“Anybody might guess beforehand that there would be blunders of the ignorant. What nobody could have guessed, what nobody could have dreamed of in a nightmare, what no morbid mortal imagination could ever have dared to imagine, was the mistakes of the well-informed.” – G. K. Chesterton, The Common Man
It was a year ago when OPEC decided not to cut production quotas for its member countries in order to avoid falling oil prices which started in 2014.
The resilience of oil production in the United States and Russia combined with the slowdown of the rate of increase of Chinese oil demand caused oil prices to continue to fall. Prices for the benchmark quality WTI in the United States is now quoted in the range of $40-45/bbl, which is around 40% of the maximum settlement reached in 2014.
The entire forward curve up to December 2014 is quoted below $60/bbl rendering oil producers the impossibility to hedge future production at levels which are deemed to be the minimum thresholds needed to recover investments in drilling new wells targeting unconventional reservoirs.
In Argentina the effects of the downward trend in oil prices were mitigated by granting higher prices to oil production.
Businessmen who lead large international conglomerates with activities in Argentina, Mr. Paolo Rocca (Chairman of the Techint Group and CEO of Tenaris) and Mr. Alejandro Bulgheroni (Honorary Chairman of Panamerican Energy), remarked that a recovery of oil prices in the range of $60 to 70/bbl could be expected.
Until recently the scarcity of worldwide oil reserves together with the extreme conditions and high costs of production have been setting the business scene for the Argentine oil and gas sector.
In 2007, the essay, “The Age of the Scarcity,” was published and distributed by the Techint Organization. The essay was written by Mr. Marcelo Martinez Mosquera who was a former CEO of the energy companies and responsible for the Energy Division of the Techint Organization, and who today is Advisor to Mr. Paolo Rocca on energy matters.
The message of the essay reached public media by 1998. The long term scarcity of energy in general, and oil in particular, was highlighted in the newspaper Página 12. The words used were “se acaba” which -in colloquial Spanish- could be understood as “we are running out of (oil).”
By December 2014; Mr. Carlos Ormachea –CEO of Tecpetrol- remarked to the newspaper La Nación, that five years ago we saw scarcity but in that period the industry changed dramatically due to technology.
Evidence suggests that judgement was flawed.
It is well documented by the technical literature that unconventional reservoirs were known for a long time and the increasing application of exploration technologies (more precisely, techniques) made it possible to improve their dimension and to better estimate their potential by late 80s. Consequently, oil reserves were considered to be large by the end of the last century which meant that the idea of “scarcity” was incorrect in terms of geological endowment.
Producing oil from unconventional reservoirs at the market prices of around $20/bbl; and sometimes, lower was disturbing. In any case, the quantities of reserves was not challenged but rather the production at certain threshold prices.
Similarly, the techniques applicable for drilling wells to reach unconventional reservoirs (horizontal drilling and fracking) were already in place even before the middle of the last century and in Argentina. It was not a disruptive technology that made the development of unconventional reservoirs possible, but the evolution of them and their combined application under an innovative approach.
From now on
The energy policy to be enacted by the newly elected President Mr. Mauricio Macri and the party he leads, Let’s Change, remains unclear. In particular, oil and gas producers and Governors of the Provinces are expecting a rapid definition of the status of ownership and administration of YPF and the continuity of the subsidies to oil production to sustain investments.
The future perspective is not optimistic for the sector. This past week, Halliburton is supposed to be halting its activities in the country and YPF, Panamerican Energy and Tecpetrol are announcing reductions in drilling activities.
The question of the level of international prices remains critical for Argentina in order to sustain oil production, to guarantee energy for consumers and to better design energy policies.
Consequently, it is important for the entire society to be involved in the discussion of the future energy policies by requesting governmental bodies and company leaders to put forth arguments justifying the policies they propose to enact. Also, energy companies should publish on a regular basis the status of the development of oil and gas resources in Argentina in terms of past and present levels of activity and future expectations.
It is not only about economics: prices, tariffs, subsidies; but also about employment and the environment.