YPF talks midstream projects, former minister warns of Vaca Muerta dollar access risk

Argentine state oil firm YPF revealed details of several major midstream projects.

YPF and sector peers are boosting production at the Neuquén basin, which in turn is driving demand for midstream infrastructure investments to support growth – to initially substitute imports in the case of gas and, in terms of crude oil, accelerate exports.

During an Argentina-focused conference hosted by rating agency Moody’s on Wednesday, CFO Alejandro Lew discussed oil pipeline projects, among other areas.

Annual oil and gas production growth at the Neuquén basin – chiefly driven by existing projects – is forecast to spike this year and next and then trend down through 2035. That is according to a report from consultancy Wood Mackenzie, whose projections are based on current output and confirmed investment. By 2035, basin oil production is expected to reach around 560,000b/d, while gas output is forecast to register just over 4.0Bf3/d (billion cubic feet per day, or 120Mm3/d).

September production at the basin, home to Argentina's golden goose, the Vaca Muerta unconventionals play, was 58,100m3/d oil (365,438b/d) and 93.2Mm3/d gas, according to a report from local energy think tank the General Mosconi institute. 

YPF PROJECT UPDATE

Oldelval

Oil pipeline concessionaire Oldelval is carrying out a US$750mn project to double transport capacity between the basin and maritime export facilities in Buenos Aires province. 

Oldelval – which transports around 90% of oil produced in the Neuquén basin – plans to boost dispatch capacity to 72,000m3/d (452,866b/d) from 36,000m3/d, easing a bottleneck resulting from rapid growth at Vaca Muerta. The duct is actually transporting around 43,000m3/d, partly via use of polymers to boost compression.

Strong interest from oil producers seeking to secure capacity on the pipeline indicated the “appetite there is in the market to accelerate growth plans, which is clearly good news,” Lew told the Moody’s conference, adding the project would support output growth in the next 2-3 years.

Río Negro pipeline and terminal

YPF recently announced plans to build an oil pipeline between the Neuquén basin and a future oil terminal in Río Negro province.

The project – branded Vaca Muerta Sur – is in the engineering and design phase, Lew said. 

The infrastructure would have the capacity “to duplicate again all the dispatch capacity toward the Atlantic,” he said. While officials are still determining the optimum location for the terminal, the objective is to build a facility that can handle “more modern ships, VLCCs [very large crude carriers], ships of this type, which also permit higher efficiency of Argentine crude exports.”

During YPF’s latest results conference call, Lew said: “We expect to have news on that project relatively soon and that’s a project that we believe should be up and running by late 2025 or early 2026, so we need to start moving on that ASAP.”

Transandino oil duct

The 425km pipeline, operated by concessionaire Otasa, runs between Argentina’s Neuquén province and Chilean region Biobió. Otasa is de-mothballing the pipeline, which last carried oil in 2006.

The company is jointly owned by YPF, Chevron and Chilean state hydrocarbons firm Enap.

The pipeline has capacity to carry 8,000-17,500m3/d (50,318-110,071b/d).

“The idea is to be able to put the oil duct back into service again, we hope in the first part of next year,” said Lew, adding that a new pipeline linking its Vaca Muerta oil assets to the duct – Vaca Muerta Norte – should be available by end-2023. 

“We hope, by the end of 2024, to be able to have the capacity to fully use this oil duct, which will surely happen in stages.”

He added that Chile would likely need to carry out associated port terminal modification work.  

"Enap has the option of accessing the crude that will be transported through the pipeline and expects to be able to satisfy close to 30% of the demand of its Bío Bío refinery," the company said in a statement earlier this year. "In addition, the crude oil differential transferred by the pipeline not acquired by Enap could be exported from Argentina as cargo in transit through the port of San Vicente [in Biobió district Talcahuano]."

SECTOR OUTLOOK

Moody’s is positive on the overall outlook for Argentina's hydrocarbons sector, where output growth is being driven by unconventional producers in the Vaca Muerta play.

“Even given the weak local macroeconomic conditions and the lack of access to the international credit market, Moody's Local Argentina considers that the industry will increase the level of production in 2023 and maintain solid credit metrics,” the agency says in a report. “Local production companies, especially in Vaca Muerta, continue with a high increase in the level of production, leveraged by high international prices, and with improvements in the levels of indebtedness and cash flow generation.”

In 2023 and beyond, the production outlook hinges chiefly on midstream debottlenecking projects.

ACCESS TO DOLLARS

Consultant and former energy minister Juan José Aranguren said limited access to foreign currency may hamper production at Vaca Muerta.

Companies in Argentina face restrictions in access to the MULC, the country’s official foreign exchange market. Argentina’s government is working to protect – and build - its depleted foreign reserves. 

"Today, Vaca Muerta is at risk of not being able to continue its production because there are not enough dollars for SMEs to bring consumables they need in order to continue contributing,” Aranguren told a conference being held simultaneously on Wednesday by local media outlet EconoJournal. “If we don’t sort out access to foreign currency in this sector, Vaca Muerta is going to be a problem.”

The Moody’s report covers the area, saying that “we understand that the low levels of international reserves, the high exchange rate gap [between official and unofficial rates], growing inflation, and restrictions on access to the MULC and transfer of profits abroad discourage and make long-term investment decisions by the private sector more expensive. 

“Similarly, the difficulties in importing equipment and materials that producers and service companies use as inputs could affect the rate of increase in extraction and create bottlenecks in the production of crude oil and gas in the country.”

FINANCING

Economic turmoil and associated elevated country risk levels have choked off viable sources of international financing for firms in Argentina. 

Lew said that cash flow and financing options in the local market would nevertheless address YPF investment needs next year.

This was echoed by the Moody’s report, which covers midstream investment financing.

“Although we believe that there are major operational and financial challenges to carry out these works, we consider that the necessary investments in crude oil transport infrastructure can be financed through the local capital market, capital contributions and advances from companies in the sector, and by the flow of the concessionaires' own funds,” the agency states.