The Beginning of the Shale Revolution in Argentina
by
Aaron Carver
AN HONORS THESIS
for the
HONORS COLLEGE
Submitted to the
Honors College
at Texas Tech University in
partial fulfillment of the
requirement for
the degree designation of
HIGHEST HONORS
MAY 2016
Approved by:
_________________________________________
Terry McInturff, J.D., Energy, Economics, and Law
_______________
Date
_________________________________________
Dr. Michael Giberson, Energy, Economics, and Law
_______________
Date
_________________________________________
Dr. Keira Williams, Honors College
_______________
Date
_________________________________________
Dr. Michael San Francisco, Dean, Honors College
_______________
Date
The author approves the photocopying of this document for educational purposes.
ABSTRACT
The United States has experienced an oil and gas production boom since 2000
after the development of advanced hydraulic fracturing techniques made production from
shale plays viable. Argentina has comparable shale hydrocarbon resources to the United
States but has not experienced the same oil and gas production boom. The technology
and funds are available to develop Argentina’s shale plays, but poor energy policy and
unstable national economics and politics have thus far hindered shale development in
Argentina. Argentina’s government has serious national financial problems to solve and
thus there is a huge incentive to create a profitable environment for foreign investors to
help develop the nation’s shale resources. The government, and its policies, will have to
be stable for this development to flourish in the long-term.
ii
ACKNOWLEDGEMENTS
I would like to thank my thesis director, Professor Terry McInturff, for the insight
he gave me throughout the process of writing this thesis. He provided great insight in
helping me to choose this interesting topic, and his many years of experience in oil law
and in teaching energy commerce helped to guide me in the process all along the way.
I would also like to thank Dr. Williams for helping encourage me throughout the
writing process. Her edits and many bits of advice are present throughout this thesis.
Finally, I would like to thank my good friend and fellow undergraduate Sooyeon,
who wrote her thesis concurrently with mine. I have read her paper and it is, as I
suspected, much better than mine. Luckily for me, her timely encouragement and helpful
suggestions improved both my mood and my writing.
iii
TABLE OF CONTENTS
ABSTRACT………………………………………………………………………………ii
ACKNOWLEDGEMENTS………………………………………………………………iii
TABLE OF CONTENTS…………………………………………………………………iv
CHAPTER 1: Introduction………………………………………………………………..1
CHAPTER 2: Background………………………………………………………………..4
CHAPTER 3: The Score…………………………………………………………………11
CHAPTER 4: The Regulatory Advantage……………………………………………….22
CHAPTER 5: Outcomes…………………………………………………………………37
CHAPTER 6: Conclusions………………………………………………………………42
REFERENCES…………………………………………………………………………..46
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CHAPTER 1
INTRODUCTION
Shale oil and gas production has boomed in the United States from the end of the
twentieth century to 2015. This boom has been called the “Shale Revolution,” and it has a
firm hold in oil and gas plays across the United States, with impacts spreading the world
over. Daniel Yergin, world renowned economics and international relations researcher
and Pulitzer Prize-winning author of The Prize: The Epic Quest for Oil, Money, and
Power, said of the impact of the shale revolution, “The geopolitical impact is already
evident,” noting that “Many other countries are reassessing their own energy policies in
light of the unconventional-energy revolution” [1].
This worldwide paradigm shift began in Texas and spread to other plays around
the United States, with varied reactions in different regions. Overall, many regions have
become very productive, as seen in Figure 1.1 below. The large and unexpected
production has transformed the energy landscape of the United States. The spread of
shale wells and their impact will not end in the United States. Enormous amounts of oil
and gas remain to be produced throughout the world, with huge impacts on global
commerce to be expected. One of the countries with the largest potential for shale oil and
gas production is Argentina. This thesis will compare the current progress of shale oil and
gas between the United States and Argentina and evaluate Argentina as a prospect for
shale oil and gas production.
1
Figure 1.1 Shale and tight resource natural gas and oil production spike.
Source: EIA [2]
Argentina’s preeminence as a potential success for shale oil and gas production
originates from its substantial recoverable resources. Argentina ranks fourth in the world
in recoverable shale oil, as seen in Figure 1.2 below. In recoverable wet shale gas,
Argentina ranks even higher, at second in the world [3].
Figure 1.2 The United States and Argentina have some of the largest shale oil
reserves worldwide. Source: IHS Energy © 2014 IHS [4]
2
Despite the sizable resources present in Argentina’s geology, the country has not
experienced an energy revolution like the United States. Several factors have kept
Argentina’s shale production to a minimum. However, an increase in domestic
production would increase energy security and domestic production revenues for
Argentina [4]. If these incentives are enough to create a production-minded push forward
by the government, Argentina’s future may be full of domestic shale oil and gas
production.
This thesis will begin with a primer on shale production in Chapter 2,
“Background.” Then, Chapter 3, “The Score,” will draw upon several trends, including
reserves, production data, and breakeven costs, to suggest the most important factors for
the future of production in Argentina’s shale plays. Chapter 4, “The Regulatory
Advantage,” will explore the historic and current energy policies of Argentina and the
United States to assess their impact on the future of production in Argentina’s shale
plays. Finally, Chapter 5, “Outcomes,” will review potential scenarios for the
development of Argentina’s shale plays based on the previous sections and upcoming
events in Argentina.
3
CHAPTER 2
BACKGROUND
2.1 Shale and Hydraulic Fracturing
Shales form in calm aqueous environments from the deposition of fine particles,
primarily made up of clay, but also from organic debris. Sheets of particles compact
together and result in rock with limited horizontal permeability and almost no vertical
permeability. Shales high in kerogen (organic debris) can form shale oil and shale gas
deposits by chemical changes over the course of millions of years in a high pressure and
high temperature environment. Because shales can form significant quantities of
hydrocarbons, shale formations are commonly referred to as source rocks [5].
Some source rocks will form enough hydrocarbons to result in commercially
viable development, while others will not. Determining whether a shale formation may
have commercially favorable geology involves thorough analysis across several areas of
the formation to take measures such as total organic carbon, thermal maturity, and
kerogen analysis. Formations with high total organic carbon and certain kerogen types
tend towards commercial viability [5].
Through geologic time, a portion of the hydrocarbons formed in the source rock
may escape. Oil or gas from shale may then move into an adjacent formation with higher
permeability, such as sandstone, and migrate until it reaches another formation of very
low permeability, known as a seal. Beneath this seal, a conventional oil or gas reservoir
may form if the hydrocarbons are in high enough quantity, as represented in Figure 2.1.
