Argentina pipeline to spur petrochemicals investment

Source: ECN

2019/03/22

Argentina’s push to boost oil and natural gas production from its vast Vaca Muerta shale region and build a pipeline to get the hydrocarbons to a key industrial site should finally spur major investment in its petrochemicals sector.

The government expects to award a contract to build a pipeline from an area in the Vaca Muerta to the industrial and petrochemicals hub of Bahia Blanca by 31 August, according to senior government officials.

“If we are able by 31 August to award a contract for the construction of the pipeline from Vaca Muerta to Bahia Blanca, I think just the fact that it is beginning to be built will spark many investments in petrochemicals. We’ve been talking with companies about their expansion plans,” said a senior government official.

Today, Dow operates the country’s sole cracker and polyethylene (PE) complex in Bahia Blanca. The company has two ethane crackers with ethylene capacities of 455,000 tonnes/year and 275,000 tonnes/year, according to the ICIS Supply and Demand database.

Downstream it has capacities of 340,000 tonnes/year of linear low density PE (LLDPE), 295,000 tonnes/year of high density PE (HDPE) capacity and 110,000 tonnes/year of low density PE (LDPE) capacity.

The Vaca Muerta (dead cow in Spanish) is “no longer a promise or potential but a reality”, and oil and gas companies have only hit the tip of the iceberg, the official added.

Already shale gas from the Vaca Muerta accounts for about 22% of Argentina’s total production of 129m cubic metres (cbm)/day, with production jumping by 215% from January 2018-January 2019.

In the same period, shale oil production rose 87% to 78,000 bbl/day, to around 16% of total oil production of 501,000 bbl/day.

However, with conventional oil and gas production in decline, Argentina’s total gas production rose 4%, and the same amount for oil.

Yet the big jumps in shale oil and gas from the Vaca Muerta show the great potential for this to significantly boost Argentina’s overall energy production for fuel and chemicals, so much so that Argentina expects to become a net exporter of natural gas in 2-3 years.

In October 2018, Argentina finally resumed natural gas exports by pipeline to Chile after 12 years because of increased gas production in the Vaca Muerta. It exports to Chile and Brazil in the summer.

However, during the winter months, Argentina imports liquefied natural gas (LNG) at a high cost of around $9-10/MMBtu, straining its budget.

Argentina wants to build an LNG plant and export terminal, likely in Bahia Blanca, in the coming years to export surplus gas. With a long lead time of 3-4 years, it is evaluating this project now.

For a private company to invest $3-4bn in building an LNG train, it would need assurance that there would be no changes in energy regulations.

The country desperately needs investment in its energy sector – not just in exploration and production, but critically in midstream infrastructure to transport the oil and gas to where it’s needed in large population centres and industrial hubs.

“We have a pipeline problem. We’re going to have a lot of wells shut in because of lack of pipelines. It’s a problem of growth – a good one to have,” said a senior government official.

Along with the planned Vaca Muerta to Bahia Blanca pipeline, the government will be receiving proposals for a new gas pipeline from the Vaca Muerta to its capital, Buenos Aires.

Because of its perpetual budget shortfalls, it needs private and foreign investment. This is no easy task, given Argentina’s history of nationalising energy assets (expropriating Spain-based Repsol’s majority stake in YPF in 2012), along with political and economic instability.

However, it is the only way to fully capitalise on the huge opportunity under ground. Top Argentina government officials met with their US counterparts along with energy and chemical companies in the US recently to highlight investment opportunities.

While Argentina’s perennial economic crises wouldn’t be fully solved by the Vaca Muerta, development would certainly help in a big way. It is the only way for the country to earn enough foreign currency to allow it to invest in other sectors of the economy. Agriculture is simply not enough.

Production from the Vaca Muerta has thus far been prolific, surpassing expectations.

“Companies have no doubt on the potential of the geology. There is no problem below the ground. Argentina needs to be organised above the ground,” said a senior government official.

From December 2015, Argentina’s government under President Mauricio Macri instituted a series of energy reforms, including transitioning to market-oriented pricing, adding power generation capacity, and restructuring its natural gas import contract with Bolivia to receive more gas when it’s needed in the winter and less in the summer which would result in net savings of around $230m/year.

While the government has pulled back subsidies for new natural gas projects as of February 2019, it argues that because of the record growth in shale gas production the subsidies spurred, the incentives are no longer needed. Argentina’s government had agreed to provide a price floor of $7.50/MMBtu for gas production above a certain base level.

The removal of the subsidies will likely cause a bump in the road to development as companies pull back on investment plans in response. However, production is set to continue increasing.

The potential of the Vaca Muerta is massive and largely untapped. Only 4% of Vaca Muerta’s 8.6m acres is in the development phase. Another 23% of acreage has been granted in concessions, while 73% has yet to be granted.

While Argentina wants to grow its energy sector, it would like to grow it steadily over time to avoid big boom and bust cycles.

Argentina’s economy and population cannot withstand a major economic or energy bust. The current business friendly administration is already pleading for its citizens to “give capitalism a chance”.

The Macri administration would be the first “non-Peronist” government in Argentina to complete its first term in 90 years, later this year. The presidential election will take place in October 2019 where Macri will be vying for a second term.

Even if there is a return to a more populist government, the policies promoting development of the Vaca Muerta could still be protected, as any government would realise this is the only new source for foreign currency, the current government argues.

If Argentina can grow investment in the Vaca Muerta (about $4.3bn in 2018), gradually by around 10%/year, the government would be “more than happy”, said a senior official.

While not as exciting as the US Permian basin’s “gold rush”, this concept of “gradualism” to harmonise political and social institutions and avoid a catastrophic bust is more fitting with Argentina’s culture and a step in the right direction. ■