Oil price slump triggers Argentina state intervention

Shale-producing Neuquen province is calling for Buenos Aires to set a minimum crude price of at least $50/bl to protect investment, writes Daniel Politi

The sharp drop in oil prices is prompting Argentina to revive state intervention to protect the domestic oil industry.

The government is putting the brakes on imports of crude, gasoline and diesel — a move that mainly benefits state-controlled YPF, Argentina's top oil producer and refiner. In the new policy, crude and fuel imports will be subject to "non-automatic licences", giving the government up to two months to authorise purchases from abroad. Jet fuel, LPG and fuel oil will be exempt.

"We are implementing non-automatic licences for imports to prevent speculative schemes linked to market volatility from affecting local output," production minister Matias Kulfas says. Kulfas, who is in charge of the energy secretariat, says the government will meet representatives of hydrocarbon-producing provinces, labour unions and oil and gas firms to determine additional measures. "The decline in international prices affects a large part of production," he says, highlighting that Argentina's Vaca Muerta shale formation "has higher costs", so "failing to do anything would probably mean those wells will stop producing".

In a hint of further action, the influential administration of shale-producing Neuquen province is calling on the national government to set a minimum crude price to shield investment. "The support price we are thinking about would be around $50/bl," Neuquen energy minister Alejandro Monteiro says. National energy secretary Sergio Lanziani says the government is in talks "to reach an agreement on energy and social welfare with all hydrocarbon-producing provinces".

Neuquen's request recalls the country's past policy of maintaining artificially high wellhead crude prices to spur output. This ended in 2017, but pump prices remain subject to informal controls. The recent plunge in oil prices could push the government to take measures that the energy sector has long demanded to boost investment, including freeing up energy companies to access the foreign exchange market and export output, Neuquen governor Omar Gutierrez says. "A crisis is a good opportunity… to accelerate measures," he says.

Argentina's oil output rose by 4pc to 508,600 b/d in 2019, while gas output grew by 5pc to 135.2mn m³/d, according to the energy secretariat (see chart). Large foreign firms including ExxonMobil, Chevron, Shell and Total hold significant acreage in Vaca Muerta, although much of the production there has been dominated by YPF.

Soar point

But YPF made a loss of 33.4bn pesos ($557mn) last year, amid lower output and falling oil and gas prices, compared with a profit of Ps38.6bn in 2018 (see table). While its 2019 revenues were up by 56pc, at Ps678.6bn, costs soared by 60pc to Ps575.6bn and YPF was forced to take a one-off impairment charge of Ps41.4bn. The firm's overall output fell by 3pc to 514,400 b/d of oil equivalent (boe/d) last year, and its gas production declined by 5.5pc to 39.7mn m3/d.

The company expects a 2pc increase in crude production and an 8pc decline in gas output this year, reflecting a shift in focus towards oil at a time of domestic gas oversupply that has resulted in sharp price drops.

YPF's capital expenditure (capex) this year was already forecast at $2.8bn, down by a fifth, reflecting lower gas drilling. Falling global crude prices are also having an effect on its investment plans. "With Brent below $50/bl, it is difficult to make an investment decision on brand new shale development," chief executive Daniel Gonzalez said, days before the benchmark fell below $35/bl. But YPF expects to drill over 100 new wells at unconventional oil assets this year, with 11 rigs and capex of $1.8bn. It aims to raise shale production to 155,000 boe/d by December. It rose by 72pc on the yearto 111,800 boe/d in the fourth quarter.

Argentina oil and gas output