Argentina’s pro-market shift tightens embrace of deepwater drilling

A top European oil company is about to plunge a drill-bit into South Atlantic waters off Argentina that are at least as deep as five Eiffel Towers. It’s a risky years-long bet on offshore drilling at a time when global demand for planet-warming fossil fuels is predicted to peak as soon as 2030. Yet Argentina’s new market-friendly administration, just like the state-oriented one that it replaced on December 10, is all in on exploring for new reserves.

Norwegian energy giant Equinor operates the offshore CAN 100 block that spans more than 15,000 square kilometres in the Northern Argentina basin, a frontier hydrocarbons play with no infrastructure or discovered resource. The company and its partners, Argentina’s state-controlled YPF and fellow European energy behemoth Shell, will spud the Argerich-1 well in 1,500 metres of water depth in the first quarter of 2024. At the same time, Equinor and other stakeholders like France’s TotalEnergies are conducting seismic surveys in nearby acreage in anticipation of further offshore drilling.

The gas-prone deep offshore would open a new chapter in Argentina’s century-old hydrocarbons industry, one that proponents say would be more efficient and less carbon-intensive, at the production stage, compared with the country’s mature onshore and shallow-water operations. Argentina is already making strides in this direction, says Juan José Carbajales of Buenos Aires energy consultancy Paspartú. Onshore, the vaunted Vaca Muerta shale formation discovered more than a decade ago now accounts for more than half of oil and gas production, and it is a quarter to a third more efficient than conventional production, he said.

The deepwater offshore drilling campaign could uncover “another Vaca Muerta there, or even two Vaca Muertas. It could be developed at lower cost, and the production would go entirely to export,” generating revenue to help alleviate poverty, Carbajales told Gas Outlook. And geopolitically, he said the offshore drilling would allow Argentina to plant a flag near its maritime border, reaffirming its historical claim to the UK-controlled Falkland Islands and projecting its sovereignty over a slice of Antarctica.

Environmentalists, in contrast, see cross-border risks. Any future oil spill “would reach Uruguay in six to seven hours,” warned environmental lawyer Gonzalo Vergez. Undeterred by a legal setback in September, Greenpeace and other environmental groups are battling in local courts to stop the offshore seismic they say will harm marine life. They are forging international networks in anticipation of further legal action next year, Vergez told Gas Outlook.

Such activism has so far gained little traction in Argentina, where more offshore activity is getting underway. Equinor’s competitors are investing $700 million in Fenix, “the world’s southernmost gas project” in shallow waters off Tierra del Fuego in deep southern Argentina. TotalEnergies and its partners, Wintershall and Pan American Energy, plan to start production there in 2025, with output projected to endure for 15 years.

Bracing for disruption

All sides in Argentina’s debate over fossil fuels are bracing for disruption since libertarian president-elect Javier Milei took office on December 10. The flamboyant economist inherits the offshore exploration campaign from his predecessors, highlighting fossil-friendly conviction across Argentina’s political spectrum. There is a political consensus that Vaca Muerta, despite underperforming expectations so far, is the main trampoline for Argentina’s desperately needed economic and fiscal recovery.

But the laissez-faire economic platform of Milei, who has denied that human activity causes climate change, would potentially turbocharge the industry by slashing environmental regulations and dismantling state controls that have discouraged investment here for decades. The local oil and gas industry, accustomed to state largess, is lobbying for his administration to maintain an upstream stimulus programme and publicly-funded construction of pipelines and other infrastructure.

Right out of the gate, Milei is preparing omnibus legislation that would deregulate the economy, shrink the public sector and privatize state-owned companies. The Environment and Sustainable Development Ministry was among nine cabinet portfolios that the new president swiftly eliminated. In his inauguration speech, Milei warned Argentinians to prepare for an inevitable economic “shock” that he blamed on his predecessors. But faced with a fragmented legislature dominated by opponents, he has tempered some of his most ambitious proposals, such as dollarization and the elimination of the Central Bank, and has appointed more mainstream conservatives to his cabinet. He now says that the sale of the state’s majority stake in YPF will not happen before the company is revalued, possibly through higher petrol prices, a move that Cabrajales said would aggravate Argentina’s inflation that is already around 150% on an annual basis. “What’s good for YPF might not be good for Argentina.”

The emerging picture reminds Diego Rivera, a research associate at Columbia University’s Center for Global Energy Policy, of the pro-business administration of Brazil’s former president Jair Bolsonaro, another climate sceptic who was among the like-minded dignitaries at Milei’s inauguration. And yet, the rising tide of investment holds the potential to lift all energy boats. “There was an increase in investment in energy projects in Brazil during the Bolsonaro years, across the spectrum, including bioenergy, wind, solar and also oil and gas. So I don’t see why it would be much different in Argentina,” Rivera told Gas Outlook. “But let’s wait to see how Milei manages the macroeconomic crisis first.”

However Milei proceeds, the new administration will have small shoes to fill when it comes to Argentina’s climate action. The now-former government of President Alberto Fernández showed far more interest in building new gas pipelines than in expanding the power grid to allow the country to generate more renewable power.

In mid-2023, the Fernández administration issued a national energy transition plan to 2030 that “focuses even more and continues to incentivize exploration and production of natural gas,” said NGO Sustentabilidad Sin Fronteras project leader Micaela Tomasoni on a recent webinar. The 2030 plan, complemented by 2050 guidance, expands the target for renewable energy and reduces the goal for energy sector emissions, which account for 51% of the country’s total. But the near-term plan’s terms remain vague, Tomasoni said. It was drawn up without public participation and will only be updated every five years in 2024 and 2029, giving scant opportunity for comprehensive review. Moreover, it is unclear how Argentina would fulfil the fundamental premise of harnessing rising gas revenue to accelerate the transition.

Even if Milei offers a freer hand to the fossil fuel industry, the companies will be somewhat constrained by their own climate commitments, shareholder activism and Argentina’s notoriously dire and unpredictable economic conditions. Equinor, similar to its peers, says it is committed to a 2050 net zero goal, with a focus on renewable energy, carbon capture and hydrogen. Still, it is not relinquishing hydrocarbons anytime soon. “The world will still need oil and gas in 2050, and it is important that future volumes are produced with the lowest possible carbon footprint. This will be our focus in Argentina as anywhere else in the world where we explore and develop new resources,” Equinor told Gas Outlook in a statement.

Other energy companies have staked out similar strategies. Against the backdrop of the COP28 climate conference in Dubai, for example, Wintershall, YPF and chemicals giant Dow signed a 12-month preliminary agreement to jointly assess potential carbon capture and storage opportunities around the Argentinian industrial hub of Bahia Blanca.

Environmentalists are unimpressed. Still in its technological infancy, carbon capture along with the “net zero” concept are bedrocks of an industry “scam” to perpetuate fossil fuels, Greenpeace International co-founder Rex Weyler has written. The controversy is a reflection of the heated central debate at COP28 over whether the world should phase down fossil fuels or aggressively phase them out altogether. Argentina is firmly in the former camp.

Milei was sworn in just as summer temperatures in Buenos Aires start to climb, a reminder that the world is careening toward a critical 1.5°C threshold. For Argentina, that’s a reason to speed up drilling, not stop it. “We know that the window is not eternal,” Carbajales said. “But Argentina should develop its own energy transition, including the offshore if the world wants it.”