Historically, oil and gas wells have produced from these conventional reservoirs.
Producing from the actual shale formation source rock is only a very recent phenomenon
4
that spread quickly throughout the United States and is now spreading throughout the
world [5, 6].
Figure 2.1 “Schematic Geology of Natural Gas Resources”. Source: EIA [6]
The reason this is a recent trend is due in part to the challenge of producing from
reservoirs with very low permeability. The permeability of beach sand is high—around 5
darcys. Comparatively much less permeable, sandstones may be close to 0.1 milidarcys.
The incredibly low permeability of shales can be in the range of 0.1 microdarcys [7].
Because shales have such low permeability, the hydrocarbons will not flow through a
well targeting a shale formation unless fractures are introduced into the rock.
Fractures are created through hydraulic fracturing [5]. Hydraulic fracturing jobs
vary greatly, but most rely on similar processes and principles. While vertical and
conventional wells can also be hydraulically fractured, typical shale wells involve long
horizontals carefully drilled through the shale payzone, where the hydraulic fracturing
will take place. To begin the hydraulic fracturing operation, a completions team will use a
5
specialized wireline truck to run a string of shaped charges to the end depth of the well.
Shale well depths can be as extensive as 13,000 feet vertically and another 10,000 feet
horizontally, sometimes even farther. Once the charges are in place, a signal is sent
through the line to the charges to activate them. The charges create dozens of carefully
spaced perforations in the well casing, creating open channels between the wellbore and
the reservoir rock. The entire wellbore is not perforated at once, but rather in stages of
about 200 ft. or more, with hydraulic fracturing taking place after each stage is perforated
[5].
With perforations in place, the string of shaped charges is removed and the well is
hydraulically fractured by pumping thousands of gallons of water and thousands of
pounds of proppant into the wellbore. This slurry of fluids and particles is pumped at very
high pressures, often around 5,000-10,000 psi, which causes breakdown of the shale rock
reservoir, allowing the mix to flow into the rock. Once the frac fluid has been pumped, a
plug is set in the wellbore just before the area that was perforated and fractured, marking
the completion of the first stage. This process of perforating, fracturing, and plugging is
repeated in stages across the length of the horizontal section of the well. (Other types of
hydraulic fracturing operations are very common, such as the use of sliding sleeves, but
placing proppant into the reservoir is the purpose of each type of operation.) At that time,
the entire well has been fractured. Then, specialized tools drill out the plugs and the well
is prepared for production [5].
The well can now produce oil or gas from the reservoir, unobstructed, to the
surface. The proppant is crucial to this operation, as it will serve to keep the permeability
of the reservoir high once the fracturing fluid flows out of the reservoir. The proppant
6
particles remain in the reservoir and prop open the rock, increasing permeability and
allowing oil or gas to flow from the reservoir into the wellbore and to the surface [5].
Figure 2.2 Schematic of a fractured shale well. Source: Pro Publica [8]
7
Figure 2.3 Trucks pump frac fluid to hydraulically fracture shale. Source: NETL [5]
These methods were developed extensively after the first productive shale well
was created. In June 1998, Mitchell Energy engineer Nick Steinsberger watched as his
S.H. Griffin #4 well in the Barnett Shale of Texas produced over one million cubic feet
per day of natural gas from a shale formation. S.H. Griffin #4 was the fifth well that
Steinsberger hydraulically fractured in the area, and the first good producer after four
costly disappointments. His well proved the previously doubted viability of shale as a
producible source of hydrocarbons. This caused, in time, a Copernican Revolution-like
paradigm shift in the way that engineers, and the world, viewed shale. The shale
revolution was soon underway, as shale left its place as an obscure, relatively unexplored
8
formation deep within the earth to become a premier interest for energy companies and
sovereign nations worldwide [7].
2.2 Shale Plays in the United States and Argentina
The United States has a myriad of shale plays, many of which are already
producing significant oil and gas resources. Seven major plays accounted for 95% of U.S.
domestic tight oil and shale gas production growth from 2011-2013 (primary state
indicated): Bakken (ND), Eagle Ford (TX), Haynesville (LA), Marcellus (PA), Niobrara
(CO), Permian (TX), and Utica (OH) [9].
Figure 2.4 Map of shale plays in the United States. Source: EIA [10]
Argentina has several major shale plays that have attracted attention as having the
potential for economically viable development. Two of Argentina’s most prominent shale
9
plays are the Vaca Muerta and the Los Molles, both of which are located in the Neuquén
Basin in Western Argentina [11].
Figure 2.5 Map of shale plays in Argentina. Source: KPMG [11]
10
CHAPTER 3
THE SCORE
This chapter compares reserves and production trends in the United States and
Argentina. The disparity in production, breakeven costs, and barriers to shale exploration
are then discussed to show how the most essential factor for the future of Argentina’s
shale plays is energy policy.
3.1 Production Disparity
Upstream oil and gas expenditures in North America in 2013 show the incredible
impact of the Shale Revolution. $200 billion were invested into oil and gas production,
largely in U.S. shale plays. This is half of the global upstream investment total and ten
times the estimated amount spent in Saudi Arabia and Russia combined [12]. The impact
of high capital expenditures was realized in a huge production boom in the United States.
In 2013, the United States became the world’s largest producer of oil, averaging 11.7
million BPD, surpassing Saudi Arabia’s 2013 average of 11.3 million BPD [12].
U.S. oil production (crude oil, tight oil, oil sands, and Natural Gas Liquids)
steadily decreased over the course of a decade from 8.269 million BPD in 1997 down to
6.841 million BPD in 2006 [13]. Since 2007, U.S. oil production has increased each year,
reaching 10.00 million BPD in 2013 [14]. This huge increase occurred as more shale
wells were drilled and began production. Tight oil and shale gas accounted for huge
percentages of recent U.S. domestic production: 29% of crude oil [3] and 36% of natural
gas in 2012 [15].
Shale gas production continued to grow in 2013, as shale gas wells out-produced
all other natural gas well types in 2013, accounting for 40% of domestic natural gas
11
production [15]. The rise in production was so significant and unexpected that the United
States may become a natural gas exporter in the next five years, as seen in Figure 3.1 [2].
This is surprising, as some U.S. natural gas import terminals that were still being
constructed are now undergoing multi-billion dollar retrofits to become natural gas export
terminals [16].
Figure 3.1 The United States has the ability to be a natural gas exporter before 2020.
