Argentina is now recuperating from yet another economic collapse. The most recent one, in 2001, sent the country’s per capita GDP plummeting and inflation and poverty soaring. A record number of foreign debts were defaulted and several Argentinean presidents resigned because of the turmoil. These events have meant hard times for an Argentine population, which is well-educated, mostly middle class, and optimistic, just as it was beginning to reacquaint itself with democratic principles following the military rule of 1976-83.

An economic rebound of sorts began in late 2002, with improvements in tax administration, strong demand for internal goods, and restructured foreign debt, followed by the election of Néstor Carlos Kirchner in early 2003. But it has largely been fueled by cheap energy prices imposed by the government. These low prices have spurred demand and helped the overall economy grow, but they have also discouraged investment into new technology, infrastructure, and exploration in the oil and gas industry. The mandates are limiting energy sector profits, particularly in natural gas. The unenviable question, now facing Argentina, is whether to invest in risky offshore exploration, or align itself with socialist hydrocarbon-rich countries like Venezuela and Bolivia in order to meet internal natural gas demand.

Currently, Argentina is an energy exporter, but perhaps not for long. According to the national statistical institute, INDEC, in October 2006 the difference between exports and imports for crude oil, natural gas, and electric energy was a positive $530 million. But oil production peaked in 1998 at 850,000 barrels of oil per day, and has declined since then to 700,000 barrels of oil per day. Oil companies have failed to increase production from mature onshore assets. The major stakeholders in Argentinean oil production are Repsol-YPF (a Spanish-owned company) with 41.5 percent of oil production, Pan American (U.S.-owned) with 16.9 percent, and Brazil’s Petrobras with almost 10 percent. Chevron controls 8.6 percent, and a number of smaller oil companies account for the remaining 23 percent.

A key problem for Argentina’s oil output is the falling production from the Neuquina basin. Oil production from Neuquina has been declining due to maturity and depletion. Figure 1 is a plot of the gas-to-oil ratio of the Neuquina basin. The profile is indicative of a reservoir that has reached bubble point pressure, and unless a reservoir pressure maintenance program is implemented, oil production will continue to decrease and gas production will race towards a peak before beginning to decline.

Figure 1: The Neuquina basin reached bubble-point
pressure in 2002. (Plotted for ET
from raw data reported by
the Mendoza state government)

While Argentina has four other significant onshore oil-producing basins, it’s not clear that they will be able to replace Neuquina in terms of output. The country has seen higher output from the Golfo San Jorge basin, a result of the extensive use of artificial lift and waterflooding.

The U.S. Energy Information Administration postulates that Argentina has 20 Tcf of proven natural gas reserves. Thanks to existing infrastructure, Argentina is South America’s leading natural gas producer, even though Venezuela and Bolivia have larger proven reserves. Argentina obtains close to 60 percent of its natural gas from the Neuquina basin. However, Loma la Lata is the biggest reservoir within Neuquina and it is declining.

Chile obtains almost all of its gas from Argentina, and this dependence has proven problematic. In 2004, an unusually cold winter caused Argentinean demand to soar. The gas demand was so great that Argentina had to begin importing natural gas from Bolivia and halt its exports to Chile, which caused diplomatic tensions between Argentina and Chile. More important, this highlighted Argentina’s vulnerability to sudden increases in gas demand, and the country will probably be unable to meet internal demand this year. Natural gas accounts for 48 percent of internal energy consumption, almost twice the world average. As shown in Figure 2, natural gas is widely used throughout the economy.

Figure 2: Argentinean natural gas consumption by
sector and electricity consumption by source.
The decrease in natural gas consumption in
2001 and 2002 was caused by the recession.
(Source: Kozulj, R.: Crisis de la Industria
del Gas Natural en Argentina, 2005. Comisión
Económica para América Latina y el
Caribe, March 2005)

Following Argentina’s oil production decline in 1998, a noticeable jump in natural gas consumption was observed in 1999. After 1998, compressed natural gas (CNG) became a factor in the total use of natural gas. In fact, Argentina leads the world with over a million CNG vehicles on the road. This demonstrates the adaptability of markets and consumers in the face of oil supply shortages, and in Argentina, the alternative was gas. In 1998 it was cheap and plentiful, so gas was an obvious replacement for a number of oil uses, primarily space heating and some power generation.

