ExxonMobil’s plans for a major investment in Argentina’s Vaca Muerta shale play are giving a boost to the new government’s pro-market drive – but amidst rampant inflation and high unemployment, the longevity of reforms will hinge on the speed of economic recovery.
- In early June, ExxonMobil’s CEO Rex Tillerson announced plans to invest $250m over the coming months in a pilot project in Argentina’s Vaca Muerta shale play. If the project at La Invernada-Bajo El Choque is successful, Exxon will start full development, which could see an additional investment in excess of $10bn over the next 20-30 years.
- Argentina’s shale deposits are estimated to be among the world’s largest. Exxon has had a presence in the western section of Vaca Muerta in the Neuquén province since 2010 and has invested $200m to date. Exxon has an 85% interest in its blocks, with the Neuquén provincial oil company holding the remaining 15%.
- Exxon’s announcement is a powerful signal that investor confidence is returning to Argentina. Since coming into office in December 2015, President Macri has taken sweeping measures to liberalise the country’s economy and attract foreign investment. The majority of currency and trade controls implemented by Mr Macri’s predecessor Cristina Fernández de Kirchner have been removed. The settlement of a 14-year dispute with international creditors has similarly helped to reassure investors by allowing Argentina to re-enter international capital markets.
- Boosting shale investment is a cornerstone of broader government efforts to resolve the country’s deep-seated energy crisis. Regulatory challenges and political interference, including the 2012 re-nationalisation of state oil company YPF, have disincentivised investment in the sector to date. The newly created Ministry of Energy and Mining – which is headed by the former CEO of Shell Argentina – is tasked with attracting foreign investors. It recently instructed YPF to divest a number of conventional blocks to focus on Vaca Muerta’s shale.
- Despite strong political backing, Exxon will need to proactively manage its broader relationships given the country’s severe socio-economic challenges. Argentina’s unions are a powerful force and while job prospects are likely to generate support for Exxon’s plans, rising unemployment and inflation are straining labour relations elsewhere. For instance, YPF faced strikes last month which shut down 40% of the company’s production. Environmental and land rights concerns are also pertinent. Last year, indigenous community protests briefly disrupted production at Chevron’s shale operations at Loma Campana.
- Over the longer term, socio-economic challenges will determine the prospects of President Macri’s pro-investment agenda. In April, the first mass protests against his government took place, supported by several major trade unions and opposition parties. Demonstrations focused on high inflation (worsened by recent currency reforms), the rise in energy and transport costs (due to the removal of subsidies), and the dismissal of over 10,000 public sector workers. Despite this pushback against austerity, President Macri continues to have relatively broad support. However, a failure to deliver an economic recovery relatively quickly could lead to a backlash at the 2019 presidential election and a slowdown in the pro-market drive.
- Climate change concerns are raising questions over the viability of major new fossil fuel developments like Vaca Muerta, even if natural gas is widely seen as a lower-carbon option relative to other sources, especially coal. The Argentinian government sees shale as vital to securing the country’s energy security and fossil fuels are expected to remain a major component of the country’s energy mix for the foreseeable future. Nonetheless the government is committed to the Paris Agreement and has put in place a number of measures to encourage the shift to a low-carbon economy. This has included launching the country’s first renewable energy auction in May through which it hopes to attract $2.1bn in investment.
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