Argentina
The 'DEAD COW' (Vaca Muerta), more alive than ever
Vaca Muerta has been present in every GBR edition about Argentina, year after year. Readers must bear with us. The giant formation, the size of Belgium, is hard to ignore. The passing of time has not taken away its significance as the second-largest shale gas deposit in the world (with an estimated 308 trillion cubic feet) and the fourth-largest shale oil deposit (believed to contain 16 billion barrels). It took almost 100 years since its discovery in Patagonia before it produced its first barrel, in 2019. But since then, developments have come a lot faster, bringing Vaca Muerta to life. All going well, the fields could pump up to 1 million barrels per day (bpd) in the coming years.
Vaca Muerta could be the answer to Latin America’s feedstock shortages, which have been the main cause of petrochemical production declines all the way from Mexico to Patagonia over the last 15 years. The quality and price of Vaca Muerta’s reservoirs are said to rival those that drove the shale boom in the US. Particularly, the natural gas from its non-conventional sources has high ethane and propane content, up to three times higher than that found in conventional resources, ideal for the development of the chemical downstream. Argentina’s gas price, at around US$3.5 per million btu, is about four times lower than Brazil’s. However, while extraction is cheap, the infrastructure to transport is not.
On the production front, this year Argentina hit two all-time record highs of 631,103 bpd for oil and 5 billion cubic feet per day for gas, according to Oil Price. The national oil company, YPF, but also foreign supermajors like Shell and Chevron, have allocated multi-billion-dollar budgets in upstream operations. Representing YPF, Martina Azcurra, executive manager for Chemicals at YPF Química, the chemical arm of the integrated player, shared with GBR that almost half of the company’s US$5 billion capex this year will go into the development of Vaca Muerta.
Argentina has big plans to, first of all, become self-sufficient in natural gas supply, before moving on to exporting to the region. For that, it will require significant investments in infrastructure; the current pipelines are already operating at capacity, while fracking equipment and utilities are scarce. According to Reuters, there are only eight active fracking crews at Vaca Muerta, way below the 280 currently active in the US. This year, YPF committed to fund 40% of takeaway capacity. Also, Argentina just inaugurated a new major pipeline connecting the massive shale gas deposit to the province of Buenos Aires, which relies on imported LNG during the winter months. Authorities said the 537-km pipeline, known under the name of President Néstor Kirchner Gas Pipeline (GPNK), will add 11 million cubic meters of gas per day, as reported by Reuters.
The pipeline was constructed in 10 months, but our interviewees are saying it was supposed to be finished five years ago. Next, Buenos Aires is said to hold an auction for a state contract to extend this pipeline. Other projects are underway, according to Jorge de Zavaleta, executive director at Argentine Chamber of the Chemical and Petrochemical Industry (CIQyP), including the Northern Gas Pipeline reversal, which will aid in the country’s ambitions to export gas to Brazil.
“Argentina has three projects to evacuate non-conventional oil production: One is a pipe connecting Neuquen with Chile’s Enap refinery, a refinery which used to import 100,000 bpd, but it was shut down due to the lack of oil from Argentina. The pipe is now only exporting 50,000 bpd, but it is due to reach 110,000 bpd, its maximum. The second project is operated by Oleoductos del Valle (Oldelval), evacuating oil from Neuquen to Bahia Blanca at a capacity of 220,000 bpd, but due to almost double to 400,000 bpd in about one a half years. Finally, the third project is Vaca Muerta South, by YPF, projected to transport 250,000 bpd. Altogether, we are looking at over 1 million bpd in the next two to three years,” outlined Zavaleta.
Besides LNG, the country eyes urea exports to Brazil, said Zavaleta: “Currently, Argentina has a large urea plant belonging to Profertil, but the country’s demand for urea is 1.8 times higher than what Profertil’s plant can produce. Next door, Brazil is one of the largest urea importers in the world, with about 7 million t/y of urea imports – this is the equivalent of four to five typical plants of 1.5 MT.”
“I expect next year to be tough, but once we have overcome this, Argentina will explode in growth. When Argentina shrinks, it shrinks very fast, but when it grows, it grows at 8-9% GDP. Argentina has many of the things that Ukraine cannot export anymore – like wheat, corn, and energy – so the liberalization of the economy is an immense opportunity.”
