BUENOS AIRES, Jan 11 (Reuters) - 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)