BOOSTING THE ENERGY POTENTIAL

The Investor Argentina 2018  I  Energy  I  Analysis

“VACA MUERTA IS EXPECTED TO DOUBLE THE PRODUCTION OF GAS AND OIL IN FIVE YEARS AND LARGE INVESTMENTS ARE EXPECTED, WITH $15 BILLION ALREADY INVESTED IN 2018.”

NON-CONVENTIONAL REVOLUTION

 

The Vaca Muerta shale field, spanning 7.5 million acres and four provinces –  Neuquén, Mendoza, Río Negro and La Pampa – is considered by the Energy Information Administration (EIA) to be the second largest in the world of non-conventional gas resources to be. At a country level, Argentina’s technically recoverable shale gas and oil reserves stand at 802 billion cubic feet and 27 billion barrels, respectively. 

 

The reserve is almost twice the size of the Eagle Ford in North America (USA & Mexico) and that its quality is on a par with that of the Permian basin. Argentina’s mega-deposit of non-conventional hydrocarbons is attracting investor attention at home and abroad. With pricing and labor costs now settled, investment figures are starting to arrive: President Macri has announced $5 billion, private companies estimate $8 billion and the total figure for the coming years stands at $120 billion. According to the U.S. Department of Energy, U.S. and Argentina’s shale gas and shale oil resources account for 32% of the world’s crude and 10% of its natural gas.

 

Among the government’s medium-term projections for Vaca Muerta is to double the production of gas and oil in five years. In the first case, it would reach 260 million cubic meters per day, which would allow to export 100 million daily. In the case of oil, the daily production would be one million barrels and half would be exported. From that portfolio, the Government indicates that if the growth rates are maintained, 500,000 people could be employed in activities associated with Vaca Muerta. In the first quarter of this year, 75 people per day found work in the Neuquén basin. Thus, after five years, exports from the energy sector would contribute $15 billion to the Argentine trade balance. Despite the economic turbulence, the progress of Vaca Muerta is firm. To such an extent that the newly appointed Minister of Energy Javier Iguacel announced that from September it will return to export gas to Chile after eleven years of suspension of these shipments.

 

Argentina ranks second after China in unconventional gas resources and fourth in unconventional oil after Russia, the United States, and China. Last year, $4,5 billion were disbursed in the Neuquén basin and this year it would reach $15 billion. The bulk of investments is to come. Estimates indicate that investments of $20 billion per year will be required for at least 20 years. The trend is paying off at a rate that surprised this year. As of March 2018, non-conventional gas production represented 30% of national production and 52% of production in the Neuquén basin. If the data is updated to June 2018, it already represents 60% of Neuquén’s production. 

 

There are more than 30 operators in Vaca Muerta, including Pampa Energía, Tecpetrol, Pan American Energy, Shell, Wintershall, Pluspetrol, Exxon, Total and Schlumberger. Pampa Energía will have a 35-year concession in the El Mangrullo area and will make an initial investment of $205 million ahead of another $2.3 billion to the massive development. ExxonMobil, the largest private oil company in the world, announced an investment of $200 million to expand oil and gas production in the Neuquén basin with its investments expected to reach $10 billion in shale projects over 20 to 30 years in the region. Total, Pan American Energy and Wintershall, in alliance with YPF, have signed an agreement to develop unconventional hydrocarbons in the Aguada Pichana and Aguada de Castro areas through an investment of $1.15 billion until 2021. 

 

Phoenix Global Resources has a portfolio of 560,000 net acres in the Vaca Muerta with proven and probable reserves amount to 57.2 million barrels of oil equivalent. Schlumberger, also in partnership with YPF, will work on a shale oil pilot project with  $400 million as an initial investment. Tecpetrol, the company of the Techint group, announced an investment of $2.3 billion in Neuquen to produce almost 10% of the gas that is extracted in the country. Shell will make an investment of $1.5 billion which will bring its production, currently at 4,000 barrels per day of crude oil to 40,000 barrels in the Neuquén Basin by 2020. Pluspetrol, together with YPF, will develop a joint exploration plan in the La Calera area with a total investment of $2.2 billion. Attracting investment to the Belgium-sized Vaca Muerta play is a key priority for Macri’s business-friendly administration as it seeks to boost local energy production in order to reduce costly imports.

RENEWABLE ENERGY

 

Argentina has been facing severe power shortages in recent years, prompting the government to refocus on increasing installed capacity. The growth of the power market has been slow, with installed capacity increasing at a compound annual growth rate of 2% between 2000 and 2015. In 2015, conventional energy sources such as thermal and nuclear accounted for 63% of installed capacity, while large hydropower accounted for 33%. The installed capacity from renewable energy sources, including small hydropower, was just 3%. 

