The Patagonian shale riches driving Argentina to an energy surplus

In a remote, scrubby stretch of Patagonian desert, Argentina’s future as a major energy exporter is taking shape.

A team of 10, working in September in a corner of the vast Vaca Muerta shale formation in the western province of Neuquén, hauled 75cm-thick carbon steel tubes into place and welded them together to build an oil pipeline. It is intended to carry crude almost 600km to the Atlantic.

Vaca Muerta is the world’s fourth-largest shale oil, and second-largest shale gas, deposit. A pipeline running south is scheduled to reach the town of Allen, 130km away, by the end of this year. A second stretch, proposed for completion in 2026, would carry crude another 440km to Punta Colorada on the south-east coast.

“This is the country’s first major pipeline designed completely for exports,” says Manuel Castillo, who is managing the project for Argentine state energy company YPF. “Eventually, we will be increasing the basin’s transport capacity by 70 per cent.”

Vaca Muerta is on the cusp of delivering on the promise successive governments have been touting over the 14 years since its discovery, as new infrastructure eases transport bottlenecks that have long hampered production.

One pipeline project, finished last year, enabled the restarting of oil exports to Chile after 17 years. Another, due for completion in 2025, will increase flows to the coast of Buenos Aires province.

The basin’s daily oil output has quadrupled over the past five years, from 90,000 barrels per day in 2019 to 369,000 bpd in August 2024 and could top 1.1mn by 2030, according to the local hydrocarbons business chamber CEPH. That would allow for exports of almost 700,000 bpd.

The more complex infrastructure to export natural gas has yet to be built. A new pipeline to Buenos Aires has, however, helped to more than double production since 2019, taking it to 70 cubic metres per day in 2024, reducing the need for costly imports. That could climb to 170 cmpd in 2030, the CEPH report says.

Argentina, which has had an energy deficit since 2011, is expected this year to net $5bn for its exports, at a time when its hard currency reserves are running dangerously low.

But the economy is still subject to strict currency and capital controls and the country must still resolve its macroeconomic challenges before it can attract the investment needed to become a significant exporter, businesses warn.

Still, the election, nearly a year ago, of President Javier Milei, who has pledged to lift those controls and deregulate the sector, has cheered investors.

Share prices for many Argentine energy companies have more than doubled since Milei’s victory, building on explosive growth in recent years. Shares in Vista Energy, which has benefited from its narrow focus on Vaca Muerta’s shale oil to become Argentina’s largest non-integrated producer, have soared almost 700 per cent in the past three years.

Miguel Galuccio, who founded Vista in 2017 after leading YPF’s initial Vaca Muerta investment as president, says the basin has enormous room to grow. “We’ve proven the quality of Vaca Muerta’s formation is second to none, [even greater] than the US’s Permian Basin,” he says. “In the US they have 500 drill rigs working; we have just 30. We have to think about how much potential we still have.”

Nevertheless, the development of Vaca Muerta has been the closest thing Argentina has to a state policy. Leftwing Peronist administrations subsidised early production in the 2010s. Politicians across the spectrum argue that the cash-strapped nation should not forgo its oil and gas riches while wealthier countries drag their feet on cutting emissions, even as concern about climate change grows in Argentina following droughts that have battered agriculture exports.

Early investment by YPF and US multinational Chevron in 2014 and Buenos Aires-based Tecpetrol in 2017 allowed for a rapid decline in costs and risk.

YPF pioneered a horizontal drilling method after finding that vertical wells were ill-suited to Vaca Muerta. That method was on display in September a few dozen kilometres from YPF’s new pipeline at one of Vista’s wells. A hulking 150-tonne drill bored 3km into the ground, before turning to drill another 3km along, in a process that costs $15mn a go.

But foreign investment in Vaca Muerta has largely stalled over the past decade. Former president Cristina Fernández de Kirchner introduced capital controls in 2011 that prevented international companies from extracting profits from Argentina, despite pledges to carve out exceptions for them. A year later, her government expropriated YPF and successive governments have since used the company’s 57 per cent market share to limit fuel prices.

“Almost all the foreign firms that operate in Vaca Muerta are doing so with limited budgets, just keeping business ticking over,” says Nicolás Arceo, director of energy consultancy EyE.

Milei’s government says its reforms will attract up to $15bn in investment next year. “We inherited an underinvested system on the edge of collapse,” says Eduardo Rodríguez Chirillo, who was energy secretary until mid-October. “In nine months [we] have managed to replace that old model with one that will insert Argentina into the world and recover its role as a leading exporter.”

The priority for the government, though, is to control Argentina’s triple-digit annual inflation, prompting it to defer plans to lift capital controls and fuel price caps.

“Although we’ve seen progress during 2024, challenges still exist in the business environment to fully enable Vaca Muerta’s growth,” says Javier La Rosa, Chevron Latin America’s managing director. “Ensuring contract sanctity, unrestricted movement of capital and steady free-market policies are crucial to attracting the investments needed to fully realise Vaca Muerta’s potential.”

Exporting gas is more of a challenge. Argentina needs fresh financing for several proposed projects, such as a $2.5bn pipeline towards Brazil and a $30bn liquefied natural gas terminal on the coast. Austerity-focused Milei has ruled out public financing. “There’s a lot more uncertainty in gas,” says Daniel Dreizzen, managing director of consultancy Aleph energy.

“To get a big jump in production, we’ll need relative macroeconomic stability and [legal] predictability, which we don’t have, yet,” says Arceo. “But Vaca Muerta will grow in the coming years. What’s at stake is how fast.”