In Argentina, drilling and fracking activity in the Vaca Muerta, the world’s fourth-largest unconventional oil reserve, is already slowing down after months of brisk growth.
The slowdown comes as global oil prices decline and production costs soar, imperilling one of President Javiers Milleis’ top economic planks, transforming Argentina into an energy superpower.
Vaca Muerta, located in the western province of Neuquén, produces 64% of the country’s oil, although only 8% of its potentially productive area is in development.
The shale play underpins the libertarian government’s drive to boost Argentina’s dollar reserves and restore faith in the peso with dollar-generating energy exports.
However, the recent drop-off in activity, evidenced by the number of drilled wells and fracking volumes, is threatening Milei’s plan to ramp oil and gas exports to $30 billion by 2030, which would double Argentina’s total oil and gas exports.
Output reaches a record high before the slowdown
As Vaca Muerta has boomed, it has delivered Argentina its highest oil output in a decade.
Driven in large part by significant investments from companies such as Chevron, Tecpetrol, and TotalEnergies, average national output reached 827,000 barrels per day in August, 15% more than the previous year.
Analysts are predicting production to plateau over the next few months.
Crude prices have plunged to about 65 dollars a barrel compared with 90 in April 2024, reducing the margin on shale projects, which rely on high prices to cover their relatively high costs.
The number of wells drilled in the Neuquén Basin fell to 55 in July from 67 in June, the third month running to see a decline, according to Argentine consulting firm AGKC.
Data released by the oilfield services company NCS Multistage shows that fracking stages dropped 9% in July compared to June.
Rising costs erode competitiveness
In a September presentation, Argentina’s Secretary of Energy and Mining Coordination, Daniel González, stated that production costs in Vaca Muerta are currently 35% to 40% more than in the Permian Basin of the United States.
Analysts attribute the increase to increased labour, utility, and service expenses, as well as higher financing costs.
“The market will adjust and we’ll return to more reasonable prices, but in the meantime, the most efficient will survive,” González assured us.
Industry predictions predicted that fracking stages would reach 24,000 by 2025, but NCS Multistage’s country manager, Luciano Fucello, said that goal is now unlikely to be realised.
Ariel Kogan, director of AGKC Consultores, added that many businesses are waiting for a post-election shift in exchange rate policy before investing again.
“At this dollar level, at this interest rate level, it’s better to keep the barrel of oil down and not extract it,” Kogan told reporters.
Pressure on suppliers and the local industry
Argentina´s industrial supply chain is already being affected by the slowdown.
Delgado Industrias, a Buenos Aires province steel supplier for the oil sector, saw its sales tumble this year by 40 per cent owing to weaker drilling activity and fiercer competition from Chinese exports.
Duralitte, which makes oil, gas and mining components, has stopped shipments from its three Argentine factories due to cheaper output in Brazil and the United States.
The company is pleading for lower taxes to be competitive, said founder Gustavo Rossi.
Profits from oil sales priced in dollars, for instance, are worth less in local currency when the peso strengthens, a trend business leaders say has squeezed margins further.
That has prompted calls for labour reform to make it easier to hire and fire.
Companies seek policy stability
Major energy companies are urging Milei’s government to lift foreign exchange restrictions and ensure unrestricted exports to attract more investment.
While Milei has taken steps to ease dividend payment restrictions and provide incentives for significant projects, uncertainty persists.
Some multinational corporations, like ExxonMobil, have either sold or are considering selling their Vaca Muerta properties.
Sergio Mengoni, CEO of TotalEnergies Argentina, emphasised the importance of a stable policy framework: “It’s important that we have stability and predictability for the future, and that we can continue to lift the exchange controls so that companies like ours can continue not only investing but also distributing dividends.”
As production flattens and costs rise, the destiny of Vaca Muerta, and Argentina’s broader energy ambitions, may be determined by Milei’s ability to strike a balance between fiscal discipline and policies that keep the country’s shale boom alive.
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