Ahead of the regional game

Argentina

TOGY talks to Fernando Meiter, associate consultant at Gas Energy Latin America, about the concerns of foreign companies looking to invest in Argentina and the regional competition for investment. Set up in 2005, the company provides consulting services in the areas of oil and gas and energy in Argentina and the region.

What is Gas Energy Latin America’s history in Argentina and in the region?
In 2004, I started working with Alvaro Rios Roca, who was then the minister of hydrocarbons in Bolivia. He resigned and became executive secretary of the Latin American Energy Organisation, and in 2006, we founded Gas Energy Latin America together.
Now, we have offices in all the Latin American countries, as well as two technical offices in Santa Cruz de la Sierra, Bolivia, and in Lima, Peru, with senior experts in each country. We are in the Latin American market with a competitive edge over any other of the large consulting companies, in that we are more flexible and smaller with lower budgets. We have worked for operators, services companies, end clients, investment banks and financial institutions.
In Argentina, we have mainly worked with YPF, CAMMESA [Compañía Administradora del Mercado Mayorista Eléctrico], Tecpetrol, Total, Medanito and Aggreko. Currently, we are also working with Chilean companies wanting to get into the Argentinian market.

What’s the main concern of companies looking to invest in Argentina?
The first issue is that current oil prices are not favourable for investment in Latin American countries. The situation differs when the barrel is USD 110, USD 80 or USD 40, which is the 2016 average. When it reaches USD 50, operators go into production, raising the offer levels, and then prices go back down to USD 42.
This is a problem, since drilling in Latin America is more expensive than in the USA, Canada and other countries. Therefore, companies don’t just look at individual countries, but at the global situation before investing.
Another major point is that thanks to the opening of the Panama Canal, the LNG price markers both for the Pacific and the Atlantic basins are at USD 4.5 [per million Btu]. Competition is not among countries, but among gas sources – domestic gas versus imported gas. For instance, Argentina’s prices are the following: In the Neuquén Basin, it is USD 5.03 per million Btu; in the south, it is USD 5.50; and in the north, it is USD 4.49-5. There is a programme that pays USD 7.5 per million Btu to companies extracting new gas from Neuquén, but this isn’t relevant because we need to take royalties from that price afterwards.
The situation in the USA and Argentina is very different, although the USA is our mirror, and Vaca Muerta is always compared to Eagle Ford. The difference lies in the fact that Eagle Ford has all the necessary infrastructure, whereas Vaca Muerta doesn’t.
If someone goes to Vaca Muerta and gets lucky with discoveries, they need to build pretty much everything, from oil pipelines, gas pipelines and separating plants to a special line for Gas Plus, the new incentives plan to discern old from new gas. In brief, it’s not easy.
Then there is a labour problem. Argentina’s labour costs are 30-40% above that of any other country. This is an important issue. Added to this, Argentina has a history of lack of contract compliance or legal security. Foreign investors need to advocate their decisions in front of shareholders, and defending investments in Argentina is quite hard.
I want to highlight the perception difference between companies and government. Oil companies look for legal security and prices, but international prices not local ones. Price incentives such as the one for new gas in Neuquén are not factored in when investors are in the decision-making process.

What is the Argentinian government doing to clarify matters?
The government’s promise is that in January 2018, all prices will be unified and there will be market prices. Producers, consumers, power producers and distributors will return to the free-contract concept.
Therefore, companies such as Total want to know if they will be punished with regulated prices at USD 2.64 while the government is importing at USD 4 or USD 5, or if they are going to give them import parity. This parity would mean enough goodwill to continue investments. That is in the government’s mind, but there are still many barriers to achieve that.
There are royalties, and also – as it is happening in the USA, Colombia, Ecuador and Venezuela when one works with these oil and gas prices – companies shut down and there are layoffs. On the other hand, other investments arrive, so the deficit is reduced. Argentina’s biggest problem is cash balance. Last year, 70% of Argentina’s commercial deficit was due to energy.

