Skip to main content

Financial risks cloud development of Argentina’s Vaca Muerta oil and gas reserve

March 01, 2019
Tom Sanzillo and Kathy Hipple
Download Full Report

Key Findings

Many international companies—including Total, Wintershall, Petrobas, Petronas, Pan American Energy (whose largest shareholder is British Petroleum)—have now entered Vaca Muerta, though the process by which they obtained their interests in the region remain opaque.

OpenOil, a Berlin-based organization that provides open data sources and analysis on oil and gas, analyzed the initial large Vaca Muerta deal between YPF and Chevron. The report concluded that the project would need upward of US$9 billion in subsidies in order to make the project viable.

The Argentine government acknowledges that it is the principal driver of development in Vaca Muerta. The plan is for the private sector to take an increasing role.

Executive Summary

The government of Argentina and a network of regional and global oil and gas companies have combined to develop the country’s large fossil fuel reserves in an area of Northern Patagonia known as Vaca Muerta (Dead Cow). The plan is unlikely to succeed.

The plan seeks to double the nation’s oil and gas output within six years. Success in Vaca Muerta is seen by Argentina’s leadership as the key to its economic recovery. The plan faces strong headwinds from current fiscal, market, political and environmental forces that are likely to continue and slow, if not halt, the plan’s progress altogether.


Argentina’s plan requires substantial, long-term subsidization. The country’s leadership has promised significant production subsidies to global oil and gas interests, subsidies it can ill afford. From 2016 to 2018, Argentina reduced these subsidies by 54% (from US$15.6 billion to US$7.2 billion). The Argentine government and economy are wracked by high inflation, currency devaluation, fiscal deficits and a failing trade policy, which required a multi-year US$57 billion bail-out from the International Monetary Fund (IMF), the largest in its history. Going forward, Argentina has agreed to further reduce both production and consumption subsidies. This reduction will come at a time when the country’s energy plan and its partners require more subsidies in order to meet Argentina’s ambitious production goals. Recent actions to reduce subsidies have proven disruptive and signify a broken promise by the Argentine government, according to oil and gas producers.

The organizational hub for development is Yacimientos Petrolíferos Fiscales Sociedad Anónima (YPF), Argentina’s majority state-owned oil and gas company. It is tasked with the strategic energy goal of moving investment from several more mature conventional production zones to the Neuquén Province, the base of Vaca Muerta’s unconventional oil and gas area. YPF has entered into partnership agreements with some of the world’s leading companies, including BP, Exxon Mobil, Total S.A., Chevron, Shell, Equinor and others. The Argentine company is financially ill-prepared to take on this role. Its business plan is tied to heavily to government subsidies, which represent the difference between profit and loss. The company’s financial position is characterized by weak stock performance, eroding revenues, declining cash flow and flat production. It is unprepared for the challenges facing the global oil and gas markets.

Support by foreign investors is critical to Argentina’s energy success. The current energy plan calls for the government of Argentina and Argentine-based companies to pay 64% of development costs. The plan also expects Argentina’s global partners to assume these costs over time. This expectation is unrealistic. Recently, the country announced a substantial reduction in its subsidy program, which prompted Tecpetrol, a key global partner, to reduce production, lay off workers and threaten suit against the government. YPF, Argentina’s leading producer, also voiced its concern that the subsidy reduction would affect financial performance.

Most of the largest foreign companies involved in Vaca Muerta have made it clear that their participation will be hinged on subsidies. Their financial commitments, thus far, have been small and tentative. While partnership agreements are in place, actual development has been slow. The global oil and gas industry is recovering from a decade of value destruction from poor capital expenditures. The industry faces challenges from investors who are increasingly questioning highly speculative new investments. Over the last six years, 31 projects have been launched in Vaca Muerta. Only five are in active development, and some of these are now threatened.

Investors are concerned about the slow pace of development in Vaca Muerta compared with other unconventional gas and oil producing regions such as the Permian Basin and Eagle Ford in the United States. Six years in, Vaca Muerta has completed only 342 unconventional oil and gas wells. By contrast, in 2014, six years into aggressive development of the Permian Basin, 3,560 wells were in production. Eagle Ford completed 478 wells after merely two years of development.

The abrupt reduction in Argentina’s production subsidy program—announced in January 2019 but applied retroactively for 2018 production—is shaking investor confidence. When the government recently announced this reduction, which also halted any new projects, Moody’s rating agency deemed the action “credit negative” for Tecpetrol, YPF and Pan American Energy (BP). Other companies that are affected by the decision include Total, Wintershall and ExxonMobil. Moody’s stated: “This change in energy policy stands to weaken investor sentiment and the business environment in the energy sector, and will likely persuade companies to postpone or reduce capital spending on unconventional gas projects.”

