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June 29, 2020

Argentina’s new subsidy plan for oil and gas not enough to increase production

By GlobalData Energy

The impact of the Covid-19 crisis in Argentina’s oil and gas industry has reduced oil refining inputs and put additional pressure to the sustainability of the country’s natural gas supply. The winter months of June to August have the highest natural gas consumption of the year and nonetheless upstream producers have reduced their production by an unusual 49mmcfd, making additional imports of LNG a likely solution to complement domestic supply. In order to minimise future production cuts the Argentinian Government has planned to offer a subsidy to upstream producers for both oil and natural gas production.

Specifically, there is now a plan in place to guarantee $45 per barrel for crude oil producers and $3.5 per mmbtu for upstream natural gas. However, there is no certainty in that these measures will effectively incentivise production in a significant manner. In particular for gas, the subsidised price seems to be enough to avoid a steep cut in production but insufficient for sustaining larger developments that require new drilling campaigns and associated infrastructure.

From March to April of the current year, upstream producers have reduced production in 14% and 11% for crude oil and natural gas respectively. Approximately half of this output reduction is from assets in the unconventional Neuquina Basin. The required breakeven prices for these assets vary and some are below the offered subsidised price.

The definitive incentive to sustain production still requires less government intervention and gradual steps towards increased price liberalisation. In particular for natural gas, at present there is a freeze on tariffs for end users until end of this year, this will require agile management from the government to avoid a longer disconnect between producer and consumer prices. Such price mismatch has in the past led to a fall in domestic natural gas production.

Unconventional production in Argentina remains the main bet for full autonomy in oil and gas production. The current pandemic crisis will likely slow down its development and a wider unfavourable economic outlook of Argentina can risk delaying its full development for another ten years.

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