What is the government doing to bring the deficit down?
In 2012, the government decided to nationalise YPF again, in a reckless move, in my opinion. YPF [was sold, the price per barrels was] USD 30, and [when it was] nationalised, barrel [prices were] at USD 80. It was the worst business deal ever, and it goes beyond Repsol’s mistakes.
The main source of deficit in Argentina are energy imports, which are not being hit so hard in 2016 because oil prices are very low, although at odds with gas ones. Gas and oil contracts are combined in a price basket, with fuel oil being the main value, and that’s why the deficit has ostensibly gone down.

Is there regional competition for the current scarce availability of investments?
Right now, the situation is very different than it was four years ago due to low prices. There are just a few companies with cash, and many countries competing for it.
Venezuela, in spite of the political turmoil, has so far complied with its bond payments. Oil companies in that region keep working. Schlumberger just signed a new contract with PDVSA to keep operations going. Nowadays, Venezuela is sought-after.
Ecuador has a big problem. It has a huge state oil company, Petroecuador, and a difficult economy because they use the US dollar and have no control of their own economic policies.
Colombia, although having good prospects, hasn’t been supported by geology. The last exploratory wells in the country didn’t yield good results. Pacific E&P has retreated and sold its operations. However, Colombia’s advantage is its legal security and its compliance with contracts.
Brazil is going through serious political turmoil, which has forced Petrobras to privatise its main assets. It has even sold its assets in Chile and Argentina.
If we look at Peru’s figures, its GDP has kept growing and the Southern Peru Gas Pipeline project has advanced nicely. It will connect the Camisea Gas Project to Lima and to the port with a petrochemicals plant at the end and five thermal plants in the middle, Cuzco being the most important.
Bolivia hasn’t explored in the past 20 years. All hopes for the Bolivian gas market are set on the site of Incahuasi, which starts operating at a third of its capacity in September 2016, with the expectation of going up to 100% in two to three years.
The next dealings of its contract with Brazil will be interesting as Brasilia is asking for certification of reserves. I have no doubt that Argentina will want to change its gas supply contract as well.

How is Argentina faring compared to other regional markets?
The Bolivian gas that Argentina received in the past two months has been very low. Brazil has a deliver-or-pay contract with Bolivia of 75%. Argentina has a take-or-pay contract with Bolivia over a 75% contract, which means that if it doesn’t have the capacity to take the delivered gas, Argentina must pay 75% of the contract amount. Argentina receives the remains after Bolivia supplies Brazil, which is its prime client. Argentina should be receiving 17 mcm [600 mcf] per day, and it has been getting only 8 mcm-9 mcm [282 mcf-318 mcf] so far in 2016.
Adding to this, we have serious docking problems in Bahía Blanca and Escobar due to storms, with ships not able to connect to the gas plants. This forces Argentina to import from Chile, which is a good deal, since we import it at USD 7 per million Btu. Without it, we import fuel oil at USD 10 per million Btu.
In this panorama, Vaca Muerta is the star. It is located between the Mendoza province in the north, Neuquén in the centre and Río Negro in the south. The people from the [Secretariat of Hydrocarbons] know the business and are doing all they can to bring in as many companies as possible.
Aguada Pichana, Loma Campana and El Orejano are three sites that have exceeded companies’ expectations. If you follow the teams working in Argentina, you will see that many of the ones that were working on Santa Cruz and Chubut are currently moving to Neuquén. The reason is these companies count on a friendlier syndicate and government.
After waiting for the 2017 elections to see if President [Mauricio] Macri continues or not, and checking the evolution of oil prices, Vaca Muerta will resurface. We can’t expect a big take off, such as in Eagle Ford and Chesapeake in the USA, because these are different times.
Unfortunately, the report from the International Energy Agency from 2009 was not acted upon when it would have been very profitable. It said we had 760 tcf [21.5 tcm] in reserves, and we lost seven years in developing them. The government at that time didn’t move in that direction.

