| BUENOS AIRES
BUENOS AIRES Jan 11 Argentina made a move to
lower its high labor costs this week with a deal to reduce
benefits for workers in the country's immense Vaca Muerta shale
oil formation, but the resource may remain largely untapped
until world oil prices recover further.
Vaca Muerta, which is Spanish for Dead Cow, is a shale gas
and oil formation the size of Belgium in the heart of the region
of Patagonia and is essential to Argentina being able to become
self sufficient in energy.
President Mauricio Macri hopes a pact he has negotiated with
unions and provincial authorities will jumpstart investor
interest in developing the field.
The government trumpeted signs this is already happening
with $5 billion in planned 2017 investments from major oil
companies including $2.3 billion from the state-owned YPF SA
Other companies Macri named as signatories to the accord,
including Chevron Corp and Royal Dutch Shell Plc
, declined to comment.
Despite the initial spurt of investment, the pact looks
unlikely to realize Vaca Muerta's potential on its own.
"The deal is a necessary but not sufficient condition," said
Luisa Palacios, energy specialist with Medley Global Advisors.
Ultimately, she said, unlocking private investment in Vaca
Muerta will hinge not just on improving investment conditions
but also on higher international oil and gas prices.
"This deal goes in the direction of flexibilizing costs,
which is important in the Vaca Muerta basin given that they
still have some ways to go on reducing the cost structure as the
U.S. shale industry has done," Palacios added.
Brent crude oil was trading at about $55 per barrel
on Wednesday, less than half the $115 price in June 2014,
limiting the cash companies have to invest in a country with
Argentina's history of policy and labor volatility.
Investment in Vaca Muerta, which got its name from the
formation's shape resembling that of a side of beef hanging in a
butcher shop, has been hobbled by decrepit infrastructure in its
home province of Neuquen, rigid labor contracts, and the threat
of steep provincial tax and royalty increases.
One of the constraints removed by the deal has to do with
the minimum number of workers that union contracts say must be
on hand to work at each well. The rule has been a disincentive
for companies to bring new fracking technology to Argentina,
because that technology requires fewer employees to operate it.
"Labor reform is a key component to bring additional players
into this market," said JP Morgan analyst Javier Zorrilla.
"There are still things that can improve but the agreement
is a step in the right direction," Zorrilla said.
Argentina will offer a subsidized price of $7.50 per million
British thermal units of natural gas produced at new wells
through 2020. The price is more than double that of front-month
natural gas futures on the New York Mercantile Exchange.
Some of the highest-producing wells can be profitable below
the government-subsidized price, said Robert Lewis, senior
research analyst for Latin America upstream at IHS Energy.
"To the extent that those wells are repeatable, there's a
lot of money to be made," Lewis said.
(Additional reporting by Luc Cohen; editing by Christian Plumb)