With an area about the size of Belgium, Vaca Muerta is one of the world’s biggest shale deposits. The sprawling area in Argentina has caught the attention of oil majors like Chevron, ExxonMobil and Shell, which are plowing billions of dollars into Neuquén, a western province home to most of the deposits.

Investment has averaged an annual $7 billion to $10 billion since 2013, encouraging the government to forecast that Vaca Muerta could help double national energy output from levels attained in 2018 to 1 million oil barrels per day (bpd) and 260 million natural gas cubic meters per day (mcm) by 2023.

While the new resources are expected to address energy shortages within the country, a sizeable portion is earmarked for export, which would bring in dollars and ease Argentina’s trade deficit. Over the same 2018-2023 period, the government says oil exports could grow to 500,000 bpd from 60,000 bpd, and gas to 80 mcm per day from less than 10 mcm.

The production growth from the first 5% of the acreage under mass development is already reducing dollar outflows for energy imports. The energy trade deficit tumbled to $545 million in the first three quarters of 2019 from a record $6.9 billion in 2014, when dwindling oil and gas production brought energy shortages.

Suzanne Minter, director of energy solutions at S&P Global Platts, says Argentina has the potential to one day compete with the United States, the world’s biggest oil and gas producer. If Argentina could fully develop Vaca Muerta, she says it could export crude to Asia when traffic congestion at the Panama Canal pushes up prices for deliveries from the US Gulf Coast.

It could also compete in liquefied natural gas (LNG) shipments to Asia, where demand is rising and prices are highest, she adds. Argentina can be a counter-seasonal supplier, selling supplies in its summer when demand is low to satisfy peak winter needs in the northern hemisphere.

Argentina has enviable shale resources — the second largest resources in the world for gas and fourth for oil. It also has a century-old oil industry, universities pumping out new engineers, and a culture that doesn’t snub the sector or get too much in its way. Indeed, Argentina is one of only four countries — along with Canada, China and the United States — that has put its shale resources into full-scale production.

This feat has led economists to suggest that Vaca Muerta could become a second source of what the country needs most: dollars. Of the nation’s total export revenue, 64% comes from crops and food products mostly derived from the Pampas agricultural belt, and only 5% from energy products, according to government data.

“I am convinced that over the next 10 years, with the developments in conventional as well as unconventional and offshore oil and gas, Argentina could have two Pampas at its disposal. This would make a surplus of dollars possible,” says Martín Redrado, an economist and former central bank president.

The dollars from Vaca Muerta’s investment and exports, he says, can pull Argentina out of the “stop and go cycle” it has been trapped in for nearly a century due to a persistent fiscal deficit, allowing it to finally grow sustainably.

The prospects are bright. “Some wells are among the best wells that we have in the world, and they are certainly very competitive with good wells in the Permian Basin,” the biggest shale basin in the US, says Sean Rooney, head of Shell Argentina.

But having natural resources is not enough, he and others say. Access to competitive financing, economic stability and legal security top the wish list of conditions needed to develop Vaca Muerta. Daniel González, CEO of Argentina’s state-backed YPF, says that to commit billions of dollars in development money, “investors need for the rules to be exactly the same when they complete the project” as when they start.

Argentina doesn’t have a good track record when it comes to playing by economic rules. The left-leaning governments of 2003-2015 imposed capital, currency, price and trade controls on the sector. If that wasn’t enough to discourage investment, the government renationalized YPF. As investment declined, energy production sagged, shortages hit and energy trade swung into deficit.

President Mauricio Macri, who steps down from office in December, improved conditions early in his presidency. But a financial crisis in 2018 pushed the inflation rate to 55%, the benchmark interest rate above 60%, and caused the sovereign to default on some debts.

To contain public discontent, Macri froze gas tariffs and capped diesel and gasoline prices, cutting them close to breakeven for producers.

In response, producers slashed investment. “If a project doesn’t have the capacity to recover the investment, we won’t do it,” YPF’s González says.

