Pan American, YPF to raise gas drilling on Argentina's stimulus program

Recommended Posts

Pan American, YPF to raise gas drilling
on Argentina's stimulus program


Pan American Energy and YPF, two of the biggest oil and natural gas producers in Argentina, plan to step up gas drilling as a new incentives program boosts the profit potential in the business, executives said Nov. 18.

"We are returning to drill for gas," Santiago Tanoira, vice president of gas and energy at YPF, the country's state-backed energy company, said at the Nov. 18 Ambito Debate online energy seminar.

YPF took the decision when the stimulus program was officially announced in October, saying at the time that it would invest $1.8 billion over the next three years in boosting gas output, including from the Vaca Muerta shale play.

The program creates a system of auctions for long-term gas supply contracts with the goal of pre-selling 70 million cu m/d of gas each year to distributors and power plants — and additional amounts during the winter (June to August) when demand surges for heating.

The gas plan, which was made official Nov. 16, is expected to increase the price for producers to $3.50/MMBtu, more than the current average of $2/MMBtu and in line with the breakeven in Vaca Muerta. The government wants the incentives to rebuild gas output in order to avert shortages and limit pricier imports of LNG as well as of diesel and fuel oil.

Rodolfo Freyre, vice president of gas, electricity and commercial development at Pan American Energy, 50% owned by BP, said the incentives should help.

"Thank goodness the gas plan is being implemented because if you don't stop this level of decline [in gas production], it will continue to decline," he said at the event.

Gas production has fallen nearly 15% to 122.8 million cu m/d in September from a most recent peak of 144.4 million cu m/d in July 2019, according to data from the Argentina Oil and Gas Institute, an industry group.

Tanoira said the decline, which equates to Argentina's winter imports of LNG, is a response to low prices, adding that the incentives will make the business more profitable.

"What is very probable is that companies are going to start drilling for gas again in Argentina to combat this decline in production," he said.

Drilling activity

Tanoira said that YPF's drilling activity is still at less than pre-pandemic levels, but it has deployed some 10 drilling rigs into the fields, some for gas.

Pan American also is below pre-pandemic levels, "but we are reaching that," Freyre said.

With plan gas, he expects to "intensify" drilling for gas so that the company can meet expected supply contracts from the plan.

An initial focus of the plan is to increase output to substitute imports, which have been in a decline from a peak of 32 million cu m/d in 2017 to an average of around 21 million cu m/d this year. That would mean that production would have to rise to more than the average demand of 140 million cu m/d, raising the question of what happens with the surplus.

Producers have long been talking about exporting LNG, but that would require investments in pipelines and a liquefaction terminal that will take time and billions of dollars, Tanoira said. In the meantime, he said the focus will be on exporting over existing pipelines to Brazil, Chile and Uruguay, a market of about 20 million cu m/d.

Freyre said the regional market offers a "fast" way to increase exports.

Exports have averaged 3.4 million cu m/d this year, down from 20 million cu m/d in the late 1990s and early 2000s, according to data from the Energy Secretariat.

A key to increasing exports is to be able to offer buyers long-term contracts so that they will be confident about deliveries, Frerye said.

"We need to be competitive and reactive because our clients have alternatives in LNG and liquid fuels," he said.

Looking forward, he said that eventually a new gas pipeline will have to be built to increase local consumption and exports, as well as to replace supplies now imported from Bolivia when the contract expires in 2026.

A new pipeline will take two to three years to build, he added. "If we don't start to think of this now, we are not going to have it in 2026."


  • Like 1

Share this post

Link to post
Share on other sites

Argentina is awaiting bids by 2 December to supply more than 70mn m3/d of natural gas for power generation in 2021-24 at subsidized wellhead prices, with awards to be issued on 15 December.

The new gas plan is designed to stimulate production and cut back on LNG and pipeline gas imports.

To ensure supply during peak-demand winter months, the government added supplemental gas to the tender: 13.11mn m3/d of gas for May, 24.6mn m3/d for June, 29.65mn m3/d for July, 22.72mn m3/d for August and 12.83mn m3/d for September.

The current auction sets a maximum wellhead price of $3.70/mn Btu, higher than the current average of around $2.3/mn Btu. The difference between the market price and the price obtained at auction will be paid by the government.

There are several incentives in place to encourage competition and lower gas prices. Companies that are part of the program, for example, would be given priority when seeking permits to export excess gas to neighboring countries such as Chile.

To participate in the gas subsidy program, all companies must sign a statement vowing to renounce any payments for previous gas subsidy schemes.

A 2017 program covering approved tight and shale gas projects paid as much as $7.50/mn Btu, decreasing by 50¢/yr until reaching $6/mn Btu in 2021.

That program resulted in higher gas production but later sparked legal battles after the government changed the way it interpreted the program in response to a steep currency devaluation that made the subsidy more costly to sustain.

Existing legal challenges can proceed, but companies must agree not to demand the higher price as soon as the new subsidy program comes into effect.

Participants can obtain access to the official hard currency market as an exception to Argentina's strict capital controls designed to conserve international reserves. Companies will be able to access the foreign exchange market starting in the second year of the plan, according to regulations outlined by the central bank.

Shale-rich Argentina produced 126.1mn m3/d of gas in January-September, down by 7.3pc from a year earlier.

  • Like 1

Share this post

Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

You are posting as a guest. If you have an account, please sign in.
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.