Juan Galt's Big Chance

An Anti-Statist President channeling Ayn Rand. Abundant resources. Argentina still won't be easy to fix.

“The hardest thing to explain is the glaringly evident which everybody has decided not to see.” - Ayn Rand

For months, the western world’s legacy media has twisted themselves into pretzels trying to portray Argentina’s new libertarian President Javier Milei as variously “alt-right” and “right-wing”. Likening him to Donald Trump, Jair Bolsonaro, Italy’s Prime Minister Giorgia Meloni, and recent winners of elections in The Netherlands and western Germany is either ignorant or intentionally misleading.

Milei’s rhetoric clearly distinguishes him as an anti-Statist libertarian. Ripping Post-it notes with the names of the Ministries he threatens to eliminate off of a white board while yelling “afuera!” (“out!”), Argentina’s new President sounds more like Juan Galt™, a character in a sequel to Atlas Shrugged, than one who could honestly be labeled as “right wing” or “alt-right”.  

On a trip to a rural area of Buenos Aires province back in May, we engaged in long conversations with many amazing Argentines about the country’s incredible history, people, and its present troubles. We did not see Milei’s victory coming. But we left with the sense something different, and big, was about to happen.

Commodities led Argentina to prosperity at the turn of the last century, and in a world where food and energy are still indispensable to life, they are likely key to its emergence from nearly 100 years of collectivist wreckage. Old standbys – grain and livestock – that helped build Argentina into one of the world’s most vibrant economies a century ago will continue to be foundational to its recovery.

But Juan Galt’s big chance to turn around Argentina’s economy may depend on a different commodity: energy. An oil and gas deposit known as “Vaca Muerta” (“dead cow”) and enormous reserves of one of the world’s most in-demand “energy transition” metals could be game changers. But, like everything else about Argentina’s recovery, the path will be difficult.

How much potential exists in Argentina’s Vaca Muerta oil and gas field? How much lithium does Argentina have? How does the value of these resources compare to the nation’s debt? And what are some of the obstacles to capitalizing on these resources in order to help turn the country around?

We begin at the turn of the last century. In 1896, adjusting for inflation and cost of living differences, only five countries worldwide had higher GDP than Argentina – the U.S., UK, Switzerland, Australia, and New Zealand.

A few years prior to WWI, Argentina’s per capita GDP was on par with The Netherlands, and in Western Europe was only exceeded by the UK, Belgium, and Switzerland. In 1913, the country's per capita income was slightly greater than France and Germany, and significantly greater than Italy's or Spain's. Argentina had a gold stock of ~£59 million - almost 4% of the world's monetary gold - and generated ~1.2% of the world's GDP, driven largely by export of agricultural commodities.

Argentina remains a world leader in key agricultural commodities today. It is the world’s 3rd largest producer of soybeans, 3rd largest producer of sunflowers, 4th largest producer of corn (maize), and 5th largest producer of beef.

Oil was first discovered in Argentina around 1907 in southeastern Chubut province. By 1922, Yacimientos Petrolíferos Fiscales (YPF) was created as the world’s first state run oil company. Privatized beginning in 1993, then purchased by Spanish energy firm Repsol in 1999, only to be nationalized under President Cristina Fernandez de Kirchner’s socialist government in 2012, part of President Milei’s platform includes privatizing YPF once again.

About two years prior to Kirchner’s nationalization, YPF-Repsol discovered the enormous Vaca Muerta oil and gas deposit underlying >31,000 square kilometers in Argentina’s Neuquen Province. The International Energy Agency (IEA) states that the deposit contains “the 2nd largest reserve of shale gas and the 4th largest reserve of shale oil worldwide”.

Today, Vaca Muerta produces around 300,000 barrels per day (bpd) of oil and Neuquen officials believe it will produce over 400,000 bpd in late 2024, with potential to reach 1 million bpd by 2028. According to the U.S. Energy Information Administration (EIA):

The Vaca Muerta shale formation has technically recoverable resources of 308 trillion cubic feet of natural gas and 16 billion barrels of oil and condensate within 8.6 million acres, and it is geologically comparable to the Eagle Ford shale play in southern Texas.