At the same time, credit has moved out of the reach of most domestic companies. High local borrowing rates of more than 10% may not be an issue for oil majors that can borrow abroad at 2% to 3% for Argentine projects, but it is a constraint for smaller local service suppliers that are essential for any project.

Access to credit and reasonable product prices are key, agrees Carlos Ormachea, CEO of Tecpetrol, the country’s third-biggest gas producer — and biggest in Vaca Muerta. “We need to have a cash flow that shows it is possible to recover the capital we invest.”

A lot of money is needed. Daniel Montamat, a former national energy secretary and board member at YPF, says that for Vaca Muerta to achieve its full potential, investors need to pony up $10 billion to $15 billion a year.

Daniel Ridelener, CEO of Transportadora de Gas del Norte, a leading gas pipeline operator, says that adequate conditions could lead to “a boom” in investment in Argentina.

But can the new government of left-leaning Alberto Fernández — or any administration, for that matter — promise these conditions?

When asked, Montamat admits he has doubts. “If you look at the history of Argentina, volatility is going to win,” he says.

The key, he adds, is the willingness to make hard political choices.

President-elect Fernández has said he supports the development of Vaca Muerta, but even oil companies say that a government endorsement is only part of what is needed. Argentina’s economy and public finances must be put back on track if the financing is to be available for Vaca Muerta.

In the meantime, companies are getting by as they can. YPF has hired a floating liquefaction terminal to export an average of 2.5 mcm of LNG per day, a new outlet needed for production growth. The gas pipeline capacity out of Vaca Muerta maxed out this past winter. While companies can expect excess capacity in the summer when heating demand declines, Ridelener says it is too costly to increase output and then shut wells for four months of the year. “The problem is not supply, it is demand.”

More demand can come from increasing sales over existing pipelines to Brazil, Chile and Uruguay, but most of the growth will have to come from “sending it out to the world,” S&P’s Minter says. This will require building a $2 billion gas pipeline — a two-year project — and a $5 billion LNG export facility that is estimated to take at least five years. Both projects are under study but lack financing, leading Minter to suggest that, in the meantime, floating LNG terminals like YPF’s “will probably be the answer.”

Texas-based Excelerate Energy is looking to build a liquefaction terminal on a modular basis, making it easier to finance, says Gabriela Aguilar, the general manager in Argentina. It would begin with 4 mcm per day of capacity in 2022, increasing to a target of 16 mcm. “We can start by using the existing infrastructure, both off-peak transport capacity and processing capacity,” she says.

Another option for financing is to pre-sell the output for the next 20 to 30 years, says Ray Zucaro, chief investment officer at RVX Asset Management in Miami. It would be similar to what Rosneft has done since the US and European Union imposed sanctions on Russia’s energy sector in 2014, limiting its access to financing. “Something could be structured like that for Vaca Muerta, with a super-secured trustee to buy every oil and gas drop that is sold outside the country,” such as China, Zucaro says.

Argentina faces a sense of urgency to develop Vaca Muerta. Most producers have already halted shale gas drilling this year, preferring to concentrate on oil because it has higher margins and more immediate export possibilities. Existing pipeline capacity can handle some two years of production growth. The problem is that the strategy, while financially sensible for producers, could trigger gas shortages once again. Shale wells naturally decline in production by 70% in a couple of years, meaning that more wells must be drilled to sustain output from a field, says Montamat.

With conventional gas production also declining, if the pace of shale gas production doesn’t pick up, Argentina will have to ramp up imports — and lose dollars — again, he says.

The silver lining is the fast production growth of Vaca Muerta. “You can drill 10 wells and have 5 million cubic meters per day of production in a month,” says Mauricio Russo, commercial director of Oilstone Energía, a smaller oil company.

That capacity is what is keeping the sector optimistic despite the tough economic conditions and political uncertainty. Montamat estimates that if the economy stabilizes and interest rates decline to 4% to 5%, like in most neighboring countries, a surge in Vaca Muerta’s oil production can take the energy trade surplus to as much as $6 billion in 2023. Then gas exports could add another $10 billion annually by the end of the decade.

“The prize that we have before us,” says YPF’s González, “is enormous.”