25 August 2023

Vaca Muerta: no time to lose

The recent opening of a pipeline that will distribute gas from Argentina’s Vaca Muerta has marked a significant leap forward for one of the world’s largest shale oil and gas reserves. But law firms, companies and the Argentine government are in a race against time to solidify the shale basin’s role in the global energy transition.

While the most optimistic expectations of the energy transition envision the world totally shifting its reliance to renewable energy sources, cleaner fossils fuels, such as natural gas, will still be needed to achieve those goals. The ticking clock to combat climate change, however, leaves little scope for error as Argentina ramps up development at Vaca Muerta.

Supporting global decarbonisation efforts is not the only motive here, there are also significant benefits for Argentina’s troubled economy. The newly opened Néstor Kirchner pipeline, which runs northeast to Buenos Aires, is expected to save Argentina US$1.7 billion on imported fuels this year alone. An additional segment will open in 2025, while a project to reverse the flow of gas imported from Bolivia is also in the works.

The economic losses have become particularly pronounced since Russia invaded Ukraine in 2022. The knock-on effect on the energy market caused prices to soar. José Martínez de Hoz, partner at Martinez de Hoz & Rueda, says this was a “wake-up call” for Argentina.

“On the one hand, continued paying for substantial volumes of liquefied natural gas (LNG) at high prices that could have been avoided if the midstream bottle neck had been addressed in time and, on the other hand, it was losing export opportunities,” he explains.

To date, only 10% of Vaca Muerta’s natural resources has been tapped. But annual export revenues could reach US$30 billion in the next 10 to 15 years if half of the reserve’s potential is unleashed.

An uptick in legal work is expected now that more companies are looking for ways to leverage the wealth of new opportunities at Vaca Muerta. Newcomers to the shale formation will need guidance from firms who have long-standing knowledge of the basin, while existing operators joining forces to take on bigger projects are also likely to generate more legal work, especially as these companies will remain shrouded in regulatory uncertainty for some time.

At present, regulatory shortcomings in Argentina are hindering the progress of LNG export projects, which face uncertainty around securing long-term permits, taxes, foreign exchange guarantees and the treatment of project financing before international arbitration tribunals. Many investors are having to plan projects without knowing what rules will be in place when a given deal closes. To combat this, Bomchil partner Pablo Alliani stresses that firms can help companies lay the groundwork to future-proof their investments by creating “more complex financial management structures” and being “aware of a dynamic regulatory framework”.

But without strong regulatory backing, the support of firms can only go so far. What Argentina needs, says José Martínez de Hoz, is a “credible” legal framework that “enables the bankability of these huge projects”.

The Liquefied Natural Gas Promotion Bill could be the answer to this. Sent to Argentina’s chamber of deputies (lower house) in May, it aims to tackle a number of concerns by offering a range of tax exemptions and reductions. Designed to provide long-term financial stability, the bill also recommends several targets for LNG projects, such as achieving US$1 billion in investments within six years of the project’s approval date. It assigns a regulator, the National Secretariat of Energy, to authorise these projects too. 

But with a general election slated for October, the bill will unlikely gain any real momentum until next year.

“It shows, at least, that the state recognises the existence of the above-mentioned challenges and needs to address them in some way to unleash the significant investment required to make these projects happen,” Alliani points out.

Alliani also believes law firms will see an increase in divestment activity, as companies shed their non-core assets and move their gaze to Vaca Muerta.

These projects will call on firms with the legs to coordinate the range of necessary legal expertise at international, national and local levels. Work will not only involve structuring and negotiating large-scale multijurisdictional contracts but will also demand a nuanced understanding of local labour and environmental regulations and potential harm to indigenous populations.

To provide this level of service, Francisco Romano, partner at Pérez Alati, Grondona, Benites & Arntsen (PAGBAM), stresses the importance of establishing strong legal links outside of Argentina. Physical proximity to Vaca Muerta itself is equally important. PAGBAM, for one, established a presence near the basin two years ago through an affiliation with Neuquén-based outfit Brillo Abogados.

Whether it is the energy transition or gains for Argentina’s economy, time is of the essence when it comes to harnessing Vaca Muerta’s potential. Francisco Macías, partner at Marval O'Farrell Mairal, highlights agility an essential trait for firms at this time, noting that: “failure to anticipate stakeholders’ claims may also adversely impact the timing and financing of projects”.

The situation requires lawyers to respond to the “fast and firm decisions that the federal and provincial governments will have to make to avoid missing the window of opportunity for hydrocarbon projects within the energy transition,” he continues.

“Argentina’s world-class resources need to be developed in the short term, and natural gas reserves from Vaca Muerta are expected to be a key player within the energy transition that the world is discussing right now,” Macías concludes.

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