Natural Gas Production, Is it Too Much?

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Argentina is in the midst of an economic and market crisis. Its local currency has lost around 40 percent against the U.S. dollar so far this year. The central bank has raised interest rates to 60 percent to try to stem soaring inflation that is running at over 30 percent. The economy is shrinking and demand is dropping. Demand for natural gas is also falling. And Argentina’s state-run energy company YPF is responding to dropping demand by scaling back its natural gas output and halting production at some wells, Bloomberg reports, citing people with direct knowledge of the plans.

Natural gas demand is down not only because of the economic hardships in Argentina. Local gas consumption is highly seasonal, with peak demand in the Argentinian winter and significantly lower consumption during the coming summer months.

This seasonality in natural gas demand compares with constantly rising gas production from Argentina’s Vaca Muerta shale play- dubbed the ‘Argentinian Permian’, although its geologic properties have been compared to the Eagle Ford - which is one of the few bright spots in shale gas production outside the United States. 

YPF, which pioneered the shale gas drilling in Vaca Muerta, also sees the rise of rivals in the shale play and Argentina’s natural gas production is growing.

Tecpetrol, an oil and gas exploration and production company which is part of the conglomerate Techint Group, announced in 2017 that it would invest US$2.3 billion in non-conventional resources at the Fortín de Piedra field in Vaca Muerta.

So far, Tecpetrol has invested US$1.4 billion in Vaca Muerta, chief executive Carlos Ormachea told the Financial Times last month. The Fortín de Piedra project, which was launched just last year, currently produces 10 percent of Argentina’s natural gas output, the manager said.

Argentina’s rising natural gas production was helped by a government subsidy program, now closed to new entrants, guaranteeing a price of $7.50 per million British thermal units (Btu) for the natural gas that companies produce above a certain baseline level.

Subsidies for natural gas production played a crucial role in bringing Vaca Muerta costs down, Wood Mackenzie analyst Amanda Kupchella told FT. This summer, when demand is much weaker than in peak winter months, Argentina will be meeting its gas needs by itself and could have a balanced or even a slightly oversupplied market, Kupchella notes.

Given the expected weak summer demand and the ongoing economic crisis, state firm YPF may even resort to curtailing gas production.

YPF’s natural gas production edged down by 1.3 percent in the second quarter of 2018 compared to the same period of 2017 due to lower demand, the company said in its Q2 earnings release

The second quarter was just before the start of the winter in Argentina and the start of the latest economic crisis in the country, which is now in recession and where consumer demand is dropping as the peso depreciates and makes goods and services more and more expensive.

Given the seasonality in Argentina’s natural gas demand, Texas-based liquefied natural gas (LNG) company Excelerate Energy and Argentina’s Transportadora de Gas del Sur signed last month a memorandum of understanding to jointly study the technical and commercial viability of an LNG project at the Bahía Blanca port city for liquefying and exporting natural gas during the summer season. The companies expect to complete the study by the end of this year.

For now, during its peak winter demand, Argentina imports LNG through two floating import terminals.

“The successful development of Argentina’s shale gas reserves resulted in a potential excess of natural gas during the summer months,” Excelerate Energy said.

“Carrying out LNG production through the Project will be key to promote the development of unconventional gas, since it will allow to expand the scale of the gas market, increasing export opportunities, after having met domestic market needs in Argentina,” TGS’s chief commercial officer Néstor Martín said.

Argentina’s gas producers may have to adapt to even lower summer demand and higher seasonality in consumption, while facing a lot of economic, financial, and political uncertainties over the coming months.

Tsvetana Paraskova for OilPrice.com