Javier Milei has started his libertarian economic experiment to transform Argentina. In a series of dispatches, The Telegraph’s World Economy Editor, Ambrose Evans-Pritchard, travels through what used to be one of the world’s richest nations to examine whether “shock therapy” can work.
President Javier Milei has flawless timing. Argentina’s shale boom has reached industrial take-off just as he embarks on his extreme libertarian experiment: a Hayekian free market assault on the delinquent Peronist state and all its works.
The long-suffering nation is swinging very fast from a costly dependence on energy imports, and a chronic leakage of hard currency, to the happier condition of net hydrocarbon exports. The prolific shale basin of Vaca Muerta is finally delivering.
After years of talk and many dropped balls, this arid expanse of northern Patagonia is suddenly starting to look like the next Texas, promising to draw in the serious dollars needed to stabilise the ruined peso and make all else possible.
“It is not the same Vaca Muerta of 10 years ago, and we’re only doing a fraction of what we could do,” said Horracio Turri from Pampa Energy.
The US Geological Survey estimates that the region holds the world’s second biggest reserves of shale gas, and fourth biggest reserves of shale oil. Drilling has begun at another shale basin at Palermo Aike in Argentina’s deep south, so the potential could be significantly larger.
“Oil is what will put Argentina back on its feet because it is going to be a very big source of foreign currency. We have to start thinking like a petro-state because we are a world player in the making. First we have to tackle our infrastructure problems,” said Mr Turri, speaking at the Vaca Muerta Insights 2024 forum.
Those problems start at the crack of dawn every day in the regional capital of Neuquén as 30,000 people try to reach the shale hub of Añelo 50 miles away. It is a lethal Mad Max parade along a two-way road, full of craters, carrying hundreds of trucks skidding on and off the dirt verge.
Many are loaded with specialist silica sand, the lifeblood of the fracking industry. There are too few trailers in Añelo to lodge the workers, so if you want to join the shale rush you take your chance.
Each well at Vaca Muerta needs some 15,000 tonnes of sand, 400 trucks of water, and a constant supply of diesel. Previous governments talked of upgrading the Norpatagónico railway to put an end to this daily ritual but the plans were overtaken by one debt crisis after another. The aqueduct bringing in water for the drilling rigs never got off the ground.
“Infrastructure is something we just don’t do in Argentina, everything has been crumbling for 70 years,” said Prof Alejandro Welbers from CEMA University.
But the needs are becoming more urgent and the stakes ever higher. Vaca Muerta is blessed with high-pressure seams of black marl at a depth of 3,000 metres, up to 450 metres thick, matching the richest layers of the Wolfberry shale in the Permian.
Rig crews from Halliburton, Schlumberger and Weatherford are already a feature of this strange moonscape, dotted with towering pillars of red sand.
McKinsey estimates that new fracking technology – smart drills, geonavigation, multi-drilling from the same pad – has cut production costs to $36 (£29) a barrel, an irresistible business in a world market with a structural price of $80-$90. It is the best low-sulphur light sweet crude. Gas comes in at circa $1.60 (MMBtu), low enough to produce liquefied natural gas (LNG) for export to Europe at competitive cost.
Shale oil output has quadrupled to 380,000 barrels a day (b/d) over the last three years, suddenly beating expectations, and tracking the Permian growth trajectory that so stunned Saudi Arabia, OPEC, and the old petroleum order.
The government target of 1m b/d already looks too modest, with wildcatters in Neuquén talking of Norwegian levels above 1.5m b/d as the potential peak.
“We think we can triple oil and double gas by 2028,” said Miguel Galuccio, founder of Argentina’s Vista Energy, which sank eight new wells here in March alone.
Horacio Marin, YPF’s Texas-trained chief executive and Milei insurgent, says he will make it his business to ensure that Argentina is generating $30bn a year in hydrocarbon exports by 2030 or shortly after.
“We’re doing this for the Argentine republic, and for our children. If we can bring in $30bn we’re not going to have any more exchange rate problems,” he said.
He is pioneering a form of ‘lean fracking’ based on the Toyota manufacturing model.
“We want the construction of an oil rig to be as efficient as the construction of a car. It gets rid of layers of operational bureaucracy and makes us extremely competitive. Not even the Americans are doing this,” he said.
Argentina’s gas has until recently been bottled up in Vaca Muerta for lack of pipelines. The country had to import 80 ship loads of LNG gas in 2022, competing with Europe at nosebleed prices for global supply after Putin’s invasion of Ukraine.
Everything went wrong at once. The worst drought in half a century shut down hydropower generation.
