Oil and gas companies on Tuesday have pledged to invest at least $5 billion in Argentina this year and more than double that annually in coming years after unions agreed to lower labor costs, President Mauricio Macri said.
Industry executives hailed the agreement, saying it will cut drilling costs and make Argentina’s oil and gas sector more competitive globally. The three-party deal also calls for the government to maintain a minimum floor price for newly produced natural gas through 2021, industry officials said.
“We would likely invest 20% to 30% less this year without the agreement,” Miguel Gutierrez, chairman of Argentine oil company YPF, said after attending the announcement by Mr. Macri.
State-run YPF plans to invest almost $2.3 billion in 2017, Mr. Gutierrez said. The company accounts for about half of all the oil and gas investment in Argentina and about 90% of its new wells.
The deal, which for now is a verbal agreement, will help YPF reduce capital expenditure costs by about 10% and operating costs by 30%, Mr. Gutierrez said.
Argentina is home to some of the world’s largest unconventional oil and gas resources in Vaca Muerta, a vast swath of land in windswept Patagonia. Deep beneath red rocks and desert scrub lie 27 billion barrels of technically recoverable oil and 802 trillion cubic feet of gas trapped in a layer of shale as much as 1,200 feet thick, according to the U.S. Energy Information Administration.
That is enough oil and gas to power Argentina for decades and turn it into a top energy exporter. For most of the past decade, though, high labor costs have combined with price caps and government regulations to make drilling in the area more expensive than in the U.S., where unconventional oil and gas output has surged.
Argentina’s unions have also spooked investors—in some cases requiring double the number of workers to operate a rig than at unconventional fields in North America, industry officials say.
Concern about layoffs led labor leaders to agree to make it easier for companies to manage drilling sites. For example, the agreement will allow companies to determine when work at drilling sites should be suspended because of weather, union and industry officials said Tuesday.
“This is a very important first step,” said Daniel Gerold, director at G&G Energy Consultants.
Mr. Gerold said a recent move by Mr. Macri to eliminate taxes on oil exports will also help boost investment.
Under the deal, the government will continue subsidizing the price of gas at $7.50 per million British thermal units, gradually reducing that to $6.50 in 2021.
Aides to Mr. Macri said they hope Tuesday’s agreement will be the first of many across multiple industries, all aimed at lowering operating costs for companies in Argentina.
Foreign investors have praised Mr. Macri’s policies since he took office a year ago, but some remain cautious about investing in Argentina. One reason is that investors are waiting to see how durable Mr. Macri’s policies are and how much political sway he will retain after midterm elections in October.
Mr. Gutierrez said Tuesday’s deal should help YPF attract investment.
YPF, which signed multibillion-dollar joint ventures with Chevron Corp. and Malaysia’s Petroliam Nasional Bhd., or Petronas, under previous Chief Executive Miguel Galuccio, is already holding “very important” joint venture talks with four to five foreign investors, Mr. Gutierrez said.
“I’m hopeful we’ll be able to close at least two deals this year,” he said.
