E&P success means industry growthOctober 5, 2017
Marcos Pourteau, undersecretary of exploration and production at Argentina’s Ministry of Energy and Mining, talks to TOGY about E&P developments in the domestic oil and gas industry, plans for upcoming offshore bidding rounds, the role of SMEs in the industry’s growth and how the government is collaborating with provinces to ensure the collection of high-quality resource data.
On attracting investment: “We have to keep in mind our current context, where international exploration budgets are at their lowest. We have to compete for a slice of those budgets. Of course, exploration costs are also low at the moment, which somewhat offsets the reduced budgets. It’s an interesting time that could yield high returns.”
On conventionals versus unconventionals: “Argentina’s basins are mature and, therefore, the opportunities of finding new reserves are limited. Nevertheless, the potential is there and we have to revitalise the sector. In the future, I see large companies turning their attention to unconventionals and small or medium-sized companies focusing on mature areas around conventionals.”
Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Marcos Pourteau below.
What are the duties of the Undersecretariat of Exploration and Production under the current administration?
The Undersecretariat of Exploration and Production supervises and regulates upstream activities in Argentina. There are three major areas in which we work. The first is exploration and production regulations at the national level. Argentina has a federal resource ownership structure whereby provincial authorities own resources in their own jurisdictions – onshore and near shore – and issue related concessions and permits. The undersecretariat is responsible for issuing national guidelines that mold provincial policies and we are the authority over offshore, where we grant concessions and permits for E&P activities.
Secondly, we receive and administer information from the different operators within the market. This involves all industry statistics and the country’s oil and gas reserves. Every year, companies must audit their own reserves in oilfields and gasfields and pass that information on to us. We study that information and publish an annual report on the state of our reserves.
Finally, we also have oversight over oil and gas transportation pipelines where there is a national concession.
How has concession policy changed since December 2015, when the new administration took office?
One of the undersecretariat’s main objectives is to put the focus back on offshore exploration in Argentina. For many years, offshore exploration was overlooked in this country, other than in Tierra del Fuego and Santa Cruz, where there are two consortiums operating. One of those consortiums is composed of Total, Pan American Energy and Wintershall, and produces 26 mcm [918 mcf] of gas per day. The other is headed by Enap Sipetrol and YPF. Both of those are working in the Austral Basin.
As for the other basins, there has been some near-shore activity, but little deep offshore. That’s why in 2016, we started studying the best options to increase activity offshore. As of August 2017, we are working on building three licence rounds: one in the Malvinas-Austral Basin, and two in what we call the Argentine Basin, which is the continental slope from the Uruguayan border to the north of the Malvinas Islands [Falkland Islands]. The blocks in the Argentine Basin will be divided into northern and southern sections. There will be one round per year, with the first one in 2018.
In preparation for this, in 2017 we have been granting permits to carry out seismic surveys. These permits are requested by companies that are either interested in gathering information for themselves or in marketing the studies to others. These permits do not grant any right over future exploration permits. We’ve given one to YPF, one to Searcher Seismic and two to Spectrum Offshore. Spectrum Offshore is doing 35,000 square kilometres, 50% of which has already been done. The company aims to be finished at the end of 2017.
With all this, we will get a clearer picture of the potential of the Argentine Basin. The information we have now is quite sparse and does not allow us to adequately assess the potential of the area.
Is Argentina drawing from the experiences of other regional offshore bidding rounds to put together its own round?
We’re studying the matter right now as we prepare our own. We hired Bain & Co. to conduct a survey of about 60 oil companies interested in offshore projects, to learn what kind of rounds they are interested in and what terms and conditions would make the rounds attractive. The report gave 14 recommendations that we are currently using to design our round.
We are in touch with the National Hydrocarbons Commission in Mexico and the National Hydrocarbons Agency in Colombia, and we are hearing about their experiences and exchanging ideas. We also have an agreement with the US State Department. We’re talking to them about applying better regulatory practices and round design.
What areas are you concentrating on in the design of the bidding rounds?
Following the survey carried out by Bain & Co., we’ve been in touch with oil companies and can see that there’s significant interest, particularly in the Argentine Basin. As I said before, it’s an area about which there is not much information available, but the current assessment indicates great potential, especially in terms of big reservoirs, which is what attracts companies. I would say the three most important things are well structured rounds with clear terms, seismic information to evaluate areas of interest and attractive fiscal terms.
While doing this, we have to keep in mind our current context, where international exploration budgets are at their lowest. We have to compete for a slice of those budgets. Of course, exploration costs are also low at the moment, which somewhat offsets the reduced budgets. It’s an interesting time that could yield high returns.
Is Argentina prepared for offshore development in terms of port infrastructure and worker skills?
The most important thing will be the fiscal terms. We have good port infrastructure to handle this kind of development and a mature services industry. Argentina has the advantage of having a large and high-quality labour force, which will facilitate these enterprises.
As for deepwater offshore areas, we expect these will be FPSO-based, which means there will be less pressure on land beyond service provision.
How has unconventional oil and gas production evolved in Argentina in 2017?
At the beginning of 2017, the stakeholders in the industry came together to tackle the issues that were hampering a faster development of unconventional resources. Labour unions agreed to an addendum of the collective labour agreement, and the federal government put in place a programme to guarantee a minimum price on natural gas to encourage the development of unconventional resources. The industry, for its part, is committing the necessary investment in the sector.
These together consolidate the potential of unconventional development and give companies the sense of security necessary to embark on it. Our job is to study the work being done and judge whether the guarantee of a minimum price is having the anticipated result of truly hastening investment and development.
What is the outlook for short-term development?
There are five or six concessions that have already proposed projects and they are currently being evaluated. We expect twice that number over the following months as companies continue to develop their projects. Almost all the concessions with potential in Vaca Muerta are taking part in this.
Argentina’s oil and gas demand is seasonal, and therefore, we need to ensure that the right conditions are available for production to reach markets year round. This means it could be exported when not needed to supply the local market. Argentina used to be the regional supplier of natural gas, along with Bolivia. We need to get back to this position, with a more dynamic exchange with Chile. Our neighbours would get the advantage of lower natural gas prices, relative to LNG imports, and Argentina would have an increased year-round production with reduced LNG imports in winter and an outlet for its summer gas.
Are there plans for natural gas storage to address seasonal disparities?
Underground storage of natural gas is something that Argentina has been studying for a while. We haven’t yet been able to find structures suitable for storage close to areas of demand, such as Buenos Aires, Santa Fe and Rosario. As the price of natural gas rises and the difference between summer and winter prices changes in response to market signals, the incentives to find these structures will increase, and the economics of storage farther away from demand centres will improve.
How do you expect conventional gas production to progress?
Today, Argentina has one of the highest wellhead gas prices in the world. On average, they’re around USD 4.90 per million Btu. As such, there is an economic incentive for the development of conventional gas. However, Argentina’s basins are mature, and therefore, the opportunities of finding new reserves are limited. Nevertheless, the potential is there and we have to revitalise the sector.
In the future, I see large companies turning their attention to unconventionals and small or medium-sized companies focusing on mature areas around conventionals.
How will the role of Argentina’s E&P SMEs change in the future?
Things are improving for them. First, upstream costs are going down. The labour agreement that was signed for unconventionals is spreading to conventional developments. A process of cost reduction started in 2016 and has strengthened over the past year. That reduction in costs will allow smaller players to find profitable projects.
Secondly, macroeconomic conditions have substantially improved since President Mauricio Macri’s administration took office at the end of 2015. This has permitted an ease of financing for small and medium-sized enterprises, which are acquiring assets from large players such as YPF.
Why is there an absence of SMEs in Argentina’s midstream sector, compared to the USA?
I believe it’s the result of several factors. To start, history matters. Argentina developed its midstream initially through government investment, and later, with a regulated and licensed system that didn’t facilitate participation of purely midstream players.
Secondly, gathering networks connecting oilfields with the transportation system were historically developed by YPF and other oil companies. This was due to the risks involved, as well as access to capital, which is easier in the US.
Ideally, oil companies should focus on the upstream and midstream-focused companies should take care of the midstream. Recently, there was a review of tariffs for all licensees, which will make business easier for them going forward. In fact, both major transporters in Neuquén – TGN [Transportadora de Gas del Norte] and TGS [Transportadora de Gas del Sur] – have expressed interest in midstream developments.
Vaca Muerta’s development will require the development of both the gathering systems and transportation to market. For new midstream players to arrive, we need a flagship project as proof of concept. Some are under analysis by investors and we hope we will have news soon.
What is the status of Argentina’s crude export and evacuation infrastructure?
Crude production has been declining from its historical peaks over past years, so there is idle capacity. There is a constant investment in maintaining crude transportation networks and export buoys.
Gathering has to be refocused on Neuquén. Our job is to make sure that those pipelines are maintained and used in a safe manner.
What steps must be taken to allow local oil prices to converge with international prices?
I think this is something that will be settled by the end of 2017. We currently have an internal price of USD 55 per barrel for Medanito crude versus USD 52 for a barrel of Brent. The gap doesn’t seem unsurmountable. However, in terms of project breakeven, USD 55 per barrel is tough, which is exacerbated by the fact that we are behind on the cost reduction process compared to the rest of the world. Internationally, this started in 2014. During 2014 and 2015, we were operating under a protection that allowed companies to keep working with high operational costs. As we advance in the convergence with international prices, it pushes down costs and improves profitability.
In August 2017, a decree was passed to drastically reduce or eliminate tariffs on imports of used upstream equipment. What effect do you think this will have?
This decree is a modification of an existing one that applied primarily to importing new equipment and there were major obstacles for importing used equipment. With the drop in oil prices, there is an opportunity to access modern equipment available and the purpose of the new decree is to allow our industry to acquire that equipment at a competitive price. I believe this will lower upstream costs and underpin the acceleration of development in Vaca Muerta.
That said, the removal of barriers to purchasing certain equipment may have a negative effect on companies that produce similar equipment in Argentina. That’s why the new decree has a provision that requires a certain percentage to be purchased locally. When the process of importing used equipment ends, the demand for local equipment will be higher and benefit the national industry, which will have improved its competitiveness.
How adequate is the government’s resource data collection infrastructure, and how does it collaborate with the provinces to compile this information?
Until 2014, there was a databank managed by Enarsa [Energía Argentina] under a contract with Remasa [Registros Mineros Argentinos], but the contract was cancelled in 2015. When we came around, we were unable to access that information.
We believe Argentina has enough history and maturity in its upstream industry to have a world-class databank. To that end, we are working with the provinces to create this databank. It should be independent from political changes, both at a national and provincial level, to ensure its sustainability.
In the meantime, we are reactivating what used to be Enarsa’s databank within the undersecretariat. We expect that to be done by the end of 2017. The information is already accessible, but it is a laborious and expensive process to access it.
We have a very good relationship with all the provinces, and on this project we are working closely with them and with Ofephi [Federal Organisation of Hydrocarbons-Producing States], which links all the oil-producing provinces.
What are the undersecretariat’s goals through 2020?
We are working on several areas. Normalisation of the oil and gas industry is the main goal, in line with the ministry’s mandate to ensure secure supply of energy and reduced environmental impact.
The most important challenge for me is to create a strong team at the undersecretariat that will provide high-quality service to the country and the industry. Under the previous government the team gradually lost people, resources and skills over the years, and we want to reverse that.
For more information on the strategy of Argentina’s Ministry of Energy and Mining, as well as plans to develop offshore and unconventional resources, see our business intelligence platform, TOGYiN.
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