Sunday, March 29, 2015

Change at the margin in Argentina could lead to revaluation of oil sector

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Argentina, once a regional energy leader, is now better known for financial busts and bombastic politicians than hydrocarbons prospects. Still, with a resource potential both vast and untapped, the nation has never been far from energy investors’ minds. The question today is just how much Argentina is willing to change and how this plays into a low oil price environment that is already negatively impacting investment elsewhere.

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Experts have kept a watchful eye on Argentina ever since the US Energy Information Administration identified the nation as holding the world’s second largest shale gas and fourth largest shale oil reserves. This translates to an estimated 802 trillion cubic feet of technically recoverable shale gas and 27 billion barrels of oil.

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But in the nation famous for the Albicelestes, things are starting to change. Argentina is making efforts to improve relations with international creditors and agreed to a $5 billion settlement with Spanish company Repsol as compensation for its YPF stake.

Meanwhile, exploration and production in the unconventional fields is slowly picking up. Argentina is one of just four countries to produce commercial quantities of shale oil or gas – joining the US, Canada, and China – and is the only producer in Latin America. Most of this production has come from the Vaca Muerta formation in west-central Argentina.

There has been continued investment and development in Argentina’s shale sector. In addition, the recent petroleum law passage shows that people in government get the fact that shale has the chance to fundamentally change Argentina’s fortunes. The Christina Kirchner era will be coming to end in the next year and Argentina will get a new government. All indications are that regardless of who wins economic liberalization and market reforms should take place.

Madalena Energy, my junior exploration pick with significant acreage in the Vaca Muerta shale is up over 50% since I featured it in the blog. I think this is because of the positive developments in the Vaca Muerta shale and the continued participation of big international oil and gas companies. My view is that at some point in the future Madalena will get taken out a premium to its existing price. 

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