WoodMac: Argentina's economic crisis brings record low wellhead natural gas prices

Aug. 27, 2003
Argentina's economic crisis has negatively affected the country's upstream oil and natural gas sector, causing operators to drastically scale back on gas projects, said consultants with Wood Mackenzie Ltd., Edinburgh.

By OGJ editors
HOUSTON, Aug. 27 -- Argentina's economic crisis has negatively affected the country's upstream oil and natural gas sector, causing operators to drastically scale back on gas projects, said consultants with Wood Mackenzie Ltd., Edinburgh.

The oil sector has a new 20% tax on crude exports, while Argentine wellhead natural gas prices have dipped to record lows.

The dollar-peso exchange rate during 2002 averaged around 1:3.1, and Argentina wellhead gas prices in 2002 averaged 40¢/MMbtu. That compared with an average Argentine wellhead price of $1.20/MMbtu in 2001, Woodmac said.

The level of investment made in Argentina's gas fields during the last 18 months was minimal, with only essential work being done to ensure that existing supply commitments are met.

"In the longer-term, this situation is inevitably unsustainable," said WoodMac consultant Pauline Geddes said in a research note Tuesday. "With a continued lack of investment in the country's gas fields and infrastructure, production and transportation capacity will soon be insufficient to meet the expected increase in domestic demand."

The Argentina government is aware of the problem, but there is still no clear schedule as to when wellhead gas prices might be increased.

"The political sensitivity of the situation appears to be the main barrier to any action being taken, as the government does not want to impose increased consumer prices on users that can ill afford to pay them (in particular, residential users). However, the need to improve wellhead prices will inevitably put pressure on the government to increase consumer prices as soon as possible" Geddes said.

WoodMac senior consultant Matthew Shaw said a key concern for Argentina is whether upstream producers will be able to meet gas demand during the winter of 2004.

"With some shortages already experienced this winter, production capacity is unlikely to be increased sufficiently by next year if no new investment is made in 2003," Shaw said. "Transportation capacity is an even more serious issue, as the domestic pipeline network is already experiencing bottlenecks. . .So even if upstream operators bring their production capacity back up relatively quickly, the question is whether the pipeline network can cope with the increase in demand."