Recently declared as Argentina’s wealthiest individual, Alejandro Bulgheroni has built his empire in the hydrocarbon industry and is now the honorary chairman of the nation’s largest private energy company, Pan American Energy. With Argentina’s new opening to the world economy for investment, and keynote agreements between provinces, labor unions, and the national government, the investment outlook for Argentina’s large unconventional oil and gas deposits have awakened global attention. Mr. Bulgheroni discusses the new phase for his industry in Argentina’s economic opening.
The Argentine government has announced US$ 42 billion of foreign direct investment within its first year of office. While many economists have praised the change, they insist that such euphoria must be sustained for true, long-term growth. What must occur for this to happen?
The most important issue we need to tackle is rebuilding the confidence in Argentina as a trustable country to invest. The government's first measures right after taking over office were aimed in that direction: settling the conflict with the holdouts, eliminating export taxes in many agricultural products, lifting the currency control and floating the peso, among others. These reforms were necessary in order to start building confidence in Argentina again.
Historically, Argentina's economy has been like a pendulum—and not just in the last twelve years. The current government had to assess the real state of the economy before it could actually start defining the changes. This process takes time and lots of hard work. One of the first moves the government rightfully did was to reestablish the confidence in INDEC - the official statistics institution. Years ago, the INDEC was a very respected and trustable agency that no one would dare refute. After the twelve years of the previous administration, the INDEC's credibility was totally destroyed. Without credible statistics, it is very hard to implement any change.
Now that the business environment is more favorable for investment and the country is regaining confidence, efforts should be focused in unleashing the potential the country has starting with agribusiness, energy and mining.
The country's reinsertion into the global economy will help these sectors to grow; thus, the government will have to negotiate new commercial agreements with the rest of the world so that Argentine products can access new markets under more favorable conditions. Former government’s foreign policy isolated economically Argentina making international trade very complicated. Currently, while neighboring countries such as Peru or Chile are able to export their products to many markets without paying tariffs, Argentina is not. The potential for Argentina’s economy to grow is always present but will be possible as long as the economic reforms in each sector are implemented and the foreign policy reset to make Argentine production more competitive.
The economic potential Argentina has is clear, due to the vast natural resources the country possesses in shale oil deposits, renewable energy potential, a competitive agricultural sector and an educated workforce. However, because of the unstable history of the Argentine economy, investors are still weary. What are they waiting to see in order to guarantee the second round of investment?
The government has placed the right reforms to stabilize the macroeconomic situation and has quite effectively communicated these changes internationally allowing the increase of investments.
I believe that now we should be looking at redefining the country´s economic rules with a sector-by-sector approach. If the right business settings are achieved, then foreign investments will consequently show up. For example, when it comes to agriculture, the decision to invest is made every year. Each time you decide what grain to plant or whether to start raising livestock, you are making an investment decision that entails risk. There are other sectors such as energy and mining where the risk is higher, and investment decisions and payouts take longer. Therefore, investors look for predictability in terms of regulations, which is something the government is working on.
Argentina has large reserves of unconventional hydrocarbons and this is an attractive investment opportunity. However, the decision-making process when investing in shale gas or oil is risky and most importantly takes a long time. You are looking at an investment for the next 40 years. Regarding conventional oil the risk is high, it entails a lot of exploration efforts and it is also a long-term investment. Another important aspect to consider in this sector is the market fluctuations. Nowadays, there is little room to maneuver; the only option is to invest if the price is high, and to stop investing if the price is low. This is the only protection you have as an investor in the oil business. The case of mining is a similar one, where there is long-term planning, investment and payout. Once you’ve invested, there’s not much that you can do to offset international price fluctuation.
For many industries the trade agreements like Mercosur are very important to define investments thus, the government should further pursue this path.
Oil and gas is a talent-based industry. Other leaders in the oil industry have stated that when oil prices drop, the companies are forced to downsize. How do you combine the long-term goals and vision of the company with the need to adapt to the economic cycle in the short-term?
First of all, you try to keep the key human capital of your business. You do not let go these employees, you relocate them. Certain activities such as drilling, services and construction, could be outsourced. We hire contractors, who suffer the most when you are downsizing. When you need more human resources you hire extra engineers and geologists, and you have them working with your core team. These are usually temporary contracts. The same practices go on all over the world.
The service companies are the ones that suffer the most when the oil price is down. When you stop drilling, you do not need to hire the service companies any longer. In the past twelve years, the problem was that the unions did not allow us to release the rigs, the equipment and the crew from the drilling sites. They wanted the machines to keep working, which is not a problem if the price is high or going up. Another problem we used to have was productivity.
The reduction of jobs in the oil sector has forced the workers to become more productive. The development of Vaca Muerta (the world’s second largest shale gas reserves), for example, was not economically viable under the former government mainly because of low productivity and macroeconomic rules. Although we are not there yet, we are on the way to seeing long term oil and natural gas shale investments.
Innovation, technology, labor regulations and macroeconomic rules have a decisive impact on development of non-conventional hydrocarbons.
We are trying to make our workers understand that working hard with higher productivity is better for everyone. I believe that soon, the Vaca Muerta shale will be economically feasible.
Considering many oil-producing countries are currently facing security issues due to terrorism, what role do you think Argentina could have in the world if it were to become a sizeable oil exporter once again?
I do not believe Argentina will become a very strong oil exporter, as we do not have as much oil reserves as a country like Venezuela. We could regain our role as a marginal exporter.
But we have to think not only about fossil fuels; renewable energy-solar and wind power are very realistic and promising proposals for our country. We have to achieve a balanced production of fossil fuels, nuclear energy and renewables. I do not believe we have to depend as much as we do on fossil fuels; we have to use all the other possibilities that we have, and be prepared for what the future will tell us about replacing them.