The energy plan faces a wide range of daunting risks, including:

  • Economic recession, with continued currency devaluation and inflation,
  • Increasing public opposition to IMF policies,
  • Investment is largely by Argentine government-controlled companies: From 2012-2017, 65% of actual investments,
  • Investment by foreign companies has been slow with oil and gas companies citing various reasons for their skittish investment stance,
  • Unstable economics of unconventional oil and gas exploration that include high production costs compared to the rest of the world,
  • High infrastructure costs to support oil and gas production and to protect the environment,
  • Lack of interest and investment from oil service supply companies,
  • Low global market prices for natural gas,
  • Competition from other better-positioned oil and gas reserves and competition from renewable and alternative energy sources,
  • Political and policy instability that add unplanned costs due to actions by national and provincial governments,
  • Unstable domestic energy markets, due to actions by provincial governments that may not align with those of the national government,
  • Inadequate water resources, and
  • Opposition and litigation from environmental and indigenous rights organizations.

In light of the many economic and political challenges it faces, the country’s oil and gas production goals seem overly optimistic. The likelihood of these underlying risks emerging will likely ensure that the goals will not be met. How the production shortfalls and energy policy missteps are managed will determine how Argentina’s energy future develops.

Notes About This Analysis:

  1. Significant, rapid currency devaluation makes precise financial reporting difficult. We address this in the paper by showing both dollars (US$) and pesos (ARS) as often as is useful for clarity of understanding and economy of writing. When only dollars are used it is because transactions actually take place in dollars and are relevant to the government’s attempt to attract outside companies that conduct their business in dollars. Dollars remain the main currency for the oil and gas industry globally.
  2. The Argentine government uses numerous programs to provide subsidy payments to companies related to oil and gas production, coal, trade, refineries and labor. Government budget documents do not provide sufficient clarity to determine how much is allocated to each program and how the funds will be deployed. Reporting in budget documents is selective and not easily subjected to aggregation of values and analysis. Individual company financial disclosures also do not typically specify and segment the receipt of cash payments from the government of Argentina or capital expenditure on projects in Vaca Muerta. The Argentine government provides some data and information through official reports but the amount and frequency of reporting is inadequate. The databases consist of company-based reports that are free-standing and relate to progress on meeting development goals. They are company-specific and not tied to public budgets or corporate financial disclosures. In this paper, these sources are supported by news articles and published reports by third-party sources, mostly international and national governments and non-governmental organizations. IEEFA conducts diligence on these sources prior to using them. The diligence work is ongoing and includes further dialogue with the authors of cited work.
  3. Yacimientos Petrolíferos Fiscales Sociedad Anónima (YPF), the country’s largest integrated energy company, is the government of Argentina's hub for the management of Vaca Muerta development. It transacts much of its development business through joint ventures with foreign corporations. These joint ventures typically announce projects, aggregate planned expenditures and sometimes provide timelines for reaching certain goals. Actual expenditures by YPF and joint-venture partners on specific projects or venture agreements identified in this paper are not currently reported under one uniform accounting source. This report relies upon the Energy Ministry’s (Ministerio de Energía y Minería or MINEM) publicly available database of planned and actual expenditures that report on unconventional development by individual companies doing business in Neuquén Province. As with any government reporting, reporting cycles may not correspond with other governmental updating and publication schedules, disclosures may be incorrectly carried over from company reports to public documents, interpretations of categories may vary by company, and public statements attributed to stakeholders may be inaccurate or misleading.

Press release: IEEFA report: Argentina’s Vaca Muerta Patagonia fracking plan is financially risky, fiscally perilous

Please view full report PDF for references and sources.

Tom Sanzillo

Tom Sanzillo is Director of Financial Analysis for IEEFA. He has produced influential studies on the oil, gas, petrochemical and coal sectors in the U.S. and internationally, including company and credit analyses, facility development, oil and gas reserves, stock and commodity market analysis, and public and private financial structures.

Go to Profile

Kathy Hipple

Former IEEFA Financial Analyst Kathy Hipple is a founding partner of Noosphere Marketing and the finance professor at Bard’s MBA for Sustainability.

Go to Profile

Join our newsletter

Keep up to date with all the latest from IEEFA