FEATURE: Argentina's bet on Vaca Muerta needs international financing

FEATURE: Argentina's bet on Vaca Muerta needs international financing

Energy Gas Project & Infrastructure Finance Debt Capital Markets Economy & Policy Coronavirus Regulation Argentina

The Argentine government is preparing new incentives for the development of Vaca Muerta, one of the world's largest shale oil and gas deposits, with the aim of bringing in much-needed dollars from exports, but analysts warn that projects may not get off the ground without access to international financing.

Vaca Muerta, the first shale deposit to come into mass-scale production outside North America, could make the country a global oil and gas exporter. To that aim, the government has rolled out a stimulus program to increase gas production and is now at work on legislation to increase oil exports.

But the government's efforts may not be enough. José Luis Manzano, head of Integra Capital, an investment company with interests in the sector, said that a key is to restore access to international capital markets for companies to invest in Vaca Muerta.

Argentina lost that access after a series of debt defaults since mid-2019. While it restructured $66 billion in international bonds in September 2020, it still must negotiate a new financial program with the International Monetary Fund (IMF) for another $44 billion in debt.

Pablo Artusso, an analyst at Moody's in Argentina, said he does not expect companies will be able to access international financing until a deal is reached with the IMF.

"We don't see a renewed access to international capital markets for the local corporate sector before the second half of 2021," he said.

While the government's gas incentives are encouraging fresh investment in Vaca Muerta, it is still a fraction of the $3 billion in annual capital that the deposit needs over the next 20 years, according to most estimates.

"Without the international financial markets, there is no Vaca Muerta," Manzano said.

State-backed YPF and Pan American Energy, a joint venture of BP and Argentina's Bridas, raised financing for projects in the local market in 2020. They and others have said they will continue to do so, but the local market is too small to finance Vaca Muerta.

Until there is access to foreign capital, Argentina's oil and gas production growth is going to be subdued and "the importance of Argentina in the world market will be null," Vera De Brito de Gyarfas, an energy expert at Mayer Brown, a law firm in Houston, said at an Institute of the Americas conference on Argentina in December.

If conditions improve to attract investment, Argentina's oil production could double "in a few years," allowing it to export 500,000 barrels per day, more than its current production, Eric Dunning, managing director of Chevron in Latin America, said at the event.

Dunning said improved conditions would include stable, predictable and transparent regulations and taxes, economic stability, market-based pricing, access to foreign-exchange markets, the ability to repatriate money for paying loans and dividends, and automatic and transparent rules for oil exports.

Without these, capital could flow away from Vaca Muerta to other countries with oil and gas potential in the region, sources said

"We will be competing with Brazil and Guyana" for capital, said Manzano from Integra.

In a world moving to a low-carbon future of renewable energy, oil and gas must be cheap — including the financing costs — to compete, Manzano added. "There is no room for expensive oil and gas," he said.

Guido Cerini, vice chairman of Latin America at Credit Suisse, said both low oil prices and the transition to cleaner energy is making companies choosier about capital allocations. "You need long-term capital that allows you to survive in an environment of low prices," he said at the event in December. "Investment will go into the best countries and the best projects."

Jorge Milanese, regional director for Latin America at Sproule, a Houston-based energy consulting firm, said Brazil, Colombia and Guayana are doing "much better" than Argentina in terms of access to capital. While Brazil's offshore oil resources are more expensive to produce than in Vaca Muerta, Brazil has had stable policies for years, making the cost of capital far less than in Argentina.

Despite the uncertainty in Argentina, there is potential for a pickup in investment. Juan Cruz Díaz, managing director of Cefeidas Group, an international advisory firm in Buenos Aires, said oil companies are slowly starting to revive projects after slowing investments during the first months of the COVID-19 pandemic.

"Things are not fantastic, but there is a sense of less pessimism," he said.

If the COVID-19 vaccines work, global oil demand and prices could pick up again and encourage new investment in Vaca Muerta, Díaz said.

In the meantime, investment and the demand for financing will be low. Federico Mac Dougall, a partner at Deloitte who advises multinationals doing business in Argentina, said that most of the investment will be by companies that know how to operate in the country with the view to benefiting from the low cost of entry into projects.

"We will see some local investors very active in looking for opportunity purchases," he said. "And we will see some international companies who will want to leave or wait to see what happens in the next few months to make any decisions."