Argentina will hold its first round of presidential elections on October 22, posing potential headwinds to the local hydrocarbon industry.
The country has struggled to balance its need to attract foreign investment into its energy sector with its domestic economic turmoil for some time. However, with activity picking up in Namibia and South Africa’s west coast, companies are turning their attention to the other side of the Atlantic.
Politics
One of the key areas of concern is political. La Libertad Avanza’s Javier Milei took a surprise lead in the primary election in August, with 30% of the vote. Following the vote on Sunday, there could be a run-off one month later.
Unidos por la Patria, the ruling party, has been unable to tame inflation, which is projected to pass 120% by the end of the year. The party came third in the August vote, with 27%.
It is the economy minister, Sergio Massa, who aims to win over voters as he runs for the position of president.
Turmoil
The country’s economy is “increasingly fragile with episodes of heightened market volatility”, the International Monetary Fund (IMF) said in August.
Argentina has a tumultuous relationship with the IMF – in addition to other sources of international capital. Massa blamed inflation on the IMF, despite the agency providing a $7.5 billion fillip in August.
IMF managing director Kristalina Georgieva, said political support is “critical in the near and medium term” for the reform plans. Tackling “the country’s deep challenges will require continued efforts by future administrations”.
Massa responded to the August vote by devaluing the peso by around 18% and increasing interest rates, in an attempt to reassure investors.
Milei has talked of dollarising the economy, of spending cuts, of shutting down the central bank and also of selling off state-owned YPF (NYSE: YPF). He has also argued against a link between human action and climate change.
Argentina’s turmoil has had a notable impact on investors. Verisk Maplecroft senior Americas analyst Mariano Machado said the government’s “price, capital, and exchange-rate controls, and the levy of export taxes” have acted to “reduce the profitability and competitiveness of energy companies”.
Somewhat offsetting federal instability, though, is the resilience of the local private sector and provincial leadership, Machado said.
Seeking advantage
“As political and policy volatility becomes a feature of the operating landscape, even private companies with a high risk appetite could be facing binding constraints when seeking to invest in Vaca Muerta and offshore plays,” the analyst said.
High wages and inflation have pushed up costs, making local operations less cost effective. “In the long run, these persistent patterns impair relationships with energy majors and creditors and affect access to financing and technology for the sector.”
AIM-listed Molecular Energies’ (LON: MEN) decision to sell off its Argentine business to its chairman, Peter Levine, seems to play to this trend. The deal, agreed in September, saw Levine take over debt payments from Molecular’s local unit in addition to a commitment on free cash flow.
Company officials said the market was “not appreciative” of the value of the Argentina assets. The company has shifted its hydrocarbon hopes to Paraguay and is also working on energy transition investments.
“Energy players with robust political acumen and established relationships have a vital edge over newcomers. Navigating the intricate regulatory web and building ties with government officials unlocks strategic advantages by enabling decision-makers to learn from previous state interventions in the market,” said Machado.
In addition to the financial and policy challenges, transportation capacity is a “major bottleneck”. This is, of course, more of a challenge for onshore operations than offshore.
Offshore options
Wintershall Dea took the final investment decision (FID) on the Fénix offshore gas project in Argentina in 2022. The company intends to start this up in 2025, with expected peak production of around 65,000 barrels of oil equivalent per day.
The plan will involve three horizontal wells, producing to a new unmanned platform. The gas will be transported 35 km to TotalEnergies (PARIS: TTE) operated Véga Pleyade platform. The French company put the project cost at $706 million. Pipelay work began in July.
Noble (NYSE: NE) has agreed to provide its Noble Regina Allen for the Fénix plan, starting in the first half of 2024.
Frontier tests
Beyond Fénix though, there is scope for frontier exploration. Equinor (OSLO: EQNR), and Shell (LON: SHEL), are due to spud an exploration well in the CAN 100 licence in December. The Argerich-1 exploration will test a new frontier, involving Valaris’ DS-17 rig.
S&P Global said the high hopes around Argerich were “founded largely on the recent deepwater exploration success in Namibia’s Orange” Basin. The analysts said the well was targeting an estimated resource of 1.1 billion boe.
It is seeking Cretaceous basin floor fan sandstones, “similar to those found in the Namibian discoveries, that remains untested in the Latin American Atlantic margin”.
