Energy
Crisis in U.S. Shale Industry Might Jeopardize Argentina's Energy Project
The world over-supply of gas could thwart energy-giant YPF's plans for the Vaca Muerta shale deposit.

Strong competition in the world markets of liquefied natural gas (LNG) is crippling the U.S. shale industry, bringing doubts for the future of the Vaca Muerta Formation, Argentina's recently discovered oil reserve.

Growing production of the fluid increased significantly the number of countries with the ability to dump surpluses abroad, and in the face of a slowdown in the world economy, prices tended to stagnate.

Meteorologists are forecasting a mild winter in the northern hemisphere that further reduces demand expectations. This is why LNG prices in Asia have been falling steadily week by week.

According to Citigroup, production in the United States will decline next year and according to Morgan Stanley, the volume of external LNG sales from the U.S. will be halved.

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The problem is that beyond this winter's temperatures, the level of activity of Asian markets - the main LNG consumers - has been advancing at a much slower pace than in previous years.

In this context, the first producers left behind are the ones that have a higher logistical cost because of the distance from the consumer hubs, unlike Australia, New Guinea or Qatar, countries that improve their export performance in this field year after year.

This decrease directly affects the plan of Guillermo Nielsen, the possible future president of the state-owned oil company YPF, who was betting on the construction of gas pipelines and liquefaction terminals necessary to join the select club of LNG exporters.

Guillermo Nielsen, close adviser to President-elect Alberto Fernández 

The amount of liquefaction plants that open every year around the world requires a very fine calculation when embarking on building a LNG plant that involves billions of dollars.

Although analysts insist that gas demand will multiply when China and India intensify the decarbonization of their economies, the fact is that this premise still shows no signs of materializing in the short term. Even if it were to begin, the amount of liquefaction plants that open every year around the world requires a very fine calculation when embarking on building a LNG plant that involves billions of dollars.

This price drop is being reflected within the U.S. economy and aggravates the financial outlook for the oil companies. The very nature of unconventional production forces a constant rise in investment to counteract the production decline that this type of deposit suffers

Until recently it was estimated that, to become competitive, Argentine gas should be placed at about 3 dollars per million BTU in Bahía Blanca, since the process of compressing the gas to transport it as a liquid at atmospheric pressure at 162 degrees below zero and re-gasifying it at the point of use, adds an additional cost of two dollars, not counting freight costs. Today, those numbers are outdated and ships are already at between 4.5 and 5 dollars a million BTU at Asian ports.

A less demanding alternative for Argentina, due to distance, would be the Brazilian market, but specialists estimate that it would be difficult to allocate more than 10 million cubic meters a day, when the plant that YPF wants to build doubles that production.

At the same time, this price drop is being reflected within the U.S. economy and aggravates the financial outlook for the oil companies. The very nature of unconventional production forces a constant rise in investment to counteract the production decline that this type of deposit suffers.

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The fact is that lower prices increase financing needs. According to Haynes & Boone, a firm that monitors oil companies' bankruptcies since 2015, in the next two years these companies will face financing needs amounting to 137 billion dollars.

At the same time, Wall Street's patience seems to be running out and so are its indicators, which go against the bull rally of last year's stock market. Since 2012, this industry has invested $187 billion more than it generated.

The Institute of Energy Economics and Financial Analysis (IEEFA), reported a negative cash flow of 1.3 billion in the third quarter of this year.

As of 2019, some 33 companies have declared bankruptcy. The most affected are SMEs and suppliers, but this phenomenon also involves well-known companies such as Chesapeake, a pioneer of this industry that admitted that it will have difficulty paying its debt if the price depression persists. 

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