Source: EIA [2]
Huge U.S. production numbers from tight oil and gas wells show the keen ability
of the United States to respond to opportunities to domestically produce oil and gas. As
the world’s largest consumer of oil and gas (Figure 3.2), the United States as a nation has
very high incentives to produce oil domestically. Domestic production boosts economic
growth and increases security of energy supply [17].
12
Figure 3.2 The United States leads the world in oil consumption. Source: EIA [17]
The United States, while still a net oil importer, has been effective in producing
from its reserves of tight oil and gas. This effectiveness has proven elusive in other areas
where there is significant opportunity to produce tight oil and gas, as shown by
Argentina’s production data.
Argentina’s current energy paradigm involves quickly increasing domestic
consumption and decreasing domestic production of both petroleum and natural gas [18].
Argentina’s oil consumption increased in nine of ten years from 2003 to 2013, rising
more than 50% during that time, from 405 thousand BPD in 2003 to 636 thousand BPD
in 2013 [14]. During the same time period, Argentina’s oil production decreased each
year from 2003 to 2013, dropping from 900 thousand BPD in 2003 to 656 thousand BPD
in 2013 [14]. Similarly, Argentina’s production of natural gas dropped from 661 thousand
BOE per day in 2003 to 572 thousand BOE per day in 2013, while consumption
13
increased from 558 thousand BOE per day in 2003 to 774 thousand BOE per day in 2013
[14].
The drops in oil and natural gas production, combined with increases in
consumption, have lessened Argentina’s ability to satisfy energy demands without
imports. Argentina imports finished liquid products, about 100,000 BPD in 2013, due to
a lack of refinery capacity, but historically the nation has been a net exporter of oil and
natural gas. However, Argentina became a net importer of natural gas in 2008, as shown
in Figure 3.3, and Argentina’s net export gap of oil is closing quickly, as shown in Figure
3.4.
Figure 3.3 Argentina is now a net importer of natural gas. Source: EIA [19]
14
Figure 3.4 Argentina’s net export gap of oil is closing quickly. Source: EIA [19]
These trends indicate that Argentina would need to increase domestic production
to maintain energy self-sufficiency. Interestingly, Argentina has not had a shale
revolution comparable to the United States. Possible reasons for the lack of shale
resource production in Argentina will be examined in the following sections.
3.2 Reserves and Breakeven Costs
Estimates show that the United States has recoverable shale oil reserves of 58.1
billion bbl, second most globally (Figure 3.4), and recoverable wet shale gas reserves of
665 Tcf, fourth most globally (Figure 3.5). Argentina has recoverable shale oil reserves
of 27 billion bbl, 4th most globally (Figure 3.4), and recoverable wet shale gas reserves of
802 Tcf, 2nd most globally (Figure 3.5). On an equivalent basis, the United States and
Argentina have 168.9 BBOE and 160.7 BBOE in technically recoverable shale resources,
respectively. The similar reserves between the United States and Argentina indicate that
reserves are not the limiting factor of Argentina’s shale production.
15
Figure 3.4 Nations with highest shale oil reserves. Source: EIA [3]
Figure 3.5 Nations with highest shale gas reserves. Source: EIA [3]
These reserve numbers represent technically recoverable resources, meaning that
economic factors are not considered when calculating reserves. The reserves that are
economically viable to recover depend heavily upon factors such as drilling costs,
16
production rates, oil prices, and above ground risks [3]. Taking into account some
economic factors, IHS estimates suggest that Argentina has a low breakeven cost
compared to shale plays in other nations, as shown in figure 3.6.
Figure 3.6 Breakeven cost by region Source: IHS [4]
Breakeven costs naturally vary greatly between different analyses, and can even
have a wide error range within a single analysis. For example, different analyses of the
Eagle Ford play in Texas show how much estimates can vary. Analyst groups at
Goldman Sachs estimated Eagle Ford shale oil breakeven cost at $80-90 bbl in Oct 2014,
while analysts at Credit Suisse estimated the breakeven at $55 in September 2014 [20].
Due to this variance, the actual value of the breakeven cost estimated above for
Argentina’s shale offers less insight than the comparison to costs in other countries. The
IHS breakeven estimates for Argentina’s shale suggests that if shale is going to be
developed outside the United States, then breakeven costs are not the limiting factor for
Argentina’s shale.
3.3 Technology Time Lag, National Interest, and Recent Investments
17
The Barnett Shale was the original shale play in the United States. In 2000,
shortly after Mitchell Energy’s first highly productive shale well was completed, the
Barnett Shale became a producer of shale gas, but not yet in large quantity. Significant
quantities of gas began to be produced around 2007, as shown in Figure 3.7. From 2000
to 2007, the technology and feasibility of producing shale gas was being developed and
the rest of the shale resources in the United States that were potentially economically
viable still remained virtually untapped. Shale technology did not spread into other
prospective plays until production in the Barnett Shale began to increase to significant
quantity. Once the technologies for shale production spread, other plays developed
rapidly, with some plays easily out-producing the Barnett from 2007 to 2014. The time
lag for technology and resources to be used in shale plays across the United States was
very short once production viability was proven.
Figure 3.7 North American shale gas supply by play and total combined production.
Source: Wood Mackenzie [21]
18
Shale technology’s spread from region to region or from state to state within the
United States is not uniformly analogous to the international spread of shale technology.
Relative ease of interstate commerce and equipment transportation, pre-existing
infrastructure, location of trained operator and service companies, and similar currency
all ease the domestic spread of such technology. In just seven years, the United States
was tapping into huge shale plays around the country, while Argentina’s shale plays
remained mostly dormant in terms of productivity. There wouldn’t have been any
expectation for Argentina to produce from shale between 2000 and 2007, when the
technology was still being developed, but from 2007 to 2014, Argentina’s plays still
virtually stood still in comparison to U.S. plays [19].
Argentina’s lack of production is not due to lack of national interest or incentive.
The Argentine government has been very clear that it wants to create energy
independence for Argentina. In 2012, the government passed Law No. 26,741, which
stated, “Hydrocarbon Sovereignty of Argentina, is declared a national public interest and
priority objective [for] the achievement of self-sufficiency in hydrocarbons and their
exploration, exploitation, processing, transportation and marketing.” [22].
Thus, this low-production trend seems to stem primarily from Argentina’s energy
policy. The trend suggesting that energy policy is the decisive factor for shale production
in Argentina is the spike in investments following changes to Argentina’s energy policy.
In May 2013, Chevron agreed to an investment of $1.5 billion in shale development in
Argentina [23]. Chevron later indicated that it would continue and increase shale
production investments in Argentina, after seeing results from the initial project [24]. In
December 2013, Shell Argentina began to seek shale production in Argentina by
19
increasing shale capital expenditures threefold from $170 million to $500 million [25].
