Why Argentina is most attractive shale play outside US


(John Kemp is a Reuters market analyst. The views expressed are his own)

By John Kemp

Nov 3 (Reuters) - Cristina Fernandez, president of Argentina, is the sort of populist political leader financial markets love to hate.

For business interests and the media, she has become an archetypal villain, a symbol of everything that has gone wrong with the country's economy over the last century.

Extreme political polarisation, serial defaults, devaluations, hyper-inflation and expropriations of foreign property, culminating in the nationalisation of oil company YPF in 2012 and a standoff with the U.S. courts over unpaid foreign debts in 2014 - Argentina's economic dysfunction is legendary.

The country remains frozen out of foreign debt markets while its lawyers argue about how to pay restructured bond holders without also paying investors who refused to participate in the restructuring.

The federal government enforces strict controls on imports as well as the export of capital and earnings to protect Argentina's meagre foreign exchange reserves.

Relations between the government and much of the business community and foreign investors can best be described as confrontational.

In the energy sector, oil and gas production has stagnated over the past two decades as consumption has grown, adding to pressure on the balance of payments.

Oil output has been falling, from a peak of more than 900,000 barrels per day in 1998 to a little over 700,000 bpd in 2013, and Argentina became a net petroleum importer in 2012.

In the foothills of the Andes, however, the country has world-class shale resources in the Neuquen Basin's Vaca Muerta (Dead Cow) and Los Molles formations.

The U.S. Energy Information Administration estimates Argentina has the world's fourth-largest technically recoverable shale oil resources at around 27 billion barrels, putting it behind only Russia, the United States and China.

The government recently updated the energy laws to ease exchange controls for investors in the oil and gas sector, harmonise treatment across provinces and provide more favourable fiscal terms.

Many observers remain sceptical, however, about whether shale can be successfully developed without a fundamental change in the business climate.

"Flogging a Dead Cow" was the headline of an article that appeared in the Economist magazine in July 2013, typical of the attitude of the international media.

But there is another side to the story, which suggests Argentina could be one of the first large shale plays outside the United States ("Flirting with default, Argentina enjoys drilling boom" July 21).

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