RIO DE JANEIRO—The recent collapse in oil prices and battle for market share between Russia and Saudi Arabia have prompted some Argentine oil companies to call for a return to the Creole barrel to shield the Vaca Muerta shale play from international turmoil.

While production costs today are significantly lower than they were years ago because of investments in technology and knowledge gained by companies, the oil price crash is setting off alarms and will likely reduce profit margins. Brent crude, a benchmark for Argentina, sank to $24.52 per barrel on March 18, its lowest since 2003, but settled up $3.59, or 14.4%, at $28.47 per barrel on March 19. The Argentine industry wants the government to set an oil price floor.

One of the measures is to have a “support price” of $50 per barrel to prevent development of Vaca Muerta from becoming unfeasible, according to some experts. Known as “barril criollo,” this measure was used between 2007 and 2015 to prevent the price from falling below $50, impacting the investments of companies operating in the country. The goal is to preserve activity and jobs. 

According to many operators, shale projects under $50 per barrel are not economic. “We are having low breakevens with new drilling in blocks already developed, but it is difficult to make investments in new blocks with international oil prices below $50,” Argentina’s YPF CEO Daniel González said during a press conference in Neuquén last week.

Unconventional fields also tend to peak within two years and production declines. It creates the need for more investment for new wells to grow production, offsetting lower output from mature wells.

Development of the Vaca Muerta was already challenging before the coronavirus outbreak.

Guillermo Nielsen, chairman of YPF, told local reporters the consequences for the Argentine oil industry were hard to predict, although the signs were not encouraging.

“The general feeling in the market is that there will be a new balance several steps below the previous balance for Brent, and that is significant for Argentina’s oil production in general, not just Vaca Muerta,” Nielsen told Argentina’s state news agency.

According to Nielsen, the market will find a new equilibrium once Russia and Saudi Arabia have settled on hard production numbers for the year. “This situation puts into question Argentina’s entire oil production apparatus at a time when cheap oil is no longer abundant,”  Nielsen said. “There’s some of it, but most of what we can produce in the country has a high production cost.”.

The oil price crash has caused problems with unconventional activity. Authorities are struggling to come up with measures that can help the oil industry weather market volatility.

The ‘Criollo’ Barrel

Among those who have asked for Argentina to decouple from international prices and set its own local “criollo” barrel is Neuquén province governor Omar Gutiérrez and union leader Guillermo Pereyra. Vaca Muerta is located in the Neuquén Basin in northern Patagonia. 

While the oil workers union and companies were able to strike a deal to avoid layoffs in exchange for suspensions and salary reductions, the conflict could be sparked again if the global market conditions pressure local oil and fuel prices.

The government intends to “enact a series of measures through a consensus with unions, producing provinces and companies to sustain production at the current levels while attempting to protect existing jobs,” according to production minister Matías Kulfas.

On March 11, Energy Minister Sergio Lanziani met with oil producers to discuss current market conditions with government members from oil provinces. They warned that a further drop in oil would trigger a social crisis and potentially the layoff of about 10,000 oil workers.

Though the oil price collapse is seen as a main concern for the Vaca Muerta project, the 30,000-sq-km oil and gas field has two other obstacles ahead—the country’s current financial crisis and coronavirus. Even before the oil price crash and the outbreak of coronavirus, the negotiations of the Alberto Fernández government with the International Monetary Fund (IMF) and the promise of a new regulatory framework for the sector froze new investments; oil companies were working only at minimum levels, waiting for signs of long-term profitability.

By year-end 2019, the crisis in Vaca Muerta was already evident. According to Econojournal, the accelerated depreciation of the peso, which occurred in mid-2018, weighed down the costs of an industry that pays in dollars. 

The situation worsened in August 2019, with emergency measures adopted by Argentina’s former president Mauricio Macri to prevent macroeconomic collapse. 

During the month following the August price freeze, the number of equipment in operation fell from 59 to 44, according to data from Baker Hughes. The year also closed with fewer wells drilled: 905 compared to 1,030 in 2018. The paralysis resulted in 3,000 layoffs and a growing union conflict.

Vaca Muerta represents a highly valuable asset for Argentina’s crumbling economy. Thanks to the shale play, Argentina went from having an energy deficit of $6.9 billion in 2013 to almost reaching equilibrium in 2019 due to a 33% year-on-year drop in fuel and energy imports and a 2.1% rise of exports, according to data from Argentina’s official statistics office.

Vaca Muerta’s output grew steadily since 2013. The prolific field ended 2019 with positive results. YPF and its partners, which control half of the field production, raised its output to 67,600 barrels per day, 20% more than in 2018. 

For the IMF, the field can be an important source of revenue for Argentina to pay down debt. Yet, due to the impact of the novel coronavirus, Argentina’s Economy Minister Martín Guzmán said in an interview with an international news agency last week that its intention to restructure nearly US$70 billion in debt by the end of this month could be extended.

Before the coronavirus crisis, companies were expecting at least conditions that ensured Vaca Muerta’s competitiveness with other basins. These included a currency protection regime, fiscal stability and a clear framework for dispute resolution.

Now COVID-19 has brought another set of challenges: remote work and maximized precautions when that isn’t an option and restricted travel.