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Guest Post: Argentina’s Natural Gas Discoveries

by Michael Levi
October 18, 2011

A view of the San Alberto gas plant (David Mercado/Courtesy Reuters).

The New York Times recently reported on a boom in Argentinean oil and gas discoveries. My colleague Shannon K. O’Neil explains the challenges in accessing this resource, and what recent developments mean for the region. Her post from her blog, Latin America’s Moment, is reposted below.

Last December, Argentina’s major oil and gas company YPF discovered some 4.5 trillion cubic feet of unconventional gas in the southwest province of Neuquén. The find has the potential to totally transform the country’s (and the region’s) energy future. It pushes Argentina’s energy reserves to 774 trillion cubic feet — making it the third largest provider of natural gas in the world, after the United States and China. If exploited it would easily cover domestic demand for gas for the foreseeable future and end the recurring and unpopular gas crises that force factories to shut down at times during the winter months.  Argentina would become energy self-sufficient for the first time in nearly a decade.

But there are challenges to get the gas out of the ground. First, Argentina’s shortage of water may stand in the way of accessing natural gas reserves. The process of drilling to extract shale gas uses up to 6 million gallons of water for every well drilled, and experts say it will take 38 billion gallons of water to capture natural gas trapped underneath the Vaca Muerta, or “Dead Cow” basin.

Another challenge is the government’s oil and gas pricing regime, which has been a major disincentive to investment in recent years. Heavy regulations hold prices down to $2.00-$2.50 per cubic foot of regulated gas — nowhere near the breakeven price needed to make development worthwhile. Argentina has set up a two-tier system under its “Gas Plus” program — allowing gas produced by new investment to be sold at much higher prices – in some cases more than double the rate in the domestic market. This has brought in more than a billion dollars from the likes of Exxon, AES and Apache. But these differential prices show how transitory Argentine rules can be. To attract the huge amounts of capital needed to truly develop these gas finds in the coming years, the Argentine government will have to convince investors that the rules won’t change with the political winds.

If this happens, it will transform regional gas markets. Bolivia will be the biggest loser. As the region’s current top energy provider, its economy today depends on fueling neighboring Argentina and Brazil. By developing its own gas reserves, Argentina takes away not just a vital customer but also potential foreign direct investment – leaving Bolivia’s economic development model in jeopardy.

Another — much more indirect — loser is Mexico. The fact that investors are more interested in Argentina — known for playing fast and loose with property rights and contracts — than in Mexico, which is ranked Latin America’s most business friendly economy, shows how hamstrung Mexico’s energy sector remains. Without further changes to the system to open up outside funding for exploration and production projects, Mexico risks becoming a spectator on the energy sidelines, with huge ramifications for its overall economy as a result.

Post a Comment 5 Comments

  • Posted by Hans Nicolaisen

    From the above – “Each well drilled to extract shale gas uses up to 6 million gallons of water per day…”

    I’m not an expert on fracking, but isn’t that an error on the part of the author? It makes it sound like fracked gas wells consume that much water, every day, for their lifetime, rather than in the initial fracking.

    Do shale gas wells really use that much water?

  • Posted by David B. Benson

    Certainly isn’t much excess water in Neuquén.

  • Posted by Charles Kohlhaas

    The comment about water requirements of 6 million gallons per day for a drilling well is out of the realm of reality. Drilling wells do not require any where near that water per day.

    A drilling operation may require that much water ONCE. That same water is then circulated and used over and over again, day in and day out, for many wells. It is treated and expensive and protected and saved and re-used.

  • Posted by Charles Kohlhaas

    When I say a drilling operation I am referring to an extensive development program with as many as 100 drilling rigs in operation at the same time – a really big operation. Much more than all of Argentina has in operation now.

  • Posted by Nawar Alsaadi

    The water issue can be addressed with waterless fracking; Gasfrac has done over a 1000 fracs with gelled propane; you don’t need any water and the process doesn’t produce any waste fluids (the propane rises back as gas along with the natural gas/oil). The process also enhances oil and gas wells productivity; it is an ideal solution for Argentina.

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