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.
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.”