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CAPITAL MARKETS

Could a dead cow moo-ve the dial for Argentina?

Vaca muerta is an enormous oil and gas field, but it may be too late to exploit it.

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The 23rd agreement between a government of Argentina and the IMF was announced on March 3. Unsurprisingly, the general reception was one of scepticism – there is nothing within the agreement (which restructures $45 billion of debt to the Fund) or among the track record of either party – to suggest this accord will fare any better than previous iterations.

The deal must be approved by Congress, but, if ratified, debt repayments will begin again and full repayment is scheduled for 2034.

The price action on the sovereign bonds spoke eloquently to the chance that this time might be different: all US dollar-denominated bonds fell by about one cent across the curve, with all issues trading between 30 cents and 36 cents on the dollar and yielding from 16.7% to 23.7%.

Perhaps, though, this time will be different. After all, the ban on Russian energy products, following that country’s invasion of Ukraine, adds a new and interesting dynamic to Argentina’s enormous oil and gas fields, dubbed ‘Vaca muerta’ (Dead cow).

The fields occupy 36,000 km2 across several Argentine provinces and rank fourth globally in the size of unconventional oil reserves and second in unconventional gas, according to estimates from the US Energy Agency.

In the meantime, the US has sent delegations to Venezuela and the prospects of Iran's re-integration into the global economy have been boosted because of its oil reserves as the search for replacements for Russian supplies gathers pace.

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Oil rigs at Vaca muerta in the Patagonian province of Neuquén. Photo: Reuters

Infrastructure challenge

But to generate both gas flow and cash flows from Vaca muerta would require a lot of investment. The area is remote and, while existing infrastructure is suitable for some expansion in oil production, it is not suitable for the area’s real asset: natural gas.

The question then is: where does that infrastructure investment come from? The government has just committed itself to fiscal consolidation and has precious little in the way of hard-currency reserves. Meanwhile the private sector faces regulatory uncertainty (the expropriation of YPF from Repsol that took place under the administration of then president Cristina Kirchner is still fresh in the minds of oil and gas professionals).

There’s a good chance that Europe’s response to its dependence on Russian gas will be an aggressive push into renewable energy

Then there are the twin problems of the government’s FX and capital controls – those foreigners brave enough to try to make money in Argentina are restricted from repatriating earnings.

A bill in the country’s congress seeks to incentivize private-sector investment in Vaca muerta by allowing the private sector to use proceeds of energy exports and to enter into long-term sales contracts.

The legislation has yet to be approved and there are doubts about how credible this new-found enthusiasm for market-based practices by the new administration really is.

However, while geopolitics offers some positive drivers for Vaca muerta – and in turn Argentina economic viability – by boosting demand for non-Russian gas, this may be a misreading of the consequences of the war in Ukraine.

Stranded asset

It is too early for any kind of clarity, but there’s a good chance that Europe’s response to its dependence on Russian gas will be an aggressive push into renewable energy, as well as a new generation of nuclear power plants.

If this is the way Europe responds, the shocks to the oil and gas markets may deliver what all the climate-change conversations have threatened but not delivered: a large and rapid shift away from hydrocarbon-based power.

The scale of opportunity for Vaca muerta is large but it is also long-term. Project financers say that creating an industry of natural-gas exports would require a scale of investment that would require at least 15 years (ideally much longer) of sustained demand to generate a viable rate of return for the necessary infrastructure.

If today’s soon-to-be ex-customers of Russia only want five years of dwindling supply as they pivot to domestically produced alternatives, then Vaca muerta will remain what it has been to date: an impressive but stranded asset.

And if Vaca muerta is a stranded asset, the prospects for Argentina remain the same – and at some point, a 24th agreement with the IMF will be necessary.

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