The Renewable Energy Law states that in 2025, 20% of energy should come from renewables. Many energy companies are making the investment needed for this sector to develop, such as Pan American Energy. Being the largest fossil-energy company in the country, what can they bring to the table?
We are proportionally reducing the energy we use to run our business in the Cerro Dragon oil field. We have approximately 300 MW that are being generated with natural gas. We are closing the cycle to be more efficient. If we develop wind energy, we could profit from cutting down on the amount of natural gas we use, and we could combine both depending on our needs.
We know that the cost of solar and wind power has dropped tremendously, and they are now quite competitive. We have to be in this market as well, and we have to combine what we already have with the upcoming opportunities.
You have been awarded a Wind Park in Chubut through the Plan Renovar Phase 1. Is this your first major initiative in renewable energy? What are your goals regarding Phase 2 and 3?
Pan American Energy through its affiliated Pan American Fueguina presented the Garayalde Wind Park project in the recent Cammesa -Renovar - Renewable Energy Round 1.
The 20-year contract was signed on Jan 12th, 2016. With a total Investment of U$S 40 million the park will generate 105 GWh/year – enough to cover the needs of approximately 20,000 homes.
Rounds 2 and 3 have not been yet presented by the Government, when that happens we will of course analyze the terms and define our participation.
Upon taking office Mauricio Macri pledged to reset the relations between the United States and Argentina. Former President Barack Obama visited Argentina in 2016 and several agreements have been signed between both countries. Soon after that the USA chose Donald Trump as president. With that in mind, do you think that Argentina will have to change its message in order to attract investment from the USA?
I believe Argentina needs to maintain its message: that it is a good country in which to invest and that we want investors to come here, which is why we are trying to tighten the relationship with the USA. I do not see Argentina needing to change this message because there is a new president.
If the Trump Administration makes a turn to more protectionist policies, Argentina has to find a way in which to engage with that policy. There are many different alternatives.
If the USA boosts its economy towards further growth surely the demand on foreign products is going to increase thus, Argentina should be ready for this to happen.
Do you agree with the idea that USA investors have a particular 'wait and see attitude’ when it comes to energy and mining in Argentina? What would make this attitude change?
Nobody wants to be left outside of the game, particularly investors. We just need the one investor to make the first step; the rest will come. This happens in many places around the world. For example, I remember we were kicked off by the government from Turkmenistan, after having done very good for the country. They mistreated us, so we left. As we were leaving, other companies were trying to come into the country. They were not thinking about why we were leaving, they were looking at the opportunity.
The oil business has always been like this all over the world. The same happened with Shell and the gas reserves in Peru. After they were forced to leave, someone else came and cut a deal with the Peruvian government and now has a profitable project. This is what the oil business is like.
We did not have state of the art technology because companies would not bring new equipment into the country, as it was very expensive. And even if they have a profit with this, the companies could not repatriate their profits. This is why we had old technology and low efficiency.
I believe the first move will occur soon since the government changes many macroeconomic rules. Companies will start bringing new technology and equipment. Once one or two start doing this, the others will follow very fast. Investors are already investigating possibilities in Vaca Muerta. Once all the changes are in place development will start. We, and other companies, are already taking some steps in that direction.
You announced a US$ 1.4 billion investment in the Salon Blanco of the Casa Rosada. President Macri affirmed that it was a 'ten-year long bad government policy which had left Argentina without energy to live and to develop'. However, during those years Pan American Energy still invested US$ 9.4 billion.
It was economically viable to invest. In 1998, I had a complicated discussion with former President Nestor Kirchner - he was governor of Santa Cruz back then - because he was pressing for investment and it was not viable to do so. I told him that if we could invest, we would do so. As it happened in 2002, when we started investing again and have never stopped since then.
If conditions imply there will be a profit in the future, we invest. Not because someone tells us to do so. In 2002, many companies left the country and stopped investing; we doubled and even tripled our bet. In 2001, Pan American Energy had 8% of the oil and gas production in Argentina; today, we have 18%. This is because we invested when no one else did. Because of this, we also have the largest oil reserve in the country.
Of course, in order to invest we need some conditions. Due to the characteristics Bridas Group and Pan American Energy have, we can better evaluate the risks we are taking. Our investing partners follow our advice because we are also risking our own money in a country in which we have a lot at stake.
The issues with the development of Vaca Muerta, as I said before, were never related to production itself. They were macroeconomic reasons. The context is changing for the better and many of these issues are likely to soon disappear.
The previous administration gave incentives to gas production. For us, those incentives were good enough to develop tight sand. We started investing in 2014 and have managed to increase our gas production.
But when it comes to shale oil and gas, we have not seen profitability yet. We have just been testing the waters, doing exploration like companies such as Exxon, Total and Shell. We are trying to find out what the possibilities are when it comes to Vaca Muerta development. In order to know what the particular conditions of the shale are we need to drill wells. In the USA, the operators drilled more than 60,000 wells; In Argentina, we only drilled around 600. We have a long way to go to understand Vaca Muerta Shale.
In the USA, they have made very important breakthroughs when it comes to efficiency and technology, which we can benefit from. We do not have to go through the whole learning curve. There will be a learning process related to the local shale, because they are not all the same. But we can learn from the mistakes that have been made in the USA, and try to copy the successes.
As soon as things get better and the companies start bringing the latest technology, we will kick-off every profitable project that we can develop.
Interview by Nicolas Carver, follow him on Twitter at @WorldTempo