stems from the fact that its resources can provide significant foreign exchange income if exported.
Because of the characteristics of the Vaca Muerta reserves, hydrocarbons are extracted using fracking methods.1
Please invest more US token, international sers
Why doesn’t Argentina produce more oil and gas? The answer is the same answer for most of the country’s woes: Argentina’s macroeconomic context places limits on investments that are difficult to remove.
First, there is a restriction on capital markets in Argentina. Second, capital in- and outflows are heavily restricted. Who is going to invest dollars if it can't take withdraw them afterwards?
Hopefully this Hotel California situation gets solved sooner than later, but if the past 2 decades are any indicator of the future, that is highly doubtful.
In the report "Vaca Muerta: Argentina's energy future," PwC Argentina created a reference for foreign investors by offering an overview of the country's unconventional reserves. Funny that if you want to incentivize more foreign investment, the English version has 1 page of data versus the Spanish version which is much more complete. Derp.
Long story short: in order to take advantage of the window of opportunity, Argentina needs a far larger US token inflow than the current investments.
Vaca Muerta needs investments of about US$68.5 billion to generate foreign exchange income of US$46 billion per year by 2030 from the export of hydrocarbons, with a production of 750,000 barrels of oil per day and 140 million m3 of gas per day ( MMm3).
Easing of dollar limits for oil companies
The Argentine government is trying to incentivize production and investment in the region.
The Foreign Exchange Access Regime for Incremental Hydrocarbon Production (Régimen de Acceso a Divisas para Producción Incremental de Hidrocarburo) is a measure from June 2022 which aims to promote investment through easier access to the Free Exchange Market and less capital controls.
To access these benefits, companies must increase production in relation to the baseline (and comply with additional requirements). In this way, access to the Free Exchange Market is facilitated.
The decree tries to partially isolate the hydrocarbon exploration and production sector from the country's macroeconomic (financial operation) problems, since each additional barrel (of oil) or m3 (of gas) generated by the industry represents new foreign exchange.
Although the measure's signal is good, 20% / 30% of incremental production, it is too little to generate confidence, and the corresponding large projects or new foreign direct investments are still on hold for now.
The decree does not solve the problem of bottlenecks in fracturing and drilling equipment, nor does it address the bottleneck problems in transportation and the gas markets, which are more of a general infrastructure issue in Argentina itself.
Companies currently invested in Vaca Muerta
The total investment in Vaca Muerta should reach about $5 billion US token in 2022, exceeding the $4.05B in 2021.
According to estimated projections, and with YPF in the lead, the growth is estimated to be around 23%.
The provincial president announced that five new unconventional exploitation concessions would be granted to reach a total of 47 concessions, "33% of the Vaca Muerta surface in Neuquén."
YPF leads among the companies that will invest in Vaca Muerta this year. This renationalized company has the state as the majority shareholder, will concentrate 47% of those disbursements.
Shell is in second place for investments, investing close to US$500 million, followed by Pan American Energy (PAE), with US$400 million. Other smaller investments are made by Tecpetrol, Vista Energy, Pluspetrol, Pampa Energía, Total, Phoenix and Chevron.
The Controversial CCP base in Vaca Muerta
In February 2015 something interesting happened shortly after Argentina was strapped for foreign cash once again. Former president Cristina Kirchner and her counterpart Xi Jinping came to a currency swap agreement that included some interesting additional footnotes: creating a Chinese military base in the middle of the Vaca Muerta region.
Xi and Chris tried to frame it as a simple bilateral agreement, which is kind of obvious since no Chinese invasions of southern Argentina were recorded, but the truth is that the installation of a Chinese military base in Neuquén grants unprecedented facilities for another country in sovereign territory.
China will have the rights to 50 years of exploitation of this base, with no Argentine participation and without paying a single peso in taxes.
The construction of this Chinese military base on Argentine soil generated great concern in Europe and the United States. The military use that will be given to the place is what raised the alarms in the highest circles of the European Union and Washington.
Another fact that draws attention is the secrecy surrounding the installation and the area occupied by the People's Liberation Army.
Only personnel specifically authorized by Beijing (military and members of the CCP regime) has access to the facilities. No Argentines are allowed to enter to supervise or inspect the base, or to understand what happens on the mysterious compound.
Surely, China did not build this base in record time to start observing the stars from a different hemisphere. There has been little news about the base after it was occupied by Chinese military, and Argentina has no idea what is going on there.
Vaca Muerta might play out to be an area of much interest in the near future if things heat up between the US and China. Of course if push comes to shove, China will have no capabilities to protect a military base located so far from Chinese shores.
Personally investing in Vaca Muerta
The most liquid way to invest is simply to bank on the companies with projects in the region. I will name the two main Argentine companies, since the other companies are international and most will be familiar with them.
YPF
YPF ($YPF) is a bit of a wild card ever since Argentina renationalized the company again without the consent of its shareholders (which saw a huge dump in the share price, who would thought that?).
However, it is the most important company in the region and of course has the full backing of the Argentine government. It is also likely that YPF will probably have additional benefits in terms of extraction rights and winning bids for new fields, just because.
Personally I don’t own any YPF stock yet, but the share price does look very attractive now, and it’s definitely not an shell company without any substance. My main issue with YPF is that since it was renationalized out of the hands of Repsol in 2012, there’s still a ton of lawsuits which still need to play out in the US because of that. But these uncertainties and the low price might make it the perfect degen play.
Pampa Energia
Pampa ($PAM) would definitely be my main local stock pick. It is an excellent company with a great track record, and is gaining ground in the Vaca Muerta area.
Pampa Energia is a personal favorite of mine (disclosure: I am a sharehodler). Pampa participates in 12% of Argentina’s electricity generation. It is basically the monopoly for electricity transmission in the Argentine national territory (85%).
Furthermore, the company takes care of 6% of national production (including an important part of the surface of the Vaca Muerta deposit) and 60% of natural gas transportation in Argentina.
Pluspetrol
Pluspetrol Argentina started operations in Argentina in 1976 (interesting year to be honest, insiders will understand why) and is headquartered in Buenos Aires.
It is ultimately controlled by the Dutch holding company Pluspetrol Resources Corporation N.V. In Argentina, it specializes in high-pressure gas fields and oil production from mature fields. Not invested personally.
Some notes
Personally I do see a great future for the Vaca Muerta extraction possibilities, especially if we are entering a new commodity cycle where hydrocarbons are more expensive.
This will be key, because in comparison the extraction in Argentina is relatively expensive due to a couple of factors:
Labor Unions - Salaries are relatively high compared to other sectors.
The Neuquén area and Patagonia is hard to reach, transportation costs are expensive, and the local area is expensive.
If the government doesn’t implement more easing of capital controls or add more tax incentives, getting more foreign investment in the area will be harder.
On the flip side, Argentina has everything present to make energy independence a reality:
Enough oil & gas deposits to last for decades.
If we are entering a commodity super cycle, foreign investment will be easier to find.
The US will probably consider the region to be of vital importance, and the fact that Russia and China are closing in might make the US move faster.
See you in the Jungle, folks!
Fracking is done by creating fractures in deep rock formations to obtain resources, then applying high-pressure water and other elements that allow hydrocarbons trapped in the formation to flow to the surface.