Good news for Vaca Muerta drillers in Argentina’s election results

By Jonathan Gilbert on 10/28/2019

BUENOS AIRES (Bloomberg) - Alberto Fernandez strolled to victory in Sunday’s presidential elections in Argentina, a widely-expected outcome after he thrashed incumbent President Mauricio Macri in August’s primaries. After all the vague campaign speak, investors are now keen for clarity on policies.

One thing is almost certain: Fernandez -- voted in by Argentines who’ve been struggling to make ends meet -- will reel in Macri’s market reforms to ease their economic pain. That means more government intervention. But how that will play out in practice remains to be seen, especially with several forces in his Peronist coalition tugging in different directions.

For shale oil and gas, there have been a few clues.

Vaca Muerta is the world’s next big shale hope and Argentina’s best chance of raking in new export dollars. It desperately needs investment to grow and shale dollars to shore up the peso, which has slumped 71% in the past two years. Macri knew that and spurred drilling. While shale production is still small, it’s helped to close the nation’s energy trade deficit.

Across the oil industry, there’s a sense that Fernandez, too, understands the importance of Vaca Muerta and will make it a pillar of his energy program. Guillermo Nielsen, one of his advisers who is being touted for a ministerial role, has even been drafting a Vaca Muerta law that would give drillers a firm regulatory framework for years to come.

How Fernandez tackles the broader economy will be crucial. He’s expected to tighten capital controls brought in by Macri to protect international reserves. That’s not good news for foreign investors who need to repatriate profits. He’s also hinted at assuaging increases in electricity and natural gas bills, which could affect gas drillers that supply both markets.

Some industry observers think Fernandez may provide drillers with a capital-controls loophole, which is what Kirchner did in 2013 to lure Chevron to Vaca Muerta. It’s also unclear what Fernandez will do with oil-price caps. Macri imposed a 90-day freeze on fuel prices at the pump that expires in mid-November. Producers are paying for the freeze and shale drilling has slowed as a result. In particular, state-run YPF SA needs revenue from fuel sales to fund shale drilling.

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