Shale Renders the ‘Obsolescing Bargain’ Obsolete: Political Risk and Foreign Investment in Argentina’s Vaca Muerta
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From a political risk perspective, the recent burst of foreign investment into Argentina’s oil and gas sector seems paradoxical, as Argentina’s substantial obstacles to foreign investment would seem to weigh against such capital inflows. National politics oscillate between the ideological right and populist left; the country is a stronghold of influential – and combative – labor unions; and institutions are notable for weak enforcement of contracts and property rights. Compounding matters, the Argentine economy is famously volatile, having undergone eight separate defaults on its external debt since independence in 1816 and five separate currency replacements since 1970, with another currency crisis under way in mid-2020. Hence, even among resource investment jurisdictions where risk tolerance is a prerequisite, Argentina stands out.
In addition to political and institutional risk and macroeconomic instability, Argentina’s domestic energy policy seeds additional disincentives for investment. In 2017, government subsidies on natural gas and transport accounted for 15% of government spending and 2.2% of GDP. However, the scale and sustainability of those subsidies is very much tied to political circumstance, and appeared to hinge on the 2019 presidential election. This only serves to heighten risks around hydrocarbon investment and production decisions. But, perhaps most worrying for foreign investors is Argentina’s recent history of state expropriation of foreign-held assets. In 2012 the Argentine government nationalized the holdings of Spanish oil major Repsol, and in 2004 Argentina seized a French-owned water services concession.
Political risk indicators and sovereign debt ratings provide quantitative warnings to large investments in Argentina. While measurable risk indicators declined somewhat during the term of President Mauricio Macri, Argentina’s differential on its bond interest rates – bond spreads – was second only to Venezuela’s in 2019. On the basis of economic freedom, Argentina ranked 148 out of 186 countries worldwide in 2019 in the Index of Economic Freedom.
Despite this compendium of caution for foreign investors, oil companies – including some of the world’s largest shareholder-owned firms – have invested $13 billion in developing oil and gas concessions in Argentina since 2013. Remarkably, the influx of capital into Argentina began just one year after the Repsol expropriation. Most of the investment has been directed toward the unconventional shale play known as the Vaca Muerta, a shale formation in the central Neuquén basin. With 153,000 boe/d in average daily production in 2018 and 268,000 boe/d projected for 2019, the Vaca Muerta has become the most productive shale play outside North America..