The outcome of Argentina’s recent presidential election is expected to have significant impacts on the South American country’s energy sector, after the election was won by far-right libertarian outsider Javier Milei.
President-elect Milei has indicated he plans to deregulate the oil and gas industry, privatise the state-run oil company YPF, and put in place policies to attract foreign investment, in a shake-up to the country’s crisis-ridden economy.
Shares in YPF surged on news of Milei’s win, jumping by about 40 per cent, the biggest intraday move since the company began trading in 1993.
Argentina’s government is the majority holder of YPF with a 51 per cent stake.
Milei’s political platform promised a radical break from previous years of government mismanagement, featuring dollarisation of the economy, shutting the central bank, and fuel pricing controls.
Dominika Rzechorzek, Senior Oil and Gas Analyst at BMI, has stated there could be upside risks to its previous long-term crude oil and natural gas production forecast under Milei’s government.
She added that his pro-business agenda was set to raise attractiveness of Argentina’s upstream sector and spur investment.
Rzechorzek said: “During the presidential campaign, Milei was vocal about planned reforms, including efforts to lift capital and currency controls, which continue to be the key challenge for upstream companies operating in Argentina.
“He also promoted market-based pricing instead of price setting and the removal of oil and gas export taxes that would benefit primarily crude oil exporters and to a smaller extent gas exporters amid limited cross-border pipeline capacity.
She noted Milei planned to privatise YPF over the next two years, and that he was supportive of the expansion of LNG export capabilities, which would likely result in a favourable regulatory framework for the sector.
“Broadly, we expect Milei to be successful in pursuing his sector-specific policy agenda given a broad support for oil and gas sector across the political scene in Argentina.”
However, BMI recognised there were also some downside risks, particularly over the near term through weakened investor sentiment on the back of expected economic turmoil in the first months of Milei’s presidency.
Rzechorzek said: “This in turn could delay midstream infrastructure projects as Milei plans to rely on private investment to develop energy infrastructure.
“On the demand front, Milei has been vocal about removing subsidies for energy, which could result in natural gas and fuel demand destruction in the near term.”
Investments in oil and gas production across Argentina’s basins will exceed US$10.7 billion this year, up 18 per cent from 2022, with the Vaca Muerta shale formation in the Neuquen basin alone accounting for nearly 70 per cent of the total planned investments.
Argentina hosts the world’s fourth-largest shale oil and second-largest shale gas reserves, much of which is in the Vaca Muerta, and only a fraction of these reserves has been developed for oil and gas production.
Rystad Energy has said its modelling indicated that Vaca Muerta oil output could realistically grow from 291,000 barrels per day (in February 2023) to more than a million barrels in the second half of 2030, if production remains relatively unimpeded.
Rystad Head of Shale Research Alexandre Ramos Peon said: “Vaca Muerta could hold the key to Argentina’s future energy economy following more than a decade of oil production declines.
“While major challenges lie ahead, reaching the important one million barrels per day threshold would change the country’s narrative, reduce its reliance on imports, and become a key regional and global oil market player.”
Production from the majors – Shell, Chevron, ExxonMobil, and TotalEnergies – increased by 62 per cent in 2022 compared to 2021, followed by other local and international players and YPF.
Gas output from other local and international players (excluding Tecpetrol) and YPF grew 63 per cent and 43 per cent, respectively.
It was reported in September that Shell was looking to increase oil production by the end of 2023, moving from 5,000 barrels of oil per day at its Vaca Muerta shale patch to 50,000 barrels.
Shell Argentina Chief Executive Officer Ricardo Rodriguez has indicated macroeconomic concerns were preventing the company from extending its capital investment in Vaca Muerta.
He noted that Shell had to consider hard before choosing where to invest because of limited access to foreign currency and price controls imposed by the Argentinian government.
Rodriguez added: “We do not have a free market price for Argentina.
“We do not have a price, but my colleagues in Brazil or Mexico do – this generates a big difference in competitiveness.”
Argentina has stringent exchange controls in place to increase the amount of foreign currency reserves in the country, which are now likely to be removed under Milei’s tenure.
After state-run oil giant YPF, Shell is thought to be the Vaca Muerta’s second-largest crude oil producer.
According to Wood Mackenzie, Milei’s administration will focus on the importance of unlocking Vaca Muerta volumes and will approach this from a platform of slashing public spending, and privatising state companies.
Wood Mackenzie Principal Analyst Raphael Portela explained: “For YPF, domestic operators, and foreign integrated oil companies, Milie’s market-oriented policies are likely to be a net positive.
“Lifting of capital controls, for instance, will help with the import of rigs and related equipment, which has been a development bottleneck for some time.
“Removal of import-export taxes and oil price caps is also expected, potentially helping unlock sales and future investments.
“Other campaign promises, such as a lower tax burden, would improve the industry’s bottom line.”
Portela cautioned that despite the business-friendly agenda, an outright sale of YPF was unlikely.
He said: “A parallel can be drawn with Brazil’s [previous] president Bolsonaro, who also promised the privatisation of Petrobras.
“In practice, many political hoops stand in the way – instead, we expected an emphasis on disposals to be the middle ground.
“The sale of non-upstream assets is more likely, especially in the fertiliser, gas and power, and downstream segments.”
Other challenges will persist, according to Portela, such as the loss of gas subsidies from the previous administration and continued difficulty in infrastructure debottlenecking.
The incoming Infrastructure Minister Guillermo Ferraro said in late November he would prioritise building roads and other infrastructure to support a ramp-up in oil and natural gas production in Vaca Muerta, which is largely supplied by trucks.
The past two governments have sought financing for a US$1-billion railroad project, most recently from China, but has been unable to do so since the country fell into a financial crisis in 2018, which is still preventing the project from being capitalised.