Adrián Schwartz, President, Grupo Simpa
Badly in need of dollars
The reduction of imports, coupled with the development of export capacities in both LNG and petrochemicals, would bring a much-needed support to Argentina’s dollar reserves at the Central Bank, which have depleted to an alarming level this year, especially after one of the worst draughts of the century impacted its agricultural sector – a world leading exporter in soy oil, flour, and corn. According to Consultancy.lat, Argentina will miss out on US$19 billion in export revenue this year, creating severe dollar shortages. This has pushed inflation even higher into the triple-digit range.
Vaca Muerta’s oil and gas resources are seen as the silver-bullet that could help Argentina’s trade balance, but, at the same time, the development of upstream and transportation projects require dollar availability, especially for the servicing sector and equipment importers. The government wants to attract US$10 billion investment to transform gas in LNG in the coming years, with a goal to reach gas exports of US$15 billion by 2027, reported Reuters. But appealing to foreign investors is challenging, especially given Argentina’s market controls. Hoping to give investors more confidence, the government is pushing for an LNG bill that would provide the markets with some stability.
In the petrochemical space, import restrictions have distorted the market. Hyperinflation and dollar shortages have led the government to impose a mechanism that requires importers to apply for a special permission. Zavaleta explained: “Known as the ‘Import System of the Argentine Republic’ (SIRA), the system was introduced about a year ago when funds at the central bank became scarce. To be able to import, players need to open a file through the SIRA system and wait for approval, which, if granted, comes in the next 24-48 hours. Otherwise, the request remains on hold indefinitely.”
This mechanism has resulted in lower imports (by volume) and higher domestic sales, with mixed effects. Indeed, the trade deficit has been reduced, Argentina normally importing 40% of its chemical needs, whereas today, local producers supply 87% of the market, said Adrián Schwartz, president at Grupo Simpa, the largest distributors in the Argentine plastics value chain. However, the reduced import dependency conceals the fact that the demand itself has shrunk: “One year ago the PE market was at 80,000 tons/month, of which about 45,000 t/m was supplied by Dow and its distributors, while 35,000 t/m came from imports. Now, the PE market is at 62,000 t/m in total, but Dow and its distributors supply the vast majority of that (55,000 t/m), with only 7,000 t/m coming from imports. Import limitations prevented our competitors from getting the product,” said Schwartz.
“With over 40 million ha of cultivable land, Argentina is one of the main producers of soy, corn, and wheat, most of which are exported. Considering the food crisis caused by the pandemic and the Ukraine-Russia war, Argentina is poised to be an extremely important protein supplier, but the country requires a better political framework to incentivize investments in agribusiness.”
Federico Alonso, General Manager, Gleba (part of Anasac Holdings)
A closed economy has also distorted the price of commodities, which have dissociated from international references. “For example, linear low-density polyethylene (LLDPE) is currently at US$1,100/t in South America, which should translate to about US$1,550/t once taxes and other expenses Argentina are added. However, in the Argentinian market, customers are paying US$2,500/t for LLDPE. Even at this price, products are sold exhaustively because manufacturers do not have other options,” Schwartz explained.
The local market is served by a handful of players taking leading positions in different polymers – for example, Dow’s largest production site in the region is in Bahia Blanca, in Argentina, where the global player has two ethylene crackers, four polyethylene (PE) plants, as well as a polyurethane (PU) complex close to San Lorenzo. The polypropylene (PP) market is dominated by Petrocuyo, the only supplier of PP in the country, while DAK Americas is the only polyethylene terephthalate (PET) producer. Then, Pampa Energia supplies polystyrene (PS) and Tecnocom is a leader in PVC. The national company, YPF, has a petrochemical line of about 30 products. Compañía Mega, a public company with YPF, Petrobras, and Dow Argentina as key shareholders, is a main supplier of ethane in the industry.
The development of the oil and gas supply is not only relevant for the petrochemical industry, but also for the agriculture sector, and even its mining sector, both large consumers of chemicals, as well as for the overall economy. The industry expects that, no matter the winner of the upcoming election, Vaca Muerta will remain a priority, even though activity at the fields have sparked some indigenous protests over the years.
Image courtesy of YPF.