Crisis-torn Argentina has managed to avert another disaster in its economically crucial hydrocarbon sector. Many institutional investors are unhappy with Buenos Aires’ sovereign debt restructuring undertaken last year, which allowed the government of President Alberto Fernández to end Argentina’s ninth debt default. That saw bondholders accept a significant reduction of income payments, collectively losing almost $40 billion between 2020 and 2024. Even after settling that deal, Argentina’s public debt is a disconcerting 110% of gross domestic product, primarily because of the impact of the COVID-19 pandemic which is estimated to have caused the economy to shrink by a worrying 12% during 2020.
What many creditors did not realize at the time was that the measures taken to avert Argentina’s third debt crisis in 18-years would also impact any investment in national oil company YPF. The integrated energy major, which was nationalized by the former president and now vice-president Cristina Fernández de Kirchner in 2012, last month announced it was restructuring $6.2 billion of debt. YPF was forced to take this action because the action taken by Argentina’s central bank to preserve its rapidly dwindling reserves of U.S. dollars prevented the energy company from making a $413 million March 2021 bond payment. International ratings company Fitch described the planned swap as a distressed debt exchange and downgraded YPF’s long-term rating to C from CCC, basically denoting it as junk debt. A hold-out group of bondholders, which account for 45% of the payments falling due on March 23, were vehemently opposed to the deal meaning YPF was facing the unpalatable prospect of defaulting on its debt. That would trigger a crisis for Argentina’s national oil company because a combination of weaker oil prices, the parlous state of Buenos Aires’ finances, and the deep recession sparked by the pandemic have made it virtually impossible to obtain finance.
If YPF was forced to cease operations, it would place tremendous pressure on Alberto Fernández’s administration because the state-controlled oil company is the leading operator in the vast Vaca Muerta shale oil and gas play which is seen by Buenos Aires as an economic silver bullet. In a recent development, holdout bondholders have agreed to a deal, granting YPF a reprieve and allowing it to push $2 billion in bond payments out to 2023, giving the company some breathing room. Buenos Aires’ precarious fiscal position, declining foreign investment, a sharply weaker Argentine peso, and the economic fallout from the pandemic have only amplified the importance of tapping the vast hydrocarbon reserves of the Vaca Muerta. This makes it essential that YPF not only avoids defaulting on its $6.2 billion of bond debt but retains sufficient liquidity to continue investing in developing its assets in the shale play. By securing a deal for the $6.2 billion debt swap and deferment of payments YPF can focus on mustering the capital required to conduct its 2021 drilling program. This is particularly important because Argentina’s national oil company has a pivotal role in developing the Vaca Muerta and extracting the shale formations considerable oil and natural gas resources. Nonetheless, YPF’s debt issues, weaker oil prices, and Buenos Aires’ precarious fiscal situation have forced the state-controlled oil company to dial down spending on its operations. While no solid numbers have been released at this time in November 2020 YPF announced estimated 2021 capital expenditures of $1.5 billion, around $1 billion less than the $2.5 billion spent for the first nine months of 2020.
These are alarming developments for the Vaca Muerta and Argentina’s crisis-stricken economy. Buenos Aires since 2012, when YPF was nationalized, has perceived the substantial hydrocarbon resources of the Vaca Muerta to be a silver bullet for all of its economic problems. The geological formation, which is ranked as the world’s second-largest shale gas resource, has been unable to attract the desired level of offshore investment because of heightened geopolitical as well as economic risk and high breakeven prices. While the outlook for the Vaca Muerta is not as positive as it was prior to Argentina’s latest economic crisis and the COVID-19 pandemic, there are signs that activity is increasing at a steady pace. Data from oilfield services company NCS Multistage indicated that fracking activity in the Vaca Muerta hit a 17-month high during January 2021. The Baker Hughes international rig count, another useful proxy measure of activity, further supported this showing 29 operational drill rigs at the end of December 2020, which was three greater than a month earlier, but that was still 42% lower than a year earlier. Both sets of numbers are good proxy indicators of activity in Argentina’s oil industry and especially the Vaca Muerta.
There are also several recent developments that will further support the development of the shale formation. Crude oil and natural gas production have been steadily growing since plunging to a multiyear low in May 2020 because of the pandemic. According to data from Argentina’s Ministry of Economy, December 2020 crude oil production rose by 4.59% month over month to an average of 495,402 barrels daily, although that was 4% lower than a year earlier. Natural gas output gained 1.67% compared to November to be 715,940 barrels of oil equivalent daily, albeit it was a worrying 10% lower year over year. Those numbers, despite the solid month over month increases, indicate there is some way to go before Argentina’s hydrocarbon sector recovers to pre-pandemic levels.
The latest oil price rally, which sees Brent up by an incredible 574% since the 2020 oil price crash to be trading at over $60 a barrel, combined with growing bullishness over the direction of prices and rising petroleum demand bodes well for increased investment to develop the Vaca Muerta. That reduces the financial pressures on Buenos Aires because Brent is now trading above the domestic $45 price floor established by President Fernández’s administration to protect the domestic oil industry from sharply weaker oil prices. A recent article from Oilprice.com contributor Viktor Katona indicates that rising energy demand from neighboring Chile coupled with an agreement to refurbish and recommission the Trans-Andean crude pipeline will boost demand for Argentina’s crude oil.