A potential natural gas pipeline hooking up Argentina’s Vaca Muerta shale formation to southern Brazil will cost about $5 billion and “pose financial challenges,” according to Buenos Aires-based Wood Mackenzie.

Vaca Muerta

“Southern Brazil remains the most attractive regional market for potential excess gas production from Argentina,” Wood Mackenzie principal Ignacio Rooney told NGI’s Shale Daily. However, “such a project will require long-term commitments on the supply and on the demand side, and Argentina is not in conditions now to take such a bold position. 

“Another factor to take into account is how would a liquefaction project in Argentina might compete, considering the greater commercial optionality that it could provide for the country’s gas production.”

Earlier this month, Brazil’s lower house approved a regulatory framework for the natural gas sector, paving the way for an opening similar to the one seen in Mexico’s gas market over the past six years.

The bill includes restrictions on market participants operating in different segments of the gas market, which would effectively break up the monopoly state oil firm Petroleo Brasileiro SA (Petrobras) has. The bill also guarantees open access on pipelines, a market-based tariff scheme and a policy on storage. 

The bill still has to make it through the senate and be ratified by Brazilian President Jair Bolsonaro.

On the heels of this movement, discussions restarted over a pipeline to transport gas from Vaca Muerta to southern Brazil.

Earlier this year, Argentine state oil firm YPF SA Chairman Guillermo Nielsen said at the World Economic Forum in Davos that a pipeline to Brazil might be a key to unlocking the potential of Vaca Muerta.

This week, Argentina’s ambassador to Brazil, Daniel Scioli, said he had discussed with Bolsonaro and Mines and Energy Minister Bento Albuquerque a 900-mile pipeline from western Argentina to the southern Brazilian city of Porto Alegre.

“This is our big bi-national project,” Scioli told Brazilian financial daily Valor Economico, adding that Brazil needs natural gas and Argentina needs new markets.

He said the project would take three years. A meeting between Argentina’s new energy minister Darío Martínez and Albuquerque is said to be scheduled for later this month. 

Currently, Brazil imports gas supplies via liquefied natural gas (LNG) import terminals and through a long-term pipeline contract with Bolivia. Argentina in 2018 began exporting gas to Chile through existing pipelines after a 10-year hiatus, but it too must import LNG and from Bolivia in the winter to meet increased demand.

Argentina also has been exploring the option of developing large-scale LNG options to send out gas from Vaca Muerta.

The news comes as Argentina tries to revitalize the shale play, which has seen a downturn since the new administration of Alberto Fernández came to power late last year, made worse by the economic impacts of the coronavirus.

Natural gas production in Argentina fell by 12.2% year/year in July to 126.8 million cubic meters/day (MMm3/d), or 4.47 Bcf/d, according to the latest report by the IAE Argentine Energy Institute. Production was essentially flat compared to June. In April, Argentina had zero rigs running, but upstream activity has picked up slowly since then.

Production from Vaca Muerta in July fell year/year to 1.14 Bcf/d from 1.23 Bcf/d. Vaca Muerta has been billed as the most promising unconventional play outside of the United States, and many major energy firms hold acreage in the formation.Argentina also is finalizing a gas tender program aimed at kickstarting production. The proposed tender system would consist of a four-year block auction mechanism starting in October, which would differentiate offers for the peak winter season and the rest of the year, according to IAE. Prices for offers from gas companies would be set at around $3.40/MMBtu.