Argentina Just Jumpstarted the “New Energy Balance,” and Here’s Who’ll Profit

The attention of energy markets is fixed firmly on the latest news from the Persian Gulf, especially OPEC’s oil cap negotiations – and whether Iraq will end up sabotaging them.

Now, these negotiations are crucial to future oil prices. But they are now overshadowing some momentous energy developments in other parts of the world…

Especially Argentina’s recent energy auctions.

You see, a few weeks ago, Buenos Aires awarded 17 renewable energy contracts to a range of international and domestic companies. All in all, that’s $1.8 billion toward transforming the country’s electricity grid.

And that’s just the first step…

But a few years ago, the story coming out of Argentina was quite different. Then, the discovery of huge deposits of shale gas spurred rumors of a natural gas boom that would take over the country’s energy sector.

That didn’t happen.

Here’s why… and who’s going to profit…

New Shale Gas Development Can Be Slow and Costly

As with most developing countries, especially so in South America, the Argentinian power generating network has been falling further and further behind the rise in local demand. A few years ago, the discovery of huge shale gas deposits provided some hope that the country had found an easy way of covering all its energy needs, with enough left over for substantial exports.

This natural gas was found in the so-called Vaca Muerta formation, believed to be one of the world’s largest shale gas deposits. All things considered, Vaca Muerta has at least 27 billion barrels of recoverable oil, and more than 800 trillion cubic feet of natural gas, according to current estimates.

A consortium involving Argentina’s state oil and gas company YPF SA (YPF) and international oil supermajor Exxon Mobil Corp. (XOM) is developing the huge field in the northwestern part of the country.

But after having already committed $250 million over the summer, ExxonMobil has now acknowledged that the final development budget could end up well north of $10 billion over the next two to three decades.

Part of the reason for the high costs and long time-frame is the enormous size of Argentina’s deposits. According to the last U.S. Energy Information Administration (EIA) global survey, Argentina has the second largest shale gas reserves, and the fourth largest shale oil reserves, in the world.

With reserves that huge, you’d think that Argentina would be pushed into an energy leadership role in the region.

That’s certainly happening, but much slower than many hoped for.

Here’s why…

Argentina Isn’t the Best Place to Do Business

For one thing, the country’s wider financial difficulties have intervened to frustrate development plans. The Argentinian peso has had a very volatile 2016, there have been banking irregularities and interruptions, inflation has been spiking, and last but not least, a long-standing environment of outright fraud seems to have resumed.

For another, Argentina remains one of the less transparent places to do business, especially when it comes to exploiting natural resources. Laws and regulations are rarely applied uniformly or without a pronounced (and ongoing) need for interpretation. Often these must be done on an ad hoc basis, offering little likelihood of a similar result the next time around.

The combination of both problems results in ballooning budgets, protracted delays, and across the board inefficiency.

Despite the positive statement from ExxonMobil in July, investment for the Vaca Muerta project has been slow to come.

And that has forced the Argentinian government to adopt some creative solutions…

Renewables Are Set to Skyrocket

Faced with concerns about the country’s ability to meet its electricity demand, the government has moved to diversify Argentina’s energy sources. That means an increasing reliance on renewables to meet a larger portion of the nation’s energy balance.

Renewables – primarily solar and wind power – are now targeted to account for 8% of domestic electricity in 2017, up from just 1.8% this year.

Here we have another government recognizing that a larger variety of energy sources in genuine balance is the goal. This is just the latest government around the world recognizing that coordinating various energy sources is the most effective approach moving forward. That it’s Argentina, a place with such a pronounced bounty of oil and gas, is extra impressive.

But note what the Argentinian government hasn’t done. A popular belief around the world, at least until recently, has been that there will be some single “silver bullet” that will wean economies off crude oil – as if replacing one dominant energy source with another is any sort of a solution.

My position here in Oil & Energy Investor has long been to promote a variety of energy sources that together create an increasingly interchangeable balance. That includes renewables, which are on the rise, as well as natural gas, which has been the preferred replacement for coal in electricity generation for a while now.

But coal will remain a staple energy source for decades, especially in Asia where it will be the primary source of power for generations to come.

In other words, the balance is not, and cannot become, a zero-sum game.

Which is why Argentina’s power program is so important…

The Focus on Power Variety Will Spread Globally

Argentina’s government received 123 project bids a month ago, finally awarding the 17 winning projects last week. Of the total, 12 are wind, four solar, and one biogas. Additional entries from biomass and hydro power did not make the final cut.

Officials said that the average winning price was $59.40 per megawatt hour, with solar coming in a shade higher at $59.70. These are slightly higher than the equivalents in North America, or even across the border in Chile (where another “energetic” solar push is underway).

But eventual costs will be coming down as the network is built out. Initially, the goal is first and foremost reliable supply.

As Argentina’s push for grid reliability and variety continues to be successful, other governments will take note. Meaning more of an emphasis on the sources of power in the global energy balance…

And great prospects for key companies involved in both renewable power generation and grid modernisation.

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