Additionally, in late 2013, Argentina-run YPF secured a $500 investment from Dow
Chemical Co. for a joint venture aimed at shale development [26]. In August 2014, YPF
signed an agreement with the Malaysian national oil company Petronas with initial
investments of over $500 million and total investments of up to $9 billion over several
years [27]. In January 2015, Argentina agreed to a Memorandum of Understanding with
China to create a foundation for Chinese investment promoting unconventional
exploration in Argentina [28]. YPF alone has spent billions leasing drilling rigs and has
pledged to invest $37 billion through 2018 and has continued to look for joint ventures
and outside investments [29].
This flurry of investing activity shows that there is sufficient corporate and
international interest to result in investments targeting development of Argentina’s wealth
of shale resources given that the projects seem profitable. It also shows that for
corporations with sufficient funds that wish to invest in Argentina’s shale plays, the
technology is now available to put to use in Argentina’s shale plays. In this way, recent
activity suggests that energy policy is the limiting factor for investments in shale
production in Argentina.
3.4 Above Ground Risk and Energy Policy
Clearly, if companies are willing to invest, Argentina’s shale plays can be
explored. By IHS estimates, Argentina is one of the highest petroleum industry risk
countries in the world, especially among the leaders in shale resources, as shown in
Figure 3.8. The factor that determines their willingness to invest is rooted in the energy
20
policy and above ground risk in Argentina. An in-depth discussion of the history of and
recent changes to Argentina’s energy policy comprises the next chapter.
United
States
Argentina
Figure 3.8 Argentina, while a leader in reserves, has very high above-ground
risk. Source: IHS Energy © 2014, arrows added, IHS [4]
21
CHAPTER 4
THE REGULATORY ADVANTAGE
This chapter explores and compares several of the major energy policy areas in
the United States and Argentina. A background of each country’s energy policy and
relevant legislative history will be examined, followed by a discussion of current policies
and recent legislative changes and trends. The legal history and recent activity of each
country will then be related to the country’s current shale production situation and future
opportunities.
4.1 From Drake to Steinsberger: The United States has a history of making oil
history
The United States has long been an innovator in the oil and gas industry. Indeed,
the first oil well was drilled in the United States, under improbable circumstances.
Colonel Edwin L. Drake led a small team of drillers in an attempt to bore an oil well in
Titusville, Pennsylvania, in 1859. No oil well had been drilled before, so the process was
untested. However, Colonel Drake was a believer in the concept, and he had a few
investors. Months of work resulted in no production of oil from their well, which
dissuaded most of Drake’s support. With only one remaining supporter of the operation, a
letter was sent from that final supporter to Colonel Drake to stop the operation, as it
seemed to be unsuccessful. But before the letter got to Drake, however, the well had
reached 69.5’, struck oil, and changed history forever. The operation was ridiculed, and
many believed that Drake was insane, but his willingness to try the new method of
producing oil was indeed a success. After the Drake well, an oil boom began that spread
throughout the world. [30]
22
The closest thing to a modern-day Colonel Drake may be Mitchell Energy
engineer Nick Steinsberger, who pioneered shale wells in 1999, as previously discussed.
Steinsberger, similar to Colonel Drake, also had limited and waning support from his
backers as he unsuccessfully drilled and fractured four shale wells over several months.
Many experts thought he was “an idiot” due to the complete lack of evidence that his
unproven method of producing oil could work. But Steinsberger prevailed, producing
large quantities of hydrocarbons with his fifth attempt at hydraulically fracturing a shale
formation, leading to the Shale Revolution [7].
Since Colonel Drake’s first well, and Steinsberger’s first shale well, drilling has
continued incessantly in the United States. This heavy drilling schedule exists in part
because many U.S. states have adopted largely pro-drilling legislation. This pro-drilling
legislation has created conditions for much activity, experimentation, and breakthrough in
the oil and gas industry. Innovations in oil and gas have come from all over the world,
but by most standards, the United States has been among the leading innovators. The
United States reaps much benefit from the innovative nature of its oil and gas industry,
but this is not to say that it hurts other countries. On the contrary, the United States is
often a proving ground for drilling experiments that pass on the best new techniques to
the rest of the world. Because of this history, the United States was in a good position to
benefit from hydraulic fracturing techniques, and it has, but now the benefits of shale
production will spread to much of the rest of the world, as well. With Argentina’s
exceptional reserves and the government’s commitment to producing oil, a prudent
expectation is that policy adjustments will take place to allow for an Argentine Shale
Revolution.
23
The rules and regulations that create the entrepreneurial environment in the
United States, and a hindered oil and gas industry in Argentina, will be examined in the
following sections.
4.2 U.S. Policy vs. Argentine Policy: Mineral Rights, Permits, and Royalties
Argentina’s constitutional law establishes that mineral rights belong to the
government in Argentina. Mineral rights are not transferred to a citizen during the
purchase of property, but rather they remain within the jurisdiction’s ownership. Section
124 of Argentina’s Constitution states, “The provinces have the original dominion over
the natural resources existing in their territory” [31]. Argentina has 24 jurisdictions: 23
provinces plus the capital city, Buenos Aires. Each province also owns hydrocarbon
reserves under the ocean within twelve miles of its shore, with those beyond twelve miles
belonging to the federal state [32].
In order to access minerals in Argentina, public or private entities or individuals
must obtain an exploration permit or production concession from the federal government
or provincial government. This process used to be more regionally fragmented before the
passing of extensive amendments to the National Hydrocarbons Law in October 2014.
Now, a national bidding process is used to determine the most suitable concession holder
based on factors like proposed capital investment and activity level [33]. Once
hydrocarbons are extracted, they become the property of the permit or concession holder,
with reasonable rights to utilize them commercially. Entities holding a permit or
concession are responsible for meeting applicable terms, for environmental damage
resulting from their activity, and for providing indemnity against surface damage to the
property owner. Entities also must prove “adequate technical and economic capacity” for
24
intended activity and register with applicable commerce registries and tax authorities
[32].
Argentine authorities also collect royalties on oil and gas production. The holder
of an exploration permit pays, up front, a one-time fee per square kilometer of land
included in the permit. Also, there is a royalty rate on both oil and gas production of 12%
as set by Law 27,007, enacted October 31, 2014. This 12% rate applies to the calculated
wellhead price of produced hydrocarbons, as reported by the producer monthly, based on
factors like market price and freight costs. The National and Provincial Executive can
reduce the royalty rate up to 5% based on certain factors, including productivity,
conditions, and well location. For permit extensions, a 3% royalty raise is applied to the
first extension, with additional royalty rate raises up to a maximum of 18% for
subsequent permit extensions. The permit extensions may also require payment of an
extension bonus, similar to the up-front payment for the original issuance of the permit
[34].
