February 19, 2020 / 11:06 AM / a month ago

Argentina's energy bust spawns 'ghost town' in prized Vaca Muerta

AÑELO, Argentina (Reuters) - Just weeks into his young administration, Argentina’s new president convened a meeting with executives from Chevron Corp (CVX.N), Royal Dutch Shell PLC (RDSa.L) and other oil companies in a bid to smooth things over with an industry which he had slammed as a candidate months before.

Campaigning last year against the South American country’s former market-friendly president, Alberto Fernandez had said there was no point in Argentina having oil riches if “you have to let multinationals come and take it away.”

In a fence-mending session Jan. 16, Fernandez apologized to energy executives for the mixed signals, according to an industry source with direct knowledge of the meeting. Fernandez said he was intent on devising a recovery plan for the Vaca Muerta shale play in the Patagonian province of Neuquen, according to the source.

But Fernandez did not present a plan at that meeting, nor put forward his own thoughts, the source said, a sign that the new government had yet to settle on a course of action for ramping the Western Argentine shale deposit up to its full potential.

“They know what they are supposed to do … but they don’t know what changes will make things better or worse,” said another official at a U.S. service provider who declined to be named, adding that he had “zero hope” that Fernandez’s promised bill would significantly improve the bleak outlook at Vaca Muerta.

When asked about the government’s plan for the area and the meeting with executives, a spokesman for the energy secretariat said, “Vaca Muerta is central as a country project at a global level.”

The presidency declined to comment for this story.

The success of Vaca Muerta, often compared to the Permian Basin in the United States based on its vast potential, is key for this South American nation that has failed for decades to break free of cyclical crises and is grappling with inflation above 50% and a $100-billion pile of sovereign debt.

But more than a dozen interviews with energy executives, property developers, analysts and locals here in Añelo, considered the capital of Vaca Muerta, show how patience is running out for global energy giants including Halliburton Co (HAL.N) and Schlumberger NV (SLB.N) once committed to tapping the region’s reserves, as well as the thousands of Argentines trying to scratch out a living in a region that was bustling just 12 months ago.

When 47-year-old truck driver Alberto Valenzuela came to Añelo, a once-thriving town, seeking opportunity and a better life, he started building his dream: a four-bedroom home with plenty of space for his wife and two children.

Now he and his family are moving on.

“I came to try my luck,” Valenzuela told Reuters. But now, “we cannot provide for ourselves with what little there is in this town.”

“NO LONGER A GOOD BET”

The remnants of Argentina’s hope for a shale boom here can be seen on a dusty hilltop in Añelo, where Valenzuela is one of the 4,000 people who have helped double the town’s population in five years.

Weeds sprout around clusters of empty, half-built houses alongside idled construction equipment. It is one of the many construction projects aimed at accommodating newcomers that stalled as investor confidence slipped in the tumultuous election season.

Rather than presenting a plan for boosting investments in Vaca Muerta or other projects, Fernandez asked the executives who attended the January meeting at the Casa Rosada presidential palace for their ideas on how to stimulate the energy sector, the source with direct knowledge said.

A sign reading "Rentals and Sales of Lots" is seen in front of an unfinished building, in Anelo, Argentina February 10, 2020. Picture taken February 10, 2020. REUTERS/Mariana Greif

He pledged in the meeting to present a plan to do so in February, although there is no sign of it so far.

The executives asked the new president for a clearer legal framework, a right to send profits home, a reduction in red tape and the need to get rid of capital controls and a fuel price freeze, the sources said, measures enacted by Mauricio Macri in his final weeks in office.

For many in the industry, though, the damage from Fernandez’s earlier broadside against oil multinationals is done.

“We had assets we were going to send down there. After those comments, everyone in the industry felt that Argentina was no longer a good bet. That equipment is still not down there,” said another source at a U.S. energy firm, who added that the diverting of assets was driven by Fernandez’s campaign comments.

Several key barometers of oil industry health have deteriorated in the region and work has gone with them in the last seven months, according to industry data and union officials.

By January, there were just 24 active rigs to extract unconventional oil and gas at Vaca Muerta, down 37% from the end of July, according to sector data by service provider Baker Hughes.

While production at Vaca Muerta hit records last year, analysts attributed the performance to a strong first half of 2019 and said a slowdown likely began in August, largely because of that month’s shock primary election result in which Macri was sorely beaten by Fernandez.

“In 2020, it’s going to be affected. By how much, we don’t know,” Martina Gallardo-Barreyro, a Latin American energy analyst for Moody’s, said of production and activity.

The lull has hit international oil majors including Halliburton, which said in January that declining activity in Argentina had hurt its revenues. Rival Schlumberger is selling off parts of its local business amid what it has called “muted” activity and a difficult investment climate.

“HERE GROWS A DREAM”

The impact from the industry’s Argentina crisis, which experts say stemmed from a lack of clarity on the rules of play as well as worries about the Peronist victory, is apparent on the ground in Añelo.

A large hand-painted sign that reads “will sell or seeking investor” is mounted on the front of Valenzuela’s unfinished house.

Local officials tried to keep up with an influx that doubled the population to 8,000 within five years, but the town’s development slowed to a crawl over the last seven months, entwined with the lower activity at Vaca Muerta.

Some oil majors and other stakeholders, including participants in the meeting, said in statements to Reuters they were optimistic that activity could still pick up at Vaca Muerta, citing its long-term potential.

German oil and gas company Wintershall DEA [WINT.UL], for example, said it had the “clear expectation” that price controls would be lifted in the short-term.

Chevron spokesman Ray Fohr said that a “stable, predictable and competitive business environment based on free market principles is essential to attract investment capital on the scale that is needed to ensure growth and expansion for the Vaca Muerta, a world-class shale play with long-term potential.”

Slideshow (9 Images)

But in Añelo, the picture is bleak. Packages of floor tiles lay in the dirt outside the unfinished structures of the hill-top housing development. Unused street lights are piled in a shed. Construction is well behind schedule with far fewer workers on the job, officials said.

In front of the empty shells of houses is a government sponsored sign that appears at many other dormant sites in the town. It reads: “Here grows a dream.”

Reporting by Cassandra Garrison and Marina Lammertyn; Editing by Christian Plumb and Edward Tobin

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