Did Gas Energy Latin America foresee the situation the country is in now?
Since 2004, several consultants of our company at forums and through articles have been foreseeing this. We had said that by 2007, Argentina would have serious problems in complying with its export commitments, and it happened.
Argentina dictated a force majeure with Chile and Uruguay, and forced AES Gener with its thermal power plant in Uruguayana, a Brazilian province bordering Corrientes, to operate at minimal levels for six years.
Also, it forced Methanex, a train for transportation of methane in South Chile with a gas supply contracted by Argentina, to move the manufacturing of two trains to the USA, all due to the lack of Argentina’s gas supply. Even though Argentina has its reserves, it will have to compete, not just with the regional countries, but with the whole world.

What is the outlook for the development of Vaca Muerta?
The development of Vaca Muerta so far has been all that is possible in the conditions of Argentina, with the Gas Plus programme. This programme still owes ARS 1.3 billion [USD 83.6 million] to operators. The former government waited until companies were drowning and then paid them with four-year bonds.
There have been two important investments in Vaca Muerta: Chevron with USD 2.5 billion in Loma Campana and the first USD 250 million from Dow Chemical Company in El Orejano, with the second USD 250 million on its way.
Dow is interested in Orejano because it has a high level of ethane. The abundant gas in this site is allowing them not only to split it with the company Mega – it owns one-third, while Petrobras and YPF own the rest – but also to become upstreamers and sell their gas in the market via a distributor. At USD 7.5 [per million Btu] prices, this is great business for them.
If conditions support them, they can go to Vaca Muerta with all they’ve got. YPF’s master plan in 2015 was to drill 1,000 wells. To do this, you need sand, water, energy and people. Drilling 1,000 wells would require new roads, railways and a need to develop the “blue corridor,” as companies doing fracking have to bring the water from outside sources, according to law.
Also, YPF is going through hard times financially and needs to clear its deficit, which is twice its operational balance. It needs to sort this out. Is it going into unconventionals, secondary and tertiary recovery, or into conventional fields that it already knows about and are cheaper? It’s very important to know the company’s plans, since it holds 56% of Argentinian sites.

Is withdrawing from smaller marginal fields part of solving the deficit?
The point is that what might not be profitable for YPF might be for a smaller operator such as Gas y Petroleo del Neuquén.
Right now, YPF is partnering with Gas y Petroleo de Neuquén, which needs YPF’s green light to operate wells. The reason YPF doesn’t go ahead is just a sense of ownership and entitlement they don’t want to let go of.
It is a pity because these wells could be profitable in the hands of smaller companies. For instance, Madalena Energy, which has been doing secondary recovery and four pilot wells in Neuquén, has done very well. It also acquired Gran Tierra’s [assets in Argentina].
We need to participate with small companies. We should follow Colombia, which uses the Canadian model of block tendering. These are small blocks, so companies give it their best to find something before turning to the next.
Argentina uses the Houston style, which is vast surfaces and huge blocks with unfriendly geology and the need to move around a lot.

What is Gas Energy Latin America’s strategy in Argentina and the region for the next five years?
For the past five years, we hadn’t worked with Argentinian companies, but instead with foreign companies working in Argentina. Since March 2016, we have made contact with many Argentinian companies and we have been hired. Our strategy is to participate in the whole value chain of the industry.
Our strong point is to know what’s going on in Chile, its gas acquisitions and its expansion plans for gas plants. Also, we know what happens in Bolivia’s old and new fields, and we have official reports. We can draw the outlook for the possibilities of those fields, and know what the gas supply prospects are for Brazil and Argentina.
We can know if Bolivia will be able to feed its two LPG plants. It has already signed supply contracts with Paraguay and is looking to do the same with Peru. It has a urea processing plant. This is sensitive information for Argentina, because it provides them with a picture of their competitors.
Our focus is to inform both upstream and distribution companies in Argentina about the business in Chile and Bolivia. Also, we are working on helping company associations like Dow Chemical did with YPF in El Orejano, because we have great molecular knowledge in well analysis and have the tools to perform forecasts and recommend a company to partner with in a well.
Argentina needs to work on lowering drilling costs and making agreements with syndicates that are demanding too much, while also lowering the fiscal burdens.
There’s no doubt about the resource. Unconventional sites are commercially proven. We’ll have to wait and see. If the government party confirms its dominance in the 2017 elections, this will promote investments.

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