In comparison, while the government controls the oil and gas industry in
Argentina, the United States has a more citizen- and corporation- controlled oil and gas
industry. The United States is rare in that it has never had a national oil company.
However, the state and federal governments still control some oil and gas resources.
Citizens own the mineral rights for private lands in the United States, accounting for the
majority of oil and gas resources, but the remainder of oil and gas resources exist under
public lands, with the mineral rights being held by the state or federal government [35].
Production on federal lands is subject to royalties paid to the federal government.
Federal government royalties in the United States are mostly set by the Amended Mineral
25
Leasing Act of 1920. Production on federal onshore lands is subject to a 12.5% royalty
paid to the federal government. Production on federal offshore lands is subject to a larger
royalty of 18.75%. The 18.75% rate for offshore production was originally the same
12.5% as for onshore production, but it was raised up to the 18.75% by new legislation,
while the 12.5% has remained the same since 1920 [35].
Both the federal onshore and federal offshore royalty rates in the United States are
considered exceedingly low by some experts, but this still doesn’t signify a great
economic situation for oil companies looking to drill on federal lands [35]. Difficulty and
slow turnaround in getting federal permits has been one limiting factor keeping drilling
and production on federal lands in the United States from growing at the rate of private
land production growth. Even during the previously discussed production boom in the
Unites States from 2009-2013, production on federal lands decreased by 6% [36].
While the federal government may not be very pro-drilling on its own land, other
actions have been taken to increase overall production. For example, federal tax
incentives for developing unconventional natural gas resources were put into place in the
United States in the 1970s during a time of natural gas shortage. U.S. federal tax
incentives helped Mitchell Energy make shale drilling practical by providing these tax
cuts for unconventional natural gas wells [37].
Similar to federal ownership of mineral rights on federal lands, states own the
mineral rights beneath state lands. State lands in the United States have different royalty
rates. The ranges vary considerably, but Texas, for example, generally has state land
royalty rates in the range of 20-25% [38]. States also vary considerably in their policies,
some of which take precedent over royalty rates. For example, in New York,
26
policymakers have formally banned hydraulic fracturing with recent legislation [39]. This
ban on hydraulic fracturing inhibits the ability for any company to produce oil or gas
from shale plays in New York. Therefore, the ban on hydraulic fracturing effectively
overrides the royalty rate in economic considerations, because with no ability to pursue
new production from shale wells, a high or low royalty rate is irrelevant to new
production from shale plays in New York. Bans on hydraulic fracturing will be further
discussed in the “Environmental Concerns” section below.
Most U.S. drilling legislation allows hydraulic fracturing despite the current and
developing bans on the activity. Because U.S. citizens own mineral rights on private
lands, many of them are eager to reap financial reward from drilling activity on their
property. In this way, private ownership of mineral rights has created huge incentives for
development of hydrocarbons in the United States. Again, this arrangement is quite rare.
Essentially every other country in the world holds its mineral rights in the sovereign state
or in the “Crown” [40]. The benefits of private mineral rights ownership have been noted
by many industry leaders, such as Exxon Mobil CEO Rex Tillerson, who calls the U.S.
way “a marvelously elegant system that ensures that all natural resources are fully
developed” [7].
With the potential for huge profits for individuals and corporations has also come
the willingness to experiment and the reward of finding new ways to produce
hydrocarbons. Wallace Pratt, a prominent early twentieth-century American petroleum
geologist, argued:
Since the very inception of the industry, the finding and producing of oil in the
United States have been carried on by literally thousands of independent
enterprises; thousands of individuals, each an oil-finder in his own right; each free
to put to the practical test of the drill his own ideas and theories of where oil
27
might be found; and each spurred on to the drilling of exploratory wells by the
assurance that if he made a discovery he would reap a reward commensurate with
its value to society. [41]
Pratt made many prophetic claims about the oil industry. In the 1950s, he said of the
geologists with views that the world would soon run out of oil, “We have been too
conservative always,” noting that much more oil had been found, even by that time, than
was expected [41]. Since then, many have claimed that the world was running dry of
hydrocarbon resources, but Pratt’s view has prevailed, as once again the world ramps up
oil production by means of shale wells. Pratt had the view that the system of thousands of
individuals looking for oil in the United States was effective in creating abundant
sources. This view pre-dated Steinberger’s breakthrough shale well by fifty years, but it
thoroughly embodied the spirit of that well and the oil glut that has followed it.
4.3 U.S. Policy vs. Argentine Policy: Oil Market Pricing
At the end of the 1980s, Argentina passed a series of deregulations to its
hydrocarbon industry with issuance of Executive Orders 1055/1989, 1212/1989, and
1589/1989. The aim of the legislation was to increase hydrocarbon production by getting
rid of restrictions to free trade and ending unfair government pricing that could set
hydrocarbons prices far below the standards of international markets. By those decrees,
entities producing hydrocarbons were allowed to sell them at market prices in lieu of
state-set prices and quotas [42, 43, 44].
More recently, Argentina’s government has been overhauling its national energy
policy. In these changes to Argentina’s energy legislation, the decrees and terms of the
late 1980s have been revoked. Executive Order 1277/2012 created the Commission for
Planning and Strategic Coordination of the National Hydrocarbons Plan to help the
28
government strategically plan hydrocarbon production, transportation, and marketing.
Many regulations were reintroduced, including certain abilities to set market prices [45].
The pricing strategy the Argentine government will use is unclear, leaving uncertainty in
the Argentine oil markets. Further producing uncertainty, the huge fluctuations in oil
prices around the world in 2014 signify that the price range that could be experienced in
Argentina is very wide.
Oil prices around the world experienced dramatic shifts during 2014, as seen
below in Figure 4.1. These oil price changes directly affected the price of oil for crude
produced in the United States, as prices are not set by the government, as they are in
Argentina, but rather they are set by market participants as determined in specific
locations by benchmark or spot pricing.
Figure 4.1 Significant fluctuations in major crude oil price benchmarks in 2014.
