Shale Renders the 'Obsolescing Bargain' Obsolete: Political risk and foreign investment in Argentina's Vaca Muerta. (December 2021) - Collins, Gabe
Abstract: Argentina is a risky place for foreign investors, with frequent political swings from right to left, weak enforcement of contracts and property rights, endemic corruption, combative unions and a volatile macroeconomic environment. And yet, between 2013 and 2019 IOCs invested $13 billion in developing oil and gas concessions in Argentina. However in contrast to past investments, which were in conventional developments, these recent investments have been almost exclusively in unconventional developments in the Vaca Muerta shale play. We hypothesize tight oil and shale gas extraction is exposed to fewer expropriation risks than conventional oil and gas, and as a result, Argentina is likely to attract more investment in the Vaca Muerta formation than would otherwise be realized given its troubled history. Moreover, while we focus on Argentina, the case may have implications for the global oil market. If risk is institutionally and structurally lower in shale investments, this realization could encourage wider proliferation of shale production outside the United States. Highlights: Argentina meets many key prerequisites for FDI into shale resource development. Natural resource-directed FDI must clear sovereign risk hurdles to profitability. The short-cycle nature of shale changes the calculus of expropriation risks. The short-cycle of shale production reduces expropriation risks in Argentina's Vaca Muerta. Government failure to maintain contractual terms can result in foreign investor departure.