 

Renewable energy represents a possible solution to two major global issues: global warming and diminishing fossil fuel reserves. It is sustainable and clean, generally emitting no or very little CO2. It has the potential to boost economies. In order to make renewable energy competitive, it is necessary for governments to provide support in the form of favorable policies and incentives. 

 

The low utilization of renewable energy sources such as wind, solar photovoltaic (PV), geothermal, and biomass is due to a lack of government incentives that support renewable investment and limited financial support in terms of financing and project funding options. However, with energy demand increasing, Argentina is now more willing to encourage the development of its untapped renewable energy sources, and a large number of projects are receiving financing from the government, which is also encouraging private participation through foreign direct investment in the energy sector. In 2017, President Macri has been given the Award of the Year by the International Renewable Energy Agency (IRENA). This is the result of the Government efforts to put in place a system to catalyse the nation’s renewable energy development and set the country on a path to easing its dependence on imported fossil fuels, and to reduce its carbon emissions in line with Paris Agreement commitments. 

 

Today, Argentina has already the 2nd largest GDP Per Capita in Latin America and is on track to become one of the biggest economic powerhouses in the region. With its large educated population – 43 million people with approximately 60% of them under the age of 35 – combined with a diverse geographical landscape, Argentina is positioned well to lead the renewable energy sector in Latin America. Through a robust set of enabling policy frameworks, renewables are finding the limelight in Argentina at an impressive speed, and a positive story is emerging to demonstrate the immense possibilities and socio-economic benefits of a sustainable and prosperous energy future. Renewable energy adoption in Argentina has seen positive progress since the establishment and introduction of Plan RenovAR by President Macri in 2016. The plan sought to secure better financial conditions for the winners of renewable energy auctions. Under the programme, the Argentinian government set a target to increase the share of renewable energy to 25 percent in the energy mix by 2025, and an 8 percent renewable energy share in electricity consumption by 2017 – attracting approximately $35 billion in renewable energy investment in the process. Renewable energy auctions have already begun and the country is looking abroad for foreign investment.

 

Round one of the initiative was six times oversubscribed and more than 2.4 gigawatts (GW) of renewable energy tenders were awarded in 2016, stimulating investment of around $4 billion. A further 1.2 GW of renewable energy was auctioned in the second round of RenovAr in November 2017. The Government is now looking to contract 400 MW of clean energy from medium scale projects in the third round of its RenovAr renewable energy auction programme. According to the Undersecretariat for Renewable Energy, the maximum power allowed per project will be 10 MW, while the minimum power will be 0.5 MW. The Ministry of Energy reports that there are currently 59 projects of the RenovAr programme and Resolution 202 that are in commercial operation or under construction, representing a combined capacity of 2.37 GW.

Since 2016, Argentina has approved 147 projects in 21 provinces totaling nearly 4,500 MW. From all concessions made by the Department of Energy and the National Mining, 41 are solar projects, 34 wind, biomass 18, 14 small hydroelectric, biogas 36 and 4 biogas relleno. Latin America was the region that showed the highest increased growth of solar energy last year and this trend is expected to continue with Argentina playing an increasing role due to Government support and high interest from investors. 

 

BIOFUELS

 

Argentine fuel ethanol production and consumption are forecast to increase to a record 1.15 billion liters in 2018 as the local industry expands in order to fulfill the official quota -- the law mandates fuel providers use a 10 percent mixture of biodiesel in all diesel fuel sold to the public -- and a growing demand of gasoline. Biodiesel production in 2018 is forecast at 2.76 billion liters, a drop from the previous two years because of expected lower exports. Increasing that mix to 12 percent while also using more biodiesel in power plants, public transport, and agricultural machinery could cover up to half of Argentina’s annual production capabilities within three years. Since EU import duties were lowered in September 2017, deliveries of Argentine SME (soy methyl ester) have been on a steady increase. By the end of March 2018, they amounted to 915,983 tonnes, which translates to 62 percent of all EU biodiesel imports. Because of anti-dumping duties, there had not been any biodiesel shipments from Argentina for four years. These figures underline the success of the Argentine government’s export promotion policy in support of its domestic biodiesel industry. But the sector, which recorded 1.2 billion dollars in revenue last year, is seeing the EU as a possible threat since it has already put a damper on sales to Europe, trimming Argentina’s biodiesel exports to no more than 700,000 tons per year, down from 1.65 million tons shipped in 2017.

 

Today, the Argentine biodiesel industry, which in the last 10 years has become one of the most powerful in the world, has an uncertain future, faced with protectionist measures in the United States and Europe and doubts in the international scenario about the environmental impact of these fuels based on agricultural products. Argentine biofuels are meeting the goals of emission reduction agreed at a global level, given the characteristics of its agricultural system. With 80 percent of the grains used grown in the Rosario area, where soils have more than 100 years of agriculture, there are no problems of deforestation or biodiversity.