Argentinian suppliers forced to move towards unconventional hydrocarbons

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After being a natural gas exporter, Argentina became an importer in order to supply the local demand. However, the discovery of important reservoirs of unconventional resources placed the southern country in the path to become a net gas exporter and an important oil producer. Analysts ensure that this is the best territory to copy the American model, although it would require a significant transformation of its industry -which is usually specialized in conventional resources- to achieve this.

In order to reach its fullest shale potential, Argentina needs the support of many sectors, especially the oil services sector. Due to its historical background as hydrocarbons producer, the country counts on a well-developed goods and services industry, but which now must face the challenge of diversifying its business model to adapt to the blooming unconventional reservoirs business.

“Unlike other countries that have unconventional reserves (except the US) the situation of the services offer in Argentina is favorable, since oil industry activities are currently developed near big shale deposits (especially in the Neuquen region). This means that there is a developed oil services industry, oil, gas and water transport pipelines and supporting infrastructure already created in the zone. This itself constitutes a great advantage for the unconventional hydrocarbons extraction that, together with the size and quality of the Vaca Muerta formation, becomes something particularly attractive and which can be developed in a relatively direct way,” says Accenture.

A resource with a bright future

According to forecasts, the Argentinian shale sector will experience an important evolution in the next years, against the decrease of the production of conventional resources. It is not in vain that the country has the third world’s largest shale gas reserves (only after China and the United States) and the fourth largest shale oil reserves. These figures represent around 50 percent of the shale believed to exist in the whole Latin America. Accenture forecasts that for 2035, the Argentinian oil production would have increased to more than 1.8 million barrels per day, and natural gas production will exceed 317 million cubic meters per day (see Figures 1 and 2). In this way, the consultancy firm believes that Argentina could reach its selfsufficiency between 2020 and 2025.

Unconventional gas production in Argentina for 2035


Unconventional oil production in Argentina for 2035


This gradual increase of the oil and gas production will boost, logically, the growth of the services industry. The Ministry of Energy confirmed that, as from the moment unconventional hydrocarbons reservoirs started to show their potential (especially Vaca Muerta) the amount of drilling rigs started to increase noticeably. In fact, in the first six months of 2015, the highest number of drilling rigs of the last 33 years was recorded, according to Baker Hughes’ data. The company ensured that in last June, there were 107 drilling rigs in the country, “the highest number since the last record” in early 1982. This is also “more than twice the figure existing in early 2012.”

A growing services sector

A significant increase of the services sector and business competition in order to sustain a higher production through fracking is expected in the next years.

The report The fall of oil prices: How does it affect Argentina? published by the Argentinian Institute of Energy General Mosconi, calculates that investments on the upstream sector between 2016 and 2023 will reach $11.2 billion. 40 percent of this amount will be used for drilling rigs, fracturing sets and chemicals, and the remaining 60 percent in security, components and services.

Also, Accenture expects a significant impact on the oil services industry. In its study Reimagining Argentina, the consultancy firm points out that the cumulated effect of the activity related to the shale development in 2035 will be of 35,238 wells drilled and 227 drilling rigs.

Cummulated effect of shale-related activities in 2035


At the moment, the supply chain serving companies specialized in exploration and production through fracking is very limited, for which the impact will only be materialized within several years. The extraction cost in conventional reservoirs is one of the lowest in the region (a recent study of the Colombian Chamber of Oil Goods and Services Campetrol points out that Argentina, together with Ecuador, are the countries with the lowest drilling costs in Latin America) but the shale business is not profitable enough.

Therefore, it is concentrated in large multinationals engaged in drilling activities and in the provision of services such as Schlumberger, HalliburtonBaker Hughes, or Wheaterford, which so far have been the only ones with the capacity to provide the capital and technology required to work in this field.

Meanwhile, local small and medium companies fight to earn a place in the sector through partnership agreements with big companies. These, for their part, welcome this kind of partnerships pursuing common growth objectives. Thus, for example, Tecpetrol has entered into an agreement with ProPymes. Also, the state-owned YPF, together with the ministries of industry and economy, have implemented the Plan Sustenta, aimed to boost the development of local suppliers that “replace imports, create jobs and add value locally.”

Likewise, several provinces with a manufacturing background are getting ready to face the future increasing demand. The region of Neuquen plans to build an industrial park specialized in providers that serve operators in Vaca Muerta. Other provinces, such as Mendoza or Cordoba neither want to lose the opportunity to get a piece of the oil sector huge cake, so they created small clusters of companies specializing in goods for the oil and gas industry.

Consequences of the price crisis

Despite the great increase forecasted, and despite the fact that the crude oil barrel in Argentina averaged $68 during the second quarter of 2015 (a figure much higher than the WTI, which averaged $45) Argentinian service companies are also suffering the effects of the international price crisis. In the last months, big multinationals have started to transfer their global adjustment plans to the country, and are also making salary cuts.

This comes together with labor union conflicts in the sector. Labor unions and operators agreed salary bonuses of 6,000 Argentinian pesos per month, but local companies claim that they are not able to afford this bonus. Thus, they have requested to hold new conversations for the purposes of finding solutions to suh a complex situation caused by the drop in oil prices.


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