Source: [46, 47, 48]
29
Different price benchmarks are set based on the location where the oil was
produced, its destination, and the makeup of the oil, with sulfur content being an
important factor. Crude oil with low sulfur content is preferred and is called “sweet,”
while crude oil with high sulfur content is less preferred and is called “sour.” One major
price benchmark for crude oil produced in the United States is the very sweet West Texas
Intermediate, or WTI, priced in Cushing, Oklahoma. Another major classification of oil is
the Brent Blend. Its price is based on oil produced from various plays in the North Sea in
Northwest Europe. Another major benchmark is Dubai/Oman. This benchmark price is
for some of the sour crude oils coming from around the Persian Gulf. Several other
classifications exist for different sources and destinations of crude oils [49]. These prices
are based on buying and selling activity by market participants, status of oil production,
speculation, and other market factors, which is a contrasting system to Argentina’s
government controlled pricing.
4.4 U.S. Policy vs. Argentine Policy: Sovereign Stability, Financial History and
Credit Ratings
The United States has enjoyed relatively stable economics and political
institutions for most of its history. U.S. sovereign stability can be noted in the lack of
governmental overthrows and scarcity of sovereign financial problems in the United
States, two conditions that strongly contrast with Argentina. The United States has not
had an external default on national debt since 1790. The last internal default on national
debt in the United States occurred in 1933. The U.S. dollar has never experienced
hyperinflation [50].
30
Though generally stable, the United States has not been free of instability. In
April 2011, the credit rating agency S&P revised the outlook on its U.S. credit rating of
AAA. The outlook was declared negative, meaning that the United States was at a risk of
being downgraded [51]. Shortly thereafter, U.S. congressional legislation raised the debt
ceiling, and the S&P credit rating for the United States was lowered to AA+, one level
below the highest rating, AAA. The United States had never been rated below AAA. This
reflected increasing sovereign debt in the United States and increasing instability of U.S.
political institutions [52]. Since then, S&P has affirmed this AA+ rating and described
the long-term outlook of the rating as stable. This stable outlook reflects the stability and
flexibility of the economy and political institutions of the United States. Also, while this
rating is historically low for the United States, AA+ is still a considered a very good
rating and surpasses most other countrys’ ratings [53].
Economic and political stability have been trends both historically and recently in
the United States, but not in Argentina. Since Argentina became an independent nation in
the early nineteenth century, it has had copious political and economic conflicts.
Argentina’s problems have been quite complicated. A compete survey of its history is not
possible here, but some examples will serve as an overview. Simon Kuznets, Nobel
laureate in economics, said of the multifaceted problems faced by Argentina:
There are four kinds of countries in the world: developed countries, undeveloped
countries, Japan and Argentina …Argentina remains in a class of its own. There is
no shortage of candidates for the moment when the country started to go wrong.
There was the shock of the first world war and the Depression to an open trading
economy; or the coup of 1930; or Argentina’s neutrality in the second world war,
which put it at odds with America, the new superpower. There was the rise of
Juan Domingo Perón, the towering figure of 20th-century Argentina, who took
power in 1946. Others reckon that things really went downhill between 1975 and
1990. [54]
31
A brief overview of Argentina in the twentieth century highlights the problems of
instability. From 1930 to 1983, 26 successful military coups took place in Argentina, with
24 different people serving as president during that time. Under the leadership of
President Juan Perón in the middle of the twentieth century, Argentina’s economy was
severely distressed. Perón was overthrown and eventually exiled from the country. In the
late 1980s, Argentina suffered hyperinflation up to 20,000 [55].
Economically, Argentina’s instability has manifested in a series of defaults. Since
its independence, Argentina has defaulted on sovereign debt a dozen times, seven times
externally and five times internally [56]. Argentina’s 2001 default was the world’s
largest sovereign default to date, in monetary value, at an excess of $90 billion, since
surpassed only by Greece’s 2012 national default [57, 58].
These continuing economic instabilities and national defaults have been severely
detrimental to Argentina’s creditworthiness, as is apparent from their national credit
rating. S&P national credit ratings are based on a nation’s creditworthiness before
external support, after external support, and an analysis of the specific instruments
involved in the nation’s finances [59]. Argentina’s impending 2014 default on sovereign
debt led to their credit rating of CCC-, nine levels below the top grade, AAA [60]. The
CCC- rating signified that the country had highly vulnerable economic conditions and
would need strong business conditions and growth to meet financial commitments [61].
Once the default occurred, the rating dropped to SD, or Selective Default [62]. This
rating is below the normal rating charts and reflects serious economic distress. Argentina
has the lowest overall credit rating of any nation rated by S&P [62].
32
To go along with a history of constant political changes and substantial economic
distress, Argentina’s oil industry is also unique in that it has been under both private and
public ownership. During much of the twentieth century, Argentina’s government
“owned an enormous portfolio of companies” [55], in industries from oil and gas to
entertainment. The government-owned businesses became an economic burden and an
effort was made to move them from public to private ownership. In order to do this with
the oil and gas industry, through the sale of the national oil company YPF, the
government enacted thorough restructuring to YPF to prepare for a stock offering. Close
to ninety percent of the workforce was cut and Argentina privatized its national oil
company. History was made as the 1993 stock listing on the New York Stock Exchange
resulted in the largest initial public offering ever at the time, amounting to $3 billion USD
[55].
Not long after YPFs 1993 privatization, the company was purchased in a merger
by the Spain-based oil company Repsol in 1999. Repsol paid a purchase price of about
$16 billion USD for YPF [63]. The Argentine government had been looking for a buyer
for YPF since January 1998 [64]. Less than a decade and a half later, in 2012, Argentina
expropriated YPF, seizing the company’s assets from Repsol [65]. Repsol sought about
$10 billion USD in return from Argentina, but that figure was disputed by Argentina.
Repsol and Argentina remained in dispute for almost two years until a deal was made in
late 2013 for Argentina to pay Repsol $4.67 billion USD in bonds [66].
3.5 Environmental Concerns: Will the United States lead the way for Argentina?
Amendments to Argentina’s National Hydrocarbons Law state that:
“The National and Provincial Governments will seek to implement a consistent
environmental legislation, which will be primarily focused on applying the best
33
practices on environmental management to hydrocarbons exploration,
development and/or transportation in order to develop the activity without
damaging the environment” [67].
This aim may suggests that the government believes its best option is to wait and assess
the environmental impact of different exploration, production, and transportation
activities, especially those related to unconventional plays. With the United States as a
leader in unconventional production, the lessons learned about environmental impacts
may develop in the United States first. Then, just as the technology and techniques of the
shale revolution are passing from the United States to Argentina, so might environmental
lessons and standards. With the United States years into its development of
unconventional plays, Argentina is in a good situation to learn from the United States
experience, but with minimal risk. However, there is obviously still environmental risk in
the activities that are to take place in Argentina and a need to minimize them and learn
from them. Argentina will have to be diligent in studying and monitoring environmental
impacts on the activities within its borders in order to make its own decisions about best
practices for unconventional activities.