In 2003, gas consumption totaled 1.22 Tcf. Assuming no growth in natural gas demand, a simple calculation shows a reserves to production ratio of 16 years. However, other studies have suggested that the supply problem is more immediate. An article in the March 2006 issue of Petrotécnia, a journal published by the Argentinean Institute of Oil and Gas, concludes that gas will need to be imported from Bolivia at the beginning of 2007 in order to meet demand due to continuing economic growth (8 percent per year), and that the old onshore basins will not be able to deliver sufficient gas for internal demand. The same concern was voiced in a November 2006 article in La Nación newspaper. The current situation is quite serious. Since the economic collapse of 2001, gas price caps have increased demand – certainly helping to fuel the past three years’ economic growth – but the low prices have discouraged new drilling. This has left Argentina with a formidable supply problem.

The prominence of natural gas in the Argentinean energy portfolio can be attributed to the early development of infrastructure around the Neuquina basin, its lack of coal mines, the development of technology to convert vehicles to flex-fuel (so they can use both natural gas and gasoline), and government price caps. Obviously, the way to meet demand is by decreasing it. This can be achieved by removing the price caps from natural gas and electricity and charging consumers the real price. Argentina pays a premium of $5 per mmbtu for natural gas from Bolivia while the government sets gas from the Neuquina basin at one third of that. On average, Chileans pay 251 percent more for electricity than Argentineans, and Brazilians pay 208 percent more. This is because the Argentinean government negotiates directly with the big three Argentinean utility companies to set a price. Setting market prices for natural gas should lower demand and deregulating the utilities would increase prices and reduce electricity demand. Of course the problem with this approach is that it will generate public discontent and slow economic growth. Both factors could be politically risky for Kirchner, who faces re-election in 2007.

A more market-friendly approach is deepwater exploration, endorsed by economists and many geologists, one of whom is Pedro Lesta. Writing in Petrotécnia in February 2006, he explains that the reason that wells drilled in the shallow shelf (less than 650 feet of water) are not economical is the lack of mature source rocks. More thermally mature petroleum systems could be present eastward, in deepwater. In light of this, Enarsa (the state-owned oil company established in 2004) has made offshore exploration its main goal. For now the company has no assets, but partnerships are forming. Oil & Gas Journal reported that in September 2006 a consortium was formed of Petrobras (35 percent share and the project’s operator), Enarsa (35 percent), and Repsol-YPF (30 percent). It will explore, develop, and commercialize potential oil and gas deposits in 700 to 10,000 feet of water off the Mar de Plata coast. Other foreign companies will be invited to invest in high-risk deepwater exploration.

Clearly, deepwater exploration is a step in the right direction and must be done to secure potential offshore resources. However, appreciable contributions to reserves are years away, and thus won’t help avert the looming gas shortages.

Another solution – though far-fetched – could be the proposed $21 billion Southern Gas Pipeline which would begin in Venezuela, extend through the Brazilian Amazon, and cross Uruguay, reaching Argentina. The presidents of Brazil, Venezuela, and Argentina signed an accord on December 9, 2005 to build the line, which would facilitate increased energy trade among South America’s biggest economies. It could facilitate a powerful South American trading block similar to the European Union. And it would attract massive investments from governments and the private sector.

But the pipeline has many drawbacks. The main drawback is cost. Another concern: whether Venezuela has enough gas to make the project viable. Venezuela may be better off using some of its natural gas for reinjection and enhanced recovery of its viscous crude. Venezuela’s Hugo Chávez sees the pipeline as a key element of PetroSur, a continental oil and gas company in South America. In its mission statement it seeks to guarantee access to “nonrenewable natural energy resources, and defend [its] people’s use of those energy resources to create more just societies and fight poverty.”

But even if the PetroSur venture gets underway, and the pipeline is included in the company’s plan, construction of the line would take five years or more. In addition, there are economic questions. Brazil currently pays about $3.60 per mmbtu for Bolivian gas; the pipeline could deliver Venezuelan gas to Brazil for $2.60 per mmbtu. This would benefit Brazil but hurt Bolivia, yet Evo Morales claims that he favors the pipeline. This stance demonstrates that the project is viewed from an ideological rather than an economic or commercial perspective. Another drawback, and perhaps the most serious, is that the pipeline would plow straight through the jungles of the Brazilian Amazon. Environmentalists will fight the pipeline tooth and nail.

The mega-pipeline, should it ever be built, will only be a long-term solution to Argentina’s natural gas crunch. Perhaps the best solution is to increase pipeline capacity to allow more gas imports from Bolivia, which has a surfeit of gas. Indeed, Bolivian gas is the most feasible short-term solution. Over the long term, Argentineans should hope that Enarsa has the same success exploring in the deepwater as Petrobras has had in offshore Brazil.

Gerardo Jiménez is a petroleum engineer with a major multinational company in Houston, Texas.

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