The Vaca Muerta is Booming, In Spite of Argentina’s Above Ground Risk
Argentina’s Vaca Muerta contains the second largest shale gas reserves and the fourth largest shale oil reserves in the world. Geologically it rivals the Permian Basin in terms of potential. Above ground however, Argentina has been unable to come close to the Permian in regard to its level of political, economic, regulatory and legal security. In spite of these above ground risks however, the Vaca Muerta remains a very attractive investment option for international and domestic oil companies, due in large part to the unique nature of the shale production process compared to the conventional production process.
In a 2021 Resources Policy article with my colleagues Gabe Collins, Jim Krane, Ken Medlock and Francisco Monaldi at Rice University’s Baker Institute Center for Energy Studies, we highlight how tight oil and shale gas investments are less at risk of government extortion and expropriation than are conventional oil and natural gas investments.
Conventional oil and natural gas extraction involves large upfront sunk costs and long-term payoffs. Once a company makes an investment in a conventional oil or natural gas well it becomes very vulnerable to adverse government actions. The government knows that as long as it pays a price that allows the company to cover its modest operational costs, the company will continue to produce. And, the government can always expropriate the conventional investment, which will continue to produce for many years with only minimal investment.
Shale oil and natural gas extraction involves small upfront sunk costs and short-term payoffs. More akin to a manufacturing process than a conventional natural resource production cycle, shale producers are constantly in motion, with a constant level of investment needed to maintain production levels. While a conventional well can remain productive for a decade or longer, a shale well’s production peaks within the first fortnight, and within two years has effectively ceased.
As a result of these production differences, shale extraction provides international and domestic energy companies with substantially more protection against adverse government intervention. If a government were to attempt to squeeze these companies through creeping expropriation, where the government gradually confiscates more and more of a company’s revenue, the company can simply stop its shale investment activity, and the government will begin to experience the negative consequences of declining production within a matter of weeks. And, were the government to expropriate a private company’s assets, it would also witness a rapid decline in oil and natural gas production.
Today in Argentina, shale oil investment benefits more than shale gas investment from the protections offered by the unique nature of the shale extraction process compared to the conventional extraction process. This is largely due to Argentina’s comparatively less-developed natural gas infrastructure, ranging from pipelines to LNG export facilities, to petrochemical plants. The ability of Argentina natural gas producers to take full advantage of the Vaca Muerta’s potential is constrained by their lack of export options. And, private companies are at least at the present time reluctant to make these types of long-term infrastructure investments that would expose them to the risks of different forms of expropriation similar to those of conventional oil and natural gas investments.
Author: Dr. Mark P. Jones
Mark P. Jones is the Joseph D. Jamail Chair in Latin American Studies, the Political Science Fellow at the James A. Baker III Institute for Public Policy and the Director of the Master of Global Affairs Program at Rice University. Jones has conducted research and lectured in Argentina for thirty years and is the author of more than one hundred articles and chapters on Argentine politics, government, economics and society.