Argentina is a relative newcomer to deepwater offshore drilling, mostly because the potential for commercial finds in Argentina’s offshore Atlantic basins is, for now, largely unknown. State-owned energy company ENARSA, which held all offshore licences since 2006, has largely neglected them.

“The basins have not been recently studied using modern day geophysical acquisition or interpretation techniques and geologic concepts,” say IHS Markit principal technical researcher Jim Flanagan.

However, neglect may now be a thing of the past. In 2015, the Argentine Energy Secretariat forced ENARSA to relinquish around 90% of its total acreage holding. At the end of October 2016, Argentina’s state-controlled energy company YPF signed a deal with Norway’s Statoil to study potential offshore drilling sites in the Atlantic coast. The seismic tests will be undertaken in waters of 500m to 3,500m  deep.

“The agreement will allow the parties to carry out joint studies in an area extending from the Argentine maritime boundary with Uruguay to 45 degrees south Latitude, covering some 360,000km2, in a basin where no other wells have been drilled,” says Flanagan.

Considering that the oil price is still relatively low compared to the lofty heights of two years ago (currently around $50 a barrel), it might seem an odd choice for Statoil to enter deepwater offshore Argentina, where there have not been any previous big discoveries.

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However, Claudia E. Pessagno, senior oil and gas equity analyst for Latin America at IHS Markit. says Statoil’s announcement is in line with the company’s ongoing strategy.

“Statoil is one of the top deepwater explorers/operators in the world; therefore exploring offshore Argentina is in line with Statoil’s general strategy to pursue new deepwater opportunities around the world, no matter where they are.”

Political difficulties

Operating in Argentina has been notoriously difficult for companies as they have been at the mercy of constantly changing policy and controversial governments.

A May 2016 report by the Wilson Center compares oil and gas policy in Argentina to that of a ‘pendulum swing’. “Management of the oil and gas industries in Argentina has been historically characterised by political and economic swings of the pendulum: from periods of investor-friendly policies to phases of government controls and market and price restrictions,” the report states.

“Argentina has been historically characterised by political and economic swings of the pendulum.”

The report goes on to say that the previous governments of both Néstor Kirchner and his wife Cristina Ferna´ndez “used the extraordinary powers granted to them by Congress to make political deals outside of the formal institutions that typically are responsible for administering the hydrocarbons sector. With the right policies in place, the new government should have no trouble in raising new investment to restore Argentina’s lost energy self-sufficiency and resolve ongoing shortages in the short run, and, in the long run, to restore Argentina’s role as a regional energy exporter.”

The report focuses mostly on Argentina’s unconventional shale reserves – the country has the fourth largest in the world – but its assessment is fitting for the whole of the oil and gas sector, especially the capital intensive offshore sector.

Correcting economic imbalances

The government of President Mauricio Macri has largely set out to correct the economic and political imbalances inherited from the previous government, presenting an opportunity for Argentina to revamp its oil and gas industry.

At the beginning of 2016, Macri agreed to a government subsidy on the price of crude oil, mostly to help save 5000 jobs that were at risk of being lost. The price of domestic crude therefore averaged at around $58 per barrel because of the subsidy, considerably above the international benchmark of around $45 a barrel at the time. A $10 subsidy was also agreed for the first six months of the year for exported oil.

However, in November Reuters reported that Macri’s government was to remove the subsidy after Madalena Energy put out a statement saying it had been advised by the refineries  which it supplies that the oil price it will receive for November and December oil production will be reduced by approximately 30%.

“Anyone investing in Argentina probably realises that the regulations in the country are prone to change – in some cases dramatically,” says Pessagno.

The new Macri administration has made efforts to steer more towards a market-based economy, she adds.

“Any operators currently in Argentina are aware that the regulated price could certainly change. At the same time, with the new Macri administration there have been other policy developments that are considered more business-friendly.

Right now companies are drawn to the promising potential of the Vaca Muerta shale and possibly unexplored offshore areas.”

Regardless of oil price volatility, companies such as Statoil will maintain exploration activities to varying degrees to help support their long-term business models,  Pessagno adds.

This in part because Statoil is well established in the region. In Latin America Statoil is currently exploring opportunities in the deep waters offshore Mexico, Suriname, Brazil, Uruguay, Colombia, and Nicaragua.

The future looks promising

Overall analysts and experts are positive about future activity offshore Argentina, even in the current oil price climate.

“In terms of offshore Argentina, we do expect to see other companies pursue opportunities in this region, but it will be rather limited until global oil prices recover or a company currently there makes a significant discovery, which would help to de-risk the play,” says Pessagno.

With the government keen to exploit the country’s vast shale reserves it is likely the Macri administration will continue down the path of business friendly policies which the offshore sector can also benefit from.

“In terms of offshore Argentina, we do expect to see other companies pursue opportunities in this region, but it will be rather limited until global oil prices recover.”

But, as always, there is room for improvement. The Wilson Center points out that any company operating in Argentina should be prepared to deal with ‘powerful and combative’ oil unions, which can lead to elevated costs.

Chiefly, however, it points out that the government should use the increased show of interest in the area to properly reform its management of the  hydrocarbons sector before a big oil play is discovered.

“The government has already indicated its strong interest in encouraging private investment in the oil and gas sectors and the initial response from companies has been positive,” the Wilson Center states.

“In the long run, however – and beyond the current administration – Argentina needs to address the historic sources of political and economic instability if an efficient, modern, sustainable, and well-managed hydrocarbons industry is to flourish… This delay could provide a grace period during which Argentina could consider long-standing governance and rule of law issues with an eye to improving if not resolving them once and for all.”