While Argentina may also be able to draw lessons from other nations such as the
United States, this will probably prove challenging. As the United States addresses the
environmental impact of unconventional activities like hydraulic fracturing, the results
have varied considerably. As previously discussed, New York has a ban on hydraulic
fracturing. Other states have similarly proposed or passed legislation banning hydraulic
fracturing. Vermont passed preventative measures in 2012 banning hydraulic fracturing
within its borders before any activity of the kind had taken place in the state [68].
Maryland legislators spent years putting drilling permit reviews on hold in order to create
34
a de facto ban on hydraulic fracturing. They now seek to create a permanent ban with
legislation creating a three year ban on hydraulic fracturing, which has been approved by
the state senate and is predicted to become law sometime in 2015 [69]. The ban on
hydraulic fracturing could continue to other states as more moratoriums and bans are
proposed. This trend could also occur at the municipal level. Some municipalities have
created bans on hydraulic fracturing while others are pursuing bans or moratoriums. For
example, in 2014, Beverly Hills became the first city in California to ban hydraulic
fracturing [70].
Many of these bans on hydraulic fracturing have been enacted for environmental
and social concerns. Contamination of groundwater and drinking water is a major
concern for legislators and citizens regarding hydraulic fracturing [68, 71]. Since
drinking water is crucial to communities and its contamination is often extremely difficult
to remediate, this concern has driven much of the resistance against hydraulic fracturing
to date. Another concern is air pollution due to drilling and production activities. Heavy
commercial truck traffic supporting hydraulic fracturing operations has been a concern
for communities because it has the potential to disrupt community life.
Increased concerns exist in some special areas as well. For example, around very
large cities with limited drinking water supplies, hydraulic fracturing may pose a larger
environmental and social risk due to the water demand and other needs of an urban
population. Additional concerns also exist in areas with environmental sensitivities, such
as wildlife reserves or conservation areas. For all of these reasons and others,
policymakers face important decisions regarding whether hydraulic fracturing is
appropriate in state, city, and geographic area [71]. As hydraulic fracturing spreads,
35
nations such as Argentina would do well to monitor and learn from both the rewards and
the risks of this process in the United States.
36
CHAPTER 5
OUTCOMES
The situation is developing quickly: unconventional production has begun its
move from the United States to the rest of the globe, the Argentine government is
overhauling its energy legislation, creditors are dealing with the most recent sovereign
default in Argentina, foreign investors pour billions of dollars into Argentina’s huge shale
plays, oil prices have made huge shifts around the globe, and environmental concerns
continue to raise the eyebrows of citizens and politicians. With huge potential for reward,
and also risk, many wonder what will happen in Argentina’s shale plays. This section will
draw upon the aspects of the situation from previous sections to analyze the future of
shale play development in Argentina.
As previously discussed, Argentina has enormous reserves, the necessary
technology for shale development is available, and investors have enough funds to
allocate towards oil and gas projects. None of these primary factors in Argentina’s
hindered shale development. The hindrance is rooted in energy policy and the high risk of
investing in Argentina. Argentina’s political instability and financial problems create
significant risk for corporations wishing to operate in Argentina. Potential corporate
investors are rightfully who are potential investors wary of the outcomes they may face if
they invest in developing some the vast reserves in Argentina.
Even with all the risk, billions are still being invested in Argentina’s shale plays.
Partnerships with YPF have been occurring steadily through 2014, indicating that at least
for some companies, bearing the risk of the Argentine markets seems to be worth the
reward. Since Argentina has such control over its oil and gas industry, the decisions of
37
the government are going to have a major impact on the future of Argentina’s shale play
development. As previously discussed, the government in Argentina exerts control
through sovereign ownership of mineral rights, governmental issuance of exploration
permits, government mandated royalties, and governmental controlled oil pricing.
Given that the government is the major player in the development of shale plays
in Argentina, a crucial aspect of the situation is knowing who runs, and will run, the
government. Currently, Argentina’s president is Cristina Fernández de Kirchner. Cristina
Kirchner belongs to the Justicialist party under the Peronist party [72]. She succeeded her
late husband, Néstor Kirchner, as president of Argentina. Néstor Kirchner served one
term and Cristina is currently serving her second [50]. The constitutional limit for
consecutive presidential terms served by a candidate is two (although a candidate can run
again after not serving for one term) [31]. This means that Ms. Kirchner cannot run in
Argentina’s next presidential elections, which will take place in October 2015.
Because Argentine politics involves a volatile list of political parties, Argentina’s
2015 presidential election will have candidates from several parties. The Peronist party
has been in control of a majority of the Argentina Congress and the presidency since the
1990s [50]. In recent years, the popularity of the Peronist party has been declining. For
instance, President Kirchner’s approval rating was as low as 30% in late 2014. The
presidential candidates considered by some to have the best chances in the upcoming
election are: Daniel Scioli, governor of the province of Buenos Aires and member of the
Peronist party; Sergio Massa, a congressman and former Kirchner supporter who has
distanced himself from the president politically by forming the Renewal Front party; and
38
Mauricio Macri, mayor of the city of Buenos Aires and member of the Republican
Proposal party [73].
Even if the candidate of a party changes, one of these three current front-running
parties will most likely have its candidate elected. The closest candidate to Kirchner
politically is Daniel Scioli. The likely outcome, if he wins election, is that a government
run by Daniel Scioli and the Peronists will remain on course with its energy policy to
date, supporting a nationalized YPF and pursuing policies similar to Kirchner’s.
The potential policy choices of Sergio Massa from the Renewal Front party would
probably differ from Kirchner’s, given his recent move away from her political stance,
but his choices would likely not be vastly different. He is still a Peronist. Mauricio Macri
from the Republican Proposal party is the candidate who may adopt an energy policy
opposing the recent nationalization of YPF and overhaul of Argentina’s energy
legislation.
Regardless of the electoral outcome, the financial problems and decreasing
hydrocarbon production in Argentina pose a problem without many solutions. One way
for the government to increase revenues and production is through developing shale
plays. Whether a government-controlled or market run oil and gas industry would benefit
Argentina more is not clear. The government-controlled scenario, which would be a
continuation of the current political regime, could help to create market conditions in the
short term that attract investors. By not relying on the open market conditions, the
government may be able to create the financial incentives companies need to find
investment profitable. However, with the government setting conditions, there is potential
for fast, detrimental changes to occur. If the government finds itself in need of large
39
amounts of capital in the short term, it could choose to forgo further development of its
shale plays by taxing producing corporations more heavily. The government could also
refuse to allow companies to sell part of their produced hydrocarbons at market rates or
exchange local currency for foreign currency, both factors which may be crucial to a
company’s ability to make a profit while operating in Argentina’s shale plays.
