Momentum Continuing Around Argentina Shale - Emerging Market Views

Momentum Continuing Around Argentina Shale

As the ‘shale revolution’ continues to maintain momentum, business conditions in Argentina, according to one ratings agency, seem supportive of the country’s oil and gas sector, despite what is currently clearly a tough macroeconomic environment.

With its regulatory environment and on again off again political uncertainty as two factors cited by global ratings agency Moody’s Investors Service as a hindrance, it is now projected that 12-18 months is the expectation of any slowdown in oil and gas investment plans.

“Fiscal consolidation and efforts to combat the drop in the peso have undermined the government’s efforts to ease market intervention in the oil and gas industry,” said Moody’s assistant vice president Martina Gallardo Barreyro. “But attractive local oil and natural gas prices and a still favorable overall regulatory environment will support E&P (exploration and production) operations in 2019.”

E&P companies are shifting their focus to shale oil in the Vaca Muerta play, says Moody’s, based on greater market momentum for oil than natural gas. Gas demand in Argentina is seasonally volatile and Argentine producers cannot store production. In addition, a recent shift in federal energy policy further diminishes momentum for natural gas and has reduced capital spending on unconventional gas projects.

The agency does not expect any funding constraints in 2019 that would significantly weaken investment in E&P activities for the rated oil and gas companies YPF, PAE Argentine Branch, Pampa Energía or Tecpetrol Internacional.

Attractive local oil and natural gas prices and a favorable overall regulatory environment will support E&P operations. But Argentine oil and gas companies would likely cut capital spending to protect liquidity if “market conditions deteriorate more than expected or if unfriendly energy policy interferes with investor sentiment,” Moody’s said.

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