The national soybean crop – Argentina’s top earner – fell by 44pc. It was this that drained dollar reserves and pushed the country into an insolvency spiral.
The Nestor Kirchner gas pipeline came into action last August, too late to save the Peronists, but it is now able to supply Buenos Aires through the approaching Argentine winter. LNG imports are collapsing. The gas balance will switch progressively into a large surplus over the next decade as Vaca Muerta supplies Chile, Brazil, and the Mercosur market by pipeline.
Mr Marin said YPF has contracted two LNG floating terminals with Malaysia’s Petronas. A larger fixed terminal on the Atlantic coast will follow. If all goes perfectly – an enormous if – Argentina’s combined exports of oil and gas per capita may not be that far short of Russia by the mid-2030s.
“Without Vaca Muerta it would be painful to think about Argentina,” says Rolo Figueroa, the governor of Neuquén province, which operates almost as an independent petro-state.
The governor no longer presides at the original Chateau Gris, a two-storey wooden chalet built in Scottish style by the firm John Wright in 1904 with materials shipped from Britain, part of the largely forgotten British and Irish influence in northern Patagonia. It was a lieutenant Ignacio Hamilton Fotheringham who first set foot in Neuquén in the War of the Desert in the 1870s.
President Milei has cut off all federal transfers to the regions in quest of his fiscal surplus. He has cut public investment by 84pc. This drastic austerity has left Neuquén with 413 paralysed projects.
Governor Figueroa is taking matters into his own hands, borrowing from the Inter American Development Bank and issuing $500m of bonds on the open market, offering Vaca Muerta as political collateral.
“We know that we have to monetise it and we have only got a window of time. We have got to get everything right to attract investors,” he said.
Getting everything right has not been Argentina’s forte over decades of misgovernment. The Peronists poisoned the energy well by nationalising the Argentine oil company YPF in 2012, setting off a chain of lawsuits. The fiscal and labour regime has been toxic for foreign capital.
Javier Milei aims to sweep away the thicket of Peronist controls, opening the country’s hydrocarbon industry to global market forces. His RIGI investment law will in principle give foreign oil and gas companies total freedom to repatriate earnings at the market exchange rate, and bring in their own kit without restrictions. It will remove import and export taxes.
It pledges no interference from the Argentine state for 30 years.
“Our guiding principle is that everything should be governed by price signals under the laws of free enterprise,” said the national energy minister, Eduardo Rodríguez Chirillo, a Thatcherite expert on privatisation.
The bet is that global capital will do the heavy lifting on infrastructure once the red carpet is rolled out. It is a risky proposition in a changed world order where industrial policy is de rigueur, and the new gospel is how to leverage private investment with public seed money.
But not every country has a Vaca Muerta to offer. McKinsey says the basin will need $45bn of investment over the next 10 years to reach scale, beyond the means of the Argentine state in any plausible scenario.
Foreign investors are keeping a watchful eye on the Peronist backlash, so far gaining little traction in a country hungry for a fresh start – like washed-out Britain in the 1970s after hitting bottom during the three-day week.
Mr Milei’s omnibus law has successfully run the gauntlet through the lower house of parliament after much horse-trading, but doing better in his showdown with the discredited parties of the ‘casta’ than many expected. The senate will be harder (he has only seven seats) but he carries the big stick of decree power if all else fails, like Emmanuel Macron in today’s France.
Oil state governors of all parties want the package. In a sense, Vaca Muerta has become a national project that transcends other divisions. Argentina’s climate pledges scarcely enter the debate. The economic imperative is too great to worry too much about CO2 emissions. Besides, shale enthusiasts argue that global fossil use is above all a demand phenomenon.
Precisely where the supply comes from is a secondary question.
Ex-president Cristina Fernandez Kirchner can only gnash her teeth and rail at the injustice of fortune, as shale technology and the global commodity cycle deliver nicely for her mortal political foe.
“Milei’s plan is not anarcho-capitalism, it is anarcho-colonial. The recovery strategy is now clear: it’s oil, gas, mines, and grains. He wants to turn Argentina into an extraction country for raw materials. This pre-capitalism takes us back to the days of the Viceroyalty,” she said.
Alternatively, it harks back to the halcyon days before the First World War when Argentina enjoyed a prosperous place as Australia’s twin in the British imperial and commercial system, shipping commodities to Europe. It was the best of times for Anglo-Argentine concord, culminating in Harrods of Buenos Aires, the only foreign branch ever opened abroad.
A century later, Australia still manages to leverage its resource and farming wealth into a high-tech economy of top tier affluence. There is no foreordained reason why Argentina cannot do much the same.
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