Unlocking the potential of the Vaca Muerta formation

Although the world is still grappling with COVID-19 and its consequences on economies and societies, there are indications that increasing demand and higher oil prices are resulting in greater production. In Argentina, production has been on the rise in recent months with output climbing to 496,000 b/d in March 2021, up from 445,000 b/d in April 2020. Argentina's government is stepping in to incentivize hydrocarbon production with gas price subsidies, export programs, and proposed reforms to energy policies. Although some of these measures have helped revive production, much work is left to be done for the oil and gas market in Argentina to fully recover. IHS Markit Companies and Transactions and Cost and Technology teams have taken a look at the obstacles that still remain to the formation's full-scale development. To download the detailed report, please, click here.

Potential Challenges Facing the Vaca Muerta's Further Development

The successful derisking and full-scale development of the formation will require significant investment over the next decade. Although the prospective shale resource base in the region is prolific—holding the second-highest technically recoverable gas reserves and fourth-highest technically recoverable oil reserves worldwide according to the US Energy Information Administration—there are numerous challenges. Among them are pipeline constraints, aboveground risk, and the low-carbon energy transition.

Pipeline Constrains
Although there is a significant prospective resource base in the Vaca Muerta formation, infrastructure constraints could limit the area's production potential. Arguably the most critical is the gas outflow capacity from pipeline capacity and local demand for gas. There are three gas pipelines able to export gas from Neuquén, yielding a volume of approximately 92.9 MMcmd. In 2019, production in the basin averaged 84.2 MMcmd, peaking at 94.2 MMcmd in the winter months, when seasonal demand increases. Without the construction of new pipelines, additional gas output may only increase as much as local demand warrants.

Should sufficient infrastructure be in place for gas, it could be transported to meet seasonal domestic demand as well as demand in neighboring countries. A few options have been on the table for pipeline capacity expansion. There was a 2019 proposal to construct an $800 million, 500 km pipeline (first stage of 15 MMcmd capacity) connecting the Neuquén Basin with Buenos Aires; however, the project has faced a series of setbacks and continues to be on hold owing to the pandemic. In 2020, the federal government also pitched to Brazil a $4.9 billion, 2,000 km pipeline (initial capacity of 15 MMcmd) that would connect the Neuquén Basin with Porto Alegre. Initial discussions on the latter pipeline are ongoing.

Aboveground Risk
A second factor that could undermine resource development is ongoing concerns regarding the aboveground risk in Argentina. For much of the last decade, the government's policies to promote hydrocarbon development have been inconsistent across three presidential administrations. Moreover, the specter of sovereign default, capital controls, and export taxes have deterred companies from making more significant investments in Argentina. The current administration hopes to address some of these market challenges with a forthcoming bill that would improve the investment environment for oil and gas companies in Argentina.

In addition to concerns regarding the government's economic policies, trade unions are well-organized with ample influence over the government and the capacity to disrupt operations in the oil and gas sector. Groups of "piqueteros" often resort to the tactic of roadblocks as a means of increasing their bargaining power over items such as spending programs and worker compensation. The most recent example came in April 2021 when healthcare workers blocked roads near the Vaca Muerta formation in an effort to secure higher compensation. Although the blockade has since been lifted, the prospect of similar protests is a recurring threat that impedes work and transportation in and around the area. Last month's episode resulted in output being cut by 10,000 b/d and 120 MMcf/d from normalized levels.

Energy Transition
A final but emerging obstacle of note to production in the Vaca Muerta formation is the transition to lower-carbon energy sources. With this in mind, for some companies, there could be the potential of a diminishing long-term role for oil and gas within their portfolios. Although costs are coming down and production is going up, there are concerns about the level of emissions that would emanate from the large-scale development of the formation. Indeed, critics contend that methane emissions represent a major issue at oil and gas installations across the formation. Going forward, companies operating there will need to mitigate emissions as a project's carbon intensity becomes increasingly relevant not just to oil and gas companies, but to the financial institutions that back them.

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Posted 03 June 2021 by Kareem Yakub, Principal Analyst, Upstream Companies & Transactions, S&P Global Commodity Insights and

Renata Machado, Associate Director, Vantage - Asset Valuations, S&P Global Commodity Insights

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.