TotalEnergies drilled a well in 2016 in Uruguay’s Pelotas Basin. The Raya-1 well was disappointing, though, and was plugged and abandoned. “Argerich-1 results will likely shape exploration in the region for the foreseeable future,” S&P said.
CGG’s Will Jeffery noted some positive signs of seeps offshore Argentina. Speaking to Energy Voice, he said finding seeps in the water removed one of the major exploration risks.
“There is source rock along that coastline,” he said. “The appearance of the slicks and the geospatial size compares with producing basins, such as Angola and the Gulf of Mexico, the seeps have the same characteristics.”
The seeps suggest high evaporation rates, which points to high quality light oil, Jeffery said.
Risks remain, though. While seeps show the presence of source rock they do not determine how thick they may be or the structure’s formation.
While the Raya well was disappointing for Total at the time, CGG’s Jeffery noted that the company had acquired blocks around the region. The company drilled Raya in 3,400 metres of water, which was at the time a world record.
Uruguay
Total drilled the Raya well offshore Uruguay. The disappointing result triggered an exit from the country’s offshore.
Uruguay held a licensing round to flag up its opportunities in early 2020. Given the timing, turn out for the round was poor – although one UK-listed company Challenger Energy (LON: CEG) did take part.
“We were the only bidder,” Challenger CEO Eytan Uliel told Energy Voice. The company won Block 1 in the offshore round but everything was put on pause owing to the pandemic. Challenger was formally awarded its licence in May 2022.
“In the meantime, two discoveries were made offshore Namibia, in early 2022, by Shell and Total,” Uliel said. “Everyone then took a second look at Uruguay, as it looks like the mirror of the Orange Basin.”
Shell and APA Corp. (NYSE: APA) took part in the next round, paying out hundreds of millions of dollars to acquire blocks. By December 2022, all but one block was licensed – with Challenger ultimately acquiring it. “Within 15 months, every offshore Uruguay licence had been taken out,” the CEO said.
Challenger accelerated its work under the first phase to complete its requirements, mostly around reprocessing, and sees “lots of potential”.
Partner plans
“The Venus structure [off Namibia] is most analogous to the structures we, Shell and APA are seeing on the margin boundary off Blocks 1 and 4,” Uliel said. “We see the same Aptian source rock.”
Challenger does not have the funds to shoot 3D seismic on its own. As such, it intends to farm-down its interest to a partner, aiming to close a deal by the end of 2023.
There has been talk of a major seismic company coming in to cover the entire offshore area in one campaign. This may take place in 2024, Uliel said.
Equinor’s Argerich well is sufficiently far from Uruguay that success – or failure – would have little impact, the CEO said. “In a technical sense, there are licences in Argentina that could be of interest, but in an operational sense it’s a completely different kettle of fish.”
The Challenger executive noted the legal travails around activities offshore Argentina as one instance of the problems in the country. “Uruguay has a clear energy policy, the government has been totally supportive of us and the industry.”
Environmental groups, including Greenpeace, have taken action against offshore plans in Argentina. Greenpeace lost its court battle earlier this year to prevent exploration but has continued to object to the plans.
Falklands
One seemingly intractable problem for Argentina has been the Falkland Islands. A number of small companies made discoveries offshore the Falklands around 10 years ago, but progress has been painfully slow.
Argentina’s protests have been a major factor in slowing development. The United Nations heard a debate on the topic earlier this year, with a number of South American countries voicing support for Argentina’s sovereignty.
Representatives from the Falklands reminded those participating that a referendum had given 99% support to remaining in the UK.
However, such is the enmity no companies involved in the Falklands were willing to talk on the record.
JHI Associates struck a deal to acquire PL001 in the North Falklands Basin in September. The licence is west of the Sea Lion find.
Navitas Petroleum and Rockhopper Exploration (LON: RKH) hold the Sea Lion find, with a potential aim of reaching an FID in 2024. Meanwhile, Borders & Southern has the Darwin condensate discovery.
SP Angel analyst David Mirzai noted the “problem has always been politics”, in addition to the commodity price swings.
This time, it may be different. In 2023, companies have returned to exploration projects. “That is what we hope to see with the Falklands, with more free cash flow redeployed into higher risk exploration and appraisal.”
Argentina may or may not be on course for a new president, but success in the offshore will require bold steps from industry. Whether they are willing to look beyond the political challenges will be a topic of keen consideration as the votes come rolling in on Sunday.
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