Vaca Muerta in the headlines again: government sweetens the pot

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On January 10, President Macri of Argentina announced new policy measures to revive investment in the Vaca Muerta shale deposits. In the picture above, the president is flanked by the leading figures in all matters Vaca Muerta. To the left, by the governor of Neuquén, Omar Gutiérrez, and to the right, by the oil workers’ union regional representative, Guillermo Pereyra, and the Minister of Energy, Juan José Aranguren. The announcement was hailed as “historic” by its participants, but is mainly a commitment to continue subsidizing the domestic price of gas to producers, plus some measures to reduce labor costs. Here are the details.

Subsidies

Despite President Macri’s and Minister Aranguren’s much vaunted commitment to restoring market rules in Argentina so they can work their magic, the government has, as was reported before in this blog, chosen to continue the much maligned policy of the previous administration of fixing domestic prices for producers of fossil fuels. For Vaca Muerta investors it entails well-head prices of USD7.50/mmBtu; YPF, Chevron, Pan American Energy, Shell, Total and Dow all had cause to celebrate.

Labor

Oil workers are presumably celebrating the deal too, as it keeps them employed in a very sluggish economy. The negotiations included the following concessions (source Infobae.com): workers will no longer be paid for the time spent commuting to the wells; teams will be smaller as new technology is incorporated (for fracturing,  for example, teams will have 16 workers); night shifts; 2 days of work per 1 day of rest (replacing 1 x 1 scheme); work in windy conditions (60+ km/hr) will only be limited for elevated work; multiple service companies will be allowed to work in same location; and the work week for operation and maintenance will be of 8 hour days, Monday through Friday, and not include weekends and holidays, as it currently does.

Consumers

Consumers, for their part, are waiting for their payday. After much heated debate and protest, the government prevailed with an increase in the price of gas to consumers. Today, residential prices have experienced a threefold increase from the beginning of 2016, and are slated to continue rising until subsidies are completely eliminated by 2019, at around US$6.80/mmBtu.

The scenario for domestic energy development in Argentina is complicated and this government, like the previous one, is resorting to incentives above and beyond what the market promises in order to lure investors to develop the resources. The markets right now are not offering returns that would justify the kind of investment needed to make Vaca Muerta yield its riches. So the government offers a protected domestic market with subsidized prices. It makes sense. It’s been done before.

The real question is what the government is demanding and obtaining in return. The government talks of converging to international prices. The government talks of millions in foreign investment with cascading spillover effects. The government talks of energy independence. But often the Argentine government offers incentives to the private sector without clear performance targets or the willingness to enforce them. This too, has been done before.

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