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Argentina offers a bright spot for oil

Argentinian oil company YPF's drilling chief Martin Costa observes two oil drilling rigs at his charge in Vaca Muerta Shale oil reservoir at Loma Campana, in the Patagonian province of Neuquen, some 1180 Km south-west of Buenos Aires, Argentina on December 4, 2014. YPF has an agreement with US Chevron to exploit Vaca Muerta, the world's second largest reserve of shale gas and fourth largest reserve of oil, estimated to contain the equivalent of 27 billion barrels. AFP PHOTO / JUAN MABROMATAJUAN MABROMATA/AFP/Getty Images©AFP

“Lower for longer” is a maxim widely bandied about in oil markets of late, amid a prevailing view that crude prices will remain at depressed levels for some time to come. But Argentina isn’t having any of it.

In fact, Juan José Aranguren, Argentina’s oil minister, is wagering that during 2016 the price of locally produced oil will reach $67.50 a barrel. With May Brent crude futures trading at $40.90 — up from $34 in late February, the level set by Mr Aranguren betokens either uncanny foresight or rash optimism.

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Mr Aranguren, the former head of Royal Dutch Shell in Argentina, announced the government’s buy-in price of $67.50/barrel, around which Argentina’s oil industry will be organised, in January. Any producer is entitled to sell locally-pumped oil to refiners at this price.

A report by FT Confidential Research, a unit of the Financial Times, shows that while other national oil companies in the region are retrenching, Argentina’s state-controlled YPF continues to invest to address the country’s energy deficit.

Already, Argentina’s bullish stance on oil is turning the nation into the only potential bright spot among Latin America’s oil producing nations, now darkened by the global downturn and battered by huge losses. Brazil’s Petrobras lost $10.2bn in the fourth quarter of last year and Mexico’s Pemex $9.6bn in the same period.

Mr Aranguren’s presence and the (widely forecast) appointment of Miguel Ángel Gutiérrez, formerly head of telecoms company Telefónica, as the new head of YPF, show the new business-friendly government of president Mauricio Macri is taking an energetic grip on the industry.

Argentina’s enormous shale oil and gas reserves help further explain why oilmen and the oilfield service companies that support the industry are making tracks for Buenos Aires.

The relative stability of YPF’s budget plans compared with peers in Brazil, Mexico and Venezuela — together with the generous buy-in price set by the new administration — add to Argentina’s appeal for oil majors.

True, YPF is not immune to dwindling oil revenues. The company reported its first quarterly loss for at least a decade in the fourth quarter of 2015. However, this is still good going. Pemex, Mexico’s national oil company, hasn’t recorded a profit since 2012 — notching up its 13th consecutive loss in the final quarter of last year.

YPF’s overall investment fell last year to 61.2bn pesos ($4.2bn), $2bn less than originally planned. However, the company plans to cut spending by a less savage 25 per cent in 2016, according to a March announcement.

For oil majors eyeing Argentina, the drawcard is the vast onshore reserve of shale oil and gas, widely believed to be the largest shale reservoir outside of the US (see graphic). Argentina is already the biggest producer of unconventional energy outside North America.

However, FTCR’s report cautioned that companies still risk overestimating the shale opportunity given the high cost of production and the fact Argentina is still in the proof-of-concept stage of development.

Lucinda Elliott covers Latin America for FT Confidential Research

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