Companies also face the threat of losing everything through very strong
governmental action such as expropriation. Less drastic, but still severe action could
include legislation that further limits or eliminates corporations’ abilities to export
hydrocarbons or exchange profits for more stable foreign currency. With these threats
looming, policies that provide large incentives up front, such as the recent policies
passed, create good investment environments. Argentina also faces the problem that they
are not the only country with shale plays that can be developed, so they will need to be
competitive against other nations in order to attract investments.
In a market-run scenario, very different conditions could shape the development
of Argentina’s shale plays. While reversing the nationalization of YPF would be an
enormous shift, it has happened before in Argentina. This seems to be a remote
possibility, however. If a market-run oil and gas industry in Argentina was to create profit
conditions more like those experienced by companies in the United States, this cold
provide a very good investing environment for companies. The ability to sell produced oil
and gas on the open market and to exchange local currency for foreign currency (at least
to some extent) may meet the needs of corporations for development to become
profitable. The main limiting factor and potential risk is that with the drop in oil prices, as
40
in 2014, the plays could become unprofitable for corporations, leaving Argentina with
little new development or production.
Whatever the scenario, Argentina’s government has to find a way to improve or
fix the nation’s faltering economics. Heavily increasing oil and gas production within
their borders could deliver billions of dollars in much-needed cash to the government.
This short-term need for cash could lead to hasty actions that do not benefit Argentina in
the long-term. Ideally, this will be considered by the party that is in control, creating
development that improves Argentina’s medium- and long-term outlooks as well.
The best two scenarios for Argentina shale play development to succeed are
probably: 1) A government-controlled oil and gas industry with steady government
regulations and no unfavorable acts by the Argentine government, such as expropriations
or large royalty changes, that would scare continued investment away and slow
development, or 2) A market-based approach combined with a steady rise in global oil
and gas prices, creating confidence in at least the short- and medium-term payout of
developing Argentina’s shale plays.
41
CHAPTER 6
CONCLUSIONS
6.1 Conclusions
Argentina has very high potential for shale play development. With some of the
world’s largest reserves, Argentina has yet to experience the enormous Shale Revolution
that is possible. A decade and a half of technological development for unconventional
resources in the United States has led to industry-proven and readily available technology
to be deployed in Argentina’s shale plays. Investors are ready to invest in Argentina, and
they have the funds to do so. With many foreign oil and gas companies already making
deals with Argentina, the industry has noted that there is great potential within the
nation’s borders.
Hindering this potential development has been faulty energy policy and the
nation’s large economic and financial instability. The most recent sovereign default and
the expropriation of YPF still loom over the investment potential in Argentina.
Argentina’s government faces serious national financial problems. Even a nation as large
as Argentina does not have many options within its economy that could mend such
issues. Developing the nation’s shale resources, though, could provide an enormous flow
of capital to the government, increase Argentina’s energy independence and security, and
bring serious aid to a suffering economy.
To benefit from its shale development potential, the government must create
conditions in which foreign companies wish to invest. With the possibility for political
change occurring in late 2015, the approach that will be taken to create profitable
conditions is uncertain. A government-controlled oil and gas industry could invoke
42
pricing, taxation, and production and currency export conditions to attract investors
quickly. However, that type of industry is also subject to actions by the government that
could reverse profitable conditions as quickly as they had been created. For that scenario
to work, the Argentine government will need to avoid serious unfavorable acts, such as
raising taxes too high for any company to operate profitably or implementing further
expropriations, which would decrease or eliminate investors’ confidence.
The other potential approach to energy policy would be a more market-based
industry. This approach would create an ability for companies to sell oil and gas at
market prices without fear of unprofitable government-invoked changes and to exchange
local currency for foreign currency. However, this structure would subject companies to
the instability of global oil prices, which experienced very significant changes in 2014. A
steady rise in oil prices would likely help a market-based approach in Argentina attract
and keep investors.
For Argentina’s shale plays to work on a large scale both short- and long-term,
the nation may only need a government with a predictable energy policy and the
condition of steady, or rising, global oil prices.
6.2 Limitations and Future Research
The method this thesis uses to evaluate Argentina as a prospect for shale
production is not distinctly economic, geological, or political. A combined approach is
used. Instead of studying the topic of Argentina’s potential for shale production by the
use of one perspective at length, the important aspects brought about by each perspective
have been weighed against each other to decide what factors could have the most impact
on the situation. This paper is meant to be an abbreviated version of the kind of
43
debriefing or exploratory document a large corporation might use to evaluate the
potential of Argentina’s shale plays. One would hope that a real corporation would do
research far beyond this paper’s extent before investing billions of dollars. Therefore, this
thesis is what the research would look like if that corporation consisted only of a single
undergraduate.
Also, though this thesis aimed to study economics, it was not rooted in the
application of the tools used by an economist. This thesis is an effort to look into the
causes and impacts of the political and economic conditions in which engineers produce
oil. Those tools of an economist, such as Internal Rate of Return (IRR) calculation,
Discounted Cash Flow (DCF) modeling, or Weighted Average Cost of Capital (WACC)
analysis, are important and widely used. Indeed, using those tools in the case of
Argentina’s unconventional hydrocarbon future could be very interesting and a great deal
of fun. But they do not suit this paper, as other factors have been the focal points.
Some of the factors affecting a company’s investment and success in a foreign oil
play hinge on the ability of the company’s managers and executives to successfully agree
with the country’s leaders on a deal that can serve both the citizens of the country and the
aims of the company. Additionally, factors such as war, conflict, and unrest play a role.
This paper is an attempt to understand those types of factors by talking to and learning
from experts, reading legislation and drawing conclusions, and observing industry trends
and making predictions.
Charlie Munger, billionaire Vice-Chairman of Berkshire Hathaway, notes the
problem with some uses of DCF models: “Some of the worst business decisions I’ve seen
came with detailed analysis. The higher math was false precision” [74]. This paper seeks
44
to avoid that potential for false precision by foregoing rigorous economic modeling in
favor of a more holistic analysis. In doing so, however, the potential benefits of higher
math are also ‘thrown out with the bath water’. Perhaps a good follow-up study for this
thesis would be one that does focus on in-depth economic modeling.
45
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