US firm loses Vaca Muerta licence

08 January 2019, Week 01, Issue 745

Argentina’s financial crisis has claimed its first victim in the Vaca Muerta shale play. 

US-based Retamco Operating has lost a licence in the Vaca Muerta, where it had expanded its reach in 2017. 

The company, founded in 1983 in Texas, won rights through its Retama Argentina unit to test and develop the Parva Negra Oeste block in the dry gas window of the play in a tender in late 2017. It had pledged to invest up to US$1 billion in its development. 

The idea was to find financing and a partner to press ahead with its plans, though these were disrupted by the latest financial crisis to grip the country. Argentina’s currency tumbled by more than 100% against the US dollar last year, pushing the economy into recession and inflation to nearly 50%. 

Add in rising American interest rates and a looming trade war between China and the US, and financial capital has been flowing out of Argentina to safer havens, reducing the appetite for investing in the Vaca Muerta. The average yield spread of Argentine sovereign bonds over US Treasuries, or country risk, spiked at nearly 830 basis points at the end of December, more than double the 365 at the start of 2018, according to an index complied by J.P. Morgan. 

While country risk has since come down to 730 basis points, it is anticipated that the Argentine presidential election in October will mean markets remain volatile this year, limiting financing for projects by companies like Retama. 

The news is a blow to the government’s efforts to lure US juniors to invest in the Vaca Muerta, which it hopes will double the country’s oil and natural gas output over the next five years and enable Argentina to become a net exporter after more than a decade of relying on imports. 

Alejandro Monteiro, the minister of energy in Neuquen province, where the block is located, said Retama requested an extension to come up with the financing for the project in light of the crisis, but this was declined. 

The authorities will hope the company’s exit does not encourage others to follow suit. It is unlikely that majors such as Chevron, Royal Dutch Shell and Total will abandon their plans, given the scale of their investment to date in Argentine shale projects. But they have deep pockets and are less exposed to domestic financial problems. Smaller operators need to borrow, and the higher country risk — and higher borrowing rates in the US — are complicating this. 

The impact this is having was apparent in November when an auction for blocks in Neuquen failed to attract any bids. Gas y Petroleo del Neuquen, which hosts the auctions, said it was the first time this had happened, suggesting there could be a change in mood regarding investment by independents in Argentine shale acreage. 

Edited by

Ryan Stevenson

Managing Editor

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