Argentina vote may decide shale play future

Shale-rich Argentina will hold primary elections on 11 August that will be key to setting the tone for October's presidential election, which could mark an end to President Mauricio Macri's business-oriented administration.

Polls show a slight advantage for Alberto Fernandez, who is running on a ticket with populist former president Cristina Fernandez de Kirchner as his vice presidential running mate. The two are not related.

Both Macri and Fernandez have described the Vaca Muerta shale formation as key to the country's future, although analysts agree the president's reelection is more likely to lead to faster growth in investment in the country's most promising shale patch than would a win for Fernandez.

But there is also guarded optimism the nascent unconventionals sector could continue to grow regardless of who takes office in December.

"Although it does matter who wins to consider an eventual increase of investments or the entry of new companies, I do not see any major shifts in the plans of the current players," said Daniel Gerold, a local energy consultant.

Recent investment announcements also appear to support that view.

US independent ConocoPhillips signed a farm-in agreement with Germany's Wintershall DEA last month to acquire stakes in two Vaca Muerta blocks. The southwestern Neuquen province, where most of Vaca Muerta is located, also signed two unconventional production contracts with local energy firm Tecpetrol in July.

"It is an important sign that companies do not see a result in one way or another that will change their decisions to invest," Gerold added.

All of Argentina's citizens are required to vote in the weekend's open primaries. The lack of competition for any of the main contests, including the presidential race, means the vote will serve as a massive poll that would set expectations for the 27 October vote.

Should the Fernandez-Fernandez ticket emerge with a strong lead in the primaries, the peso currency would likely come under strong pressure amid an expected sell-off of Argentinian assets due to fears of a return to a heavy state control over the economy. That was the norm when Cristina Fernandez was president from 2007 through 2015.

The election is taking place at a time when there are faint hints the economy may be slowly emerging from a recession and inflation is slowing after clocking in at more than 50pc this year. The economy grew an estimated 2.6pc in May from a year earlier, marking the first time the monthly estimate by the Indec statistics bureau has reported growth since March 2018. The International Monetary Fund estimates Argentina's economy will contract by 1.3pc this year after shrinking by 2.5pc in 2018. The IMF forecasts growth of 1.1pc in 2020.

The development of Argentina's shale sector has been one of the few economic bright spots of Macri's four-year administration.

Oil and gas production have been surging, reflecting the impact of rising unconventional flows from Vaca Muerta.

Natural gas output in Argentina reached an 11-year high of 140mn m3/d (4.9bn ft3/d) in June with a 7pc drop in conventional output more than made up by a 28pc gain in unconventional production while crude production rose 2.5pc to 497,000b/d, marking the 16th straight month of year-on-year growth with unconventional output making up 18pc of total output.

"There is a level of maturity in Vaca Muerta that is pretty significant and everything is ready for there to be a serious takeoff," said Sergio Berensztein, a political and economic analyst. "But there is very relevant infrastructure that is still missing and whether that is completed will have to do with the business climate."

The government launched a tender last month to build and operate a $2bn natural gas pipeline to ease one of the key bottlenecks in Vaca Muerta, where some producers have been forced to shut-in gas wells due to a lack of infrastructure to evacuate all of the gas to market.

Although investors would be more skeptical of a Fernandez presidency, analysts warn a Macri victory would not automatically ensure the macroeconomic situation will improve enough to reduce country risk and interest rates to such a degree that would guarantee the infrastructure is completed.