Dead Cow Fracking | Shutterstock

In November, ten days before Milei’s election, Exxon launched a bid for an oil pipeline to increase capacity in the Vaca Muerta.  In the week after his victory, YPF’s stock price increased by almost 70%.

Consider the value of the hydrocarbon reserves in the Vaca Muerta in the context of Argentina’s sovereign debt of ~US$400 billion. Setting aside critical questions of recoverability, production cost, where the capital might come from (and at what cost), and the many political, technological, infrastructure, and labor questions, capitalizing on even a fraction of its hydrocarbon deposits is a potential road out of the economic box canyon for Argentina.

At West Texas Intermediate crude (WTI) spot prices, sixteen billion barrels of oil has a market value over US$1.2 trillion. At U.S. Henry Hub spot prices, 308 trillion cubic feet of nat gas has a value of ~US$800 billion. Because landed European LNG prices are about 5-6X U.S. Henry Hub spot prices, gas in the Vaca Muerta formation represents potential of almost US$4.5 trillion at current European LNG spot rates. “Leave it in the ground” climate enthusiasts witnessing the deteriorating living conditions in Argentina should answer for their objections to the country’s exploiting these resources.

In the advanced world’s foolhardy rush to electrify everything and replace internal combustion engine vehicles with electric vehicles (EVs), Argentina holds another important resource advantage. The northwestern provinces of Jujuy and Salta are located in the “lithium triangle,” an area of desert salt pans near its borders with Chile and Bolivia believed to contain up to 60% of the world’s total lithium reserves.

Fewer than 30% of Argentina’s potential lithium reserves have been prospected, but lithium is Argentina’s fastest growing mining segment. With the enormous gap between advanced nations’ EVs and utility scale battery storage aspirations and current global lithium production, Argentina stands to gain economically from long-term growth in lithium demand. But without the ability to process raw lithium into battery grade chemicals at scale (a market dominated by China), Argentina will only be able to capture a portion of the value chain from its lithium deposits. As a May 2023 Wall Street Journal story noted, China is already spending billions next door in Chile and Bolivia pursuing interests in lithium mines.

Boku Bucks Brine in Argentina | Shutterstock

Despite Argentina’s enormous opportunities in agriculture, traditional hydrocarbon energy, lithium and other “energy transition” metals, years of deeply embedded Statist politics have left its economy destabilized and its currency debased. This will make attracting foreign investment and ramping needed technologies at scale a herculean task. American energy interests weighing decadal capital investments in advanced hydraulic fracturing technology in the Vaca Muerta see the ghost of nationalizations past everywhere. And for good reason.

For years, Argentina’s state-owned oil and gas enterprise YPF has been embroiled in litigation over the firm’s 2012 nationalization. In September 2023, a U.S. District Judge awarded two investors - Petersen Energia (Spain) and Eton Park Capital Management (NY) -  $16.1 billion including interest for damages suffered in the nationalization. YPFs market capitalization is presently less than half of the award, an amount equal to ~20% of Argentina’s budget, making an unsustainable debt problem even worse.

In a late October motion, Argentina officials requested the court stay enforcement of the $16.1 billion final judgment pending an appeal without bond or impose a temporary stay of enforcement for 30 days. On December 21^st, Judge Preska denied the motion, ordering the Republic to either post a bond or other assets to the Plaintiffs by January 10, 2024, or seek an expedited Appeal by the end of January. Yesterday, President Milei said in a TV interview that he was considering issuing a “perpetual” bond without a fixed maturity date to pay for the award. Juan Galt took the opportunity to throw shade at Buenos Aires Socialist governor, Axel Kicillof who he said spearheaded efforts to nationalize YPF, suggesting the bond would be paid by the creation of “the Kicillof tax”.

Deeply rooted Peronist Socialistas in Argentina’s legislature will attempt to thwart Milei’s ambitious plans. Many will fancy themselves as defending the country from a leader Argentina’s State-friendly media will endlessly paint as a mashup of Trump and Bolsonaro. They will have help.

Environmental and indigenous rights groups will rightly worry about the consequences of oil and gas exploitation in Neuquen and lithium mining in Jujuy and Salta provinces, and we expect them to try to constrain both productive enterprises. The day prior to Milei’s inauguration, British media site The Guardian summarized environmentalists’ concerns nicely with the headline “From horrible to merely bad: will Javier Milei take his chainsaw to the environment in Argentina?”, taking care to include “..the new far right President” in the subtitle.

Hydrocarbon energy production in South America will be painted as historically destructive outside the context of climate change, with Ecuador and other countries held out as examples. As Ford’s debacle with aluminum in Brazil for the infamous Ford F-150 Lightning showed, even mining in South America that supports the world’s “alternative energy” transition will face endless hurdles, and come with costs.

Collectivist parties will line up against Milei’s economic and energy agenda and will call for “alternative energy” and “green jobs” as a path to recovery in Argentina. The data fails to support such arguments. At present, “renewable” energy in Argentina employs fewer than 35,000 people, and ~28,000 of those work in the country’s hydropower sector. Of the ~2,500 employed in the nation’s solar sector, ~80% work in temporary construction jobs. And Argentina lacks both the cheap capital and manufacturing scale to successfully compete with China for wind turbines and solar photovoltaic panels.

Argentina has important advantages in addition to its natural resources. While the country’s birth rate fell below the replacement rate (2.1 births per fertile woman) in 2017, at 1.89 it is still above Mexico’s (1.82), Brazil’s (1.64) and substantially above Chile’s (1.54). With its birth rate and a median age of 31 years, Argentina has demographic advantages over China (median age 39/birth rate 1.16), Germany (44/1.53), France (42/1.79), the UK (41/1.56), and the United States (38/1.66).

In a world where globalization appears to be waning and regional alignments rising, Argentina has a decided geographic advantage. It is proximate to a resurgent industrial America taking advantage of its own low-cost energy and stability, along with Canada, Mexico, and other South American trading partners. Deepwater port access to western Europe and Asia with the latter’s growing demand for energy and food commodities are favorable to Argentina’s long-term economic prospects.

The Permian basin in Texas has emerged as the world’s swing producer of oil worldwide thanks to fracking. Argentina’s Vaca Muerta becoming a second swing producer in the Americas could change the geopolitics of oil, reducing OPEC’s leverage in the Middle East and Russia’s determination to use energy as a strategic weapon, outcomes that would serve many aligned interests for America and Argentina.

We close our final piece for 2023 noting that Argentina’s precarious economic condition brings us full circle, back to a key theme of this Substack. Whether caused by decades of failed economic policies as in Argentina, or the combination of absurd environmental, energy and economic policies over a shorter period as in Europe and particular Germany, those at the bottom of the income scale suffer the worst consequences. While Argentina’s woes are domestic, Europe’s affected others, particularly Southeast Asia and Africa.

Javier Milei has an uphill battle as he tries to lift Argentina from decades of economic doldrums, but also a mountain of resources with which to work. Extracting those resources will not come without environmental cost.

When climate and environmental activists attempt to constrain Milei’s efforts to use Argentina’s natural resources to lift its citizens to prosperity, they should be confronted with a simple question: After standing by idly while China used coal to lift hundreds of millions of its citizens from poverty, even using forced labor in XinJiang to supply solar panels for advanced nations’ “renewables” hunger, on what basis do you object to Argentina using its natural gas, oil and lithium to do the same?  

Be wary of those who would use the environment to stand in the way of Juan Galt and Argentina’s big chance. As we have said from the beginning, the planet is going to be fine, worry about the people.

This post is dedicated