Things to come in ArgentinaDecember 18, 2017
Ezequiel L. Mirazón, PwC’s energy, utilities and mining leader in Argentina, talks to TOGY about the trends, opportunities and challenges in the domestic oil and gas industry, how the global price scenario is likely to unfold and how new projects are impacting the power generation sector.
PwC established a local subsidiary in Argentina in 1913 and has since opened four offices throughout the country in Buenos Aires, Córdoba, Rosario and Mendoza. More than half of the local branch’s revenues are derived from its auditing services, followed by tax, advisory and other assurance services.
Due to its long presence in the country, PwC has developed solid partnerships with major E&P companies. The firm provides consulting services to all the major oil and gas companies involved in Argentina’s upstream and downstream sectors.
On resource abundance: “Vaca Muerta’s hydrocarbons potential has been known for more than 80 years. It was not economically viable to exploit it because the technology required was not available. Today that technology exists, which is why that resource is now being exploited. Due to all this, we observe a hydrocarbons abundance and this has an impact on the price per barrel.”
On price effects: “Just a few years ago, they strategically prepared for a barrel price that was much higher than the current one. This has led to a very significant transformation of the companies, which are mainly doing two things: reviewing their whole investment portfolios and aiming for projects that give them rapid cashflow, while getting rid of those projects that do not. Thus, there are a lot of asset sales and purchases at present.”
Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Ezequiel L. Mirazón below.
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What tendencies are you observing in Argentina’s energy industry?
The three topics regarding global tendencies that our energy group has identified are resource abundance, energy transformation and technological advances. The local tendencies that we have identified are renewable energies, Vaca Muerta and how appealing Argentina is to investors.
Regarding resource abundance, 20-30 years ago, we were expecting to run out of oil. We now see that there is an abundance of resources, without even considering the technological developments that appear every year. The best example of this is Vaca Muerta.
Vaca Muerta’s hydrocarbons potential has been known for more than 80 years. It was not economically viable to exploit it because the technology required was not available. Today that technology exists, which is why that resource is now being exploited. Due to all this, we observe a hydrocarbons abundance and this has an impact on the price per barrel.
What is the outlook for global oil prices?
One of the factors that has had a great influence on prices is the so-called paper barrel, which is everything that involves futures contracts. Besides the physical trading, there is oftentimes more paper or financial barrel trading. The paper barrel has a lot of influence and pressure on prices, even more so than physical production.
It is clear that prices will not go back to the high-price scenario of 2008, where a barrel was above USD 100. The industry has to be prepared for a barrel price of USD 50-60 for the next few years.
How has this new reality affected oil companies?
Just a few years ago, they strategically prepared for a barrel price that was much higher than the current one. This has led to a very significant transformation of the companies, which are mainly doing two things: reviewing their whole investment portfolios and aiming for projects that give them rapid cash flow, while getting rid of those projects that do not. Thus, there are a lot of asset sales and purchases at present.
Those who have more mature fields and an IRR [internal rate of return] that is a bit lower prefer to get rid of those assets, which are then taken as an opportunity purchase by companies that are more specialised in that area or that have a strong position in that region and whose additional cost for operating one more field is much lower due to the structure already in place. There are now strategic and geographical groupings and we are going to see a lot more of this. A huge focus has been placed on the cashflows of the companies, which have had the biggest impact on price.
In terms of energy transformation, we have seen older oil companies gradually becoming energy companies, making way for renewable energy developments in their portfolios.
What technological developments are shaping the industry?
There are two things having an impact on companies. One is technological development for oilfields. I go back to the example of Vaca Muerta, where you can find horizontal wells and fracking, which are enabling hydrocarbons production in a place where it was previously not viable. The Permian Basin or the Eagle Ford in the United States are other examples.
Another very important side to this issue is the technological advances that are unrelated to oil production, per se, but rather those that have to do with digitalisation, among other things. Today we are using drones to move parts and sending parts to an offshore platform is now done with a drone, no longer sent by helicopter. To examine gas and oil pipelines, the drone is used. There is a lot of digitalisation of measurement readings, barcodes and so on. This is substantially changing the way companies operate. Back in the day, someone got into a pickup truck and went to the site. This is no longer done.
In the back offices of oil companies, many are implementing robotics for tasks that are simple and repetitive. With a small technological robot, they are performing different tasks, from reports they send, to payments to suppliers, to supply orders.
What trends are you observing in the electricity sector?
Renewable energies are now relevant in Argentina. RenovAr 1.0 and 1.5 were very positive last year, as offers exceeded what the government had expected by six-fold. RenovAr 2.0 this year has confirmed that trend, with offers exceeding the government expectations by eight times.
What challenges do companies in Argentina face with regards to the development of renewables and how are they addressing those obstacles?
The most relevant issue is getting the financing that can completely change the viability of projects. If you look at Argentina and the latest bonds that have been issued, the rate of financing for a company in Argentina, including energy companies, is much higher than the rates existing at a global level. Therefore, there are some international companies that can obtain financing several points below what Argentine companies can get. This is a great opportunity for these companies.
Many suppliers are also offering to finance wind turbines or solar panels. Because they also have access to very low financing rates, they can create a pass-through entity to finance Argentine companies.
Is it possible for Argentina’s financial system to play a part in renewable energy projects?
Yes, and in fact, we were surprised by RenovAr 1.0 and 1.5, because the local banks were a bit removed, with a wait-and-see attitude. Now, the local banks are much more active. One of the things the banks require is a revision of the financial models that the companies will submit, to analyse the viability of financing them. PwC is working with a lot of banks on this. This means that the banks are seeing a great opportunity in this area, because these are long-term projects that can be attractive for them.
Today Argentina is very appealing because the rates of return are still very high, in a world where the rates of return on investments and capital are extremely low compared to what has happened historically. Today an Argentine bond with a 2033 or 2038 expiration date has a return rate of approximately 7%. These bonds have a very high IRR compared to those from other countries. Thus, Argentina is providing a very appealing investment opportunity.
What is your take on the speed at which investments are arriving?
I think that we are all too anxious. When a change in the Argentine political and economic environments comes about, we want everything that had not taken place in previous years to happen very fast. The truth is that there were some very fundamental changes that needed to be made and which have now been done: having a reasonable currency value, devaluation, lifting restrictions for exports and imports, and creating a confident environment. Generating confidence takes time, especially in a country that has some defaults on its record.
Today we perceive that the intention to invest is there. Now it is just a matter of reaching agreements in terms of the projects, return rates, prices and so on. In the first two years, particularly in 2016, many people came just to see what was going on.
What issues remain to be addressed that still inhibit investor confidence and delay the arrival of foreign investment?
I think that the main issue is infrastructure. We can return to the example of Vaca Muerta. You need a train to move sand and a roundabout for trucks loaded with pipes to enter oilfields. We lack even the most basic things in terms of infrastructure, in some cases. It is something that takes time, but I think that the public-private partnership projects will be a good opportunity to solve the infrastructure deficit.
What is the role of the provinces in financing, infrastructure and legislation?
Each province is a very different world. You have provinces whose main income is the oil industry and others in which the oil industry is not the main source of income. Some provinces are doing things really well and others are not.
If I had to make a suggestion to the provinces, it would be to have a strategic long-term plan with two things. The first is how to proceed in attracting oil investments to the province, because each province competes with other provinces and other countries on a global level.
For energy companies, their investment game board is the whole world. If revenues are not good because the province establishes high royalties or gross income taxes, then companies are not going to exploit the resources available in Argentina and they will decide to invest somewhere else. Companies are closely paying attention to cashflow because prices are not as high as they were in the past.
The second issue the provinces should begin to work on, especially those that are highly dependent on oil, is how they can begin to generate other industries.
What are the asset trends in Argentina?
Every company is reviewing its investment portfolio. This means that we are going to witness several field purchase and sales operations and many acquisitions and sales of companies. Many companies are getting rid of fields for strategic reasons. Perhaps they prefer to get rid of their small operations in a certain basin and someone that has a strong position in that basin will probably be willing to take over, because its operational cost is marginal, as they already have all the infrastructure.
Several companies are in different stages of the sales and acquisitions process. Some of these transactions are public. Many companies are in the midst of a purchase or sales process, be it fields or shares.
Do you expect a revival of E&P SMEs that once operated in the country?
Absolutely; they already are coming back. In fact, in Q3 2017, some Canadian companies that are listed on the TSX [Toronto Stock Exchange] are investing in Argentina. There are several cases of Canadian companies that were very successful in the past. Some did not do very well, but others did extremely well and they feel comfortable in Argentina. Thus, we see this as a very plausible scenario.
How will Argentina’s upstream sector be positioned in 2022?
I think that the Argentine oil industry is very strong. Argentina and many Argentine companies have oil in their DNA. Many Argentine economic groups led and invested in many different places in Latin America during these past few years. After the deregulation process, many Argentine companies went out and invested and are very important oil producers in different places such as Peru, Colombia, Venezuela, Mexico, the United States and some African countries.
The Argentine oil industry has a structure. It has local companies that are very strong. I imagine that these companies, with the wisdom and skills they have shown, will also be very good at exploiting a resource such as Vaca Muerta. I also see these companies working closely with the government, labour unions and provinces in creating a positive business climate and solving the problems that they encounter.
The agreement for Vaca Muerta in January 2017 is being replicated in the rest of the provinces, and is a good example of the dialogue that exists between the different parties. I think that this is the path the companies will begin to take.
What are PwC’s objectives in Argentina?
PwC’s goal is to be able to provide assistance to all energy companies in the most relevant aspects of their businesses, from the creation of companies and their constitution, to be listed on the stock market, helping them acquire and develop assets in Argentina and, once the companies are operating, to help them to be efficient. PwC supports companies throughout every process and it makes me very proud to see how we have worked with many energy companies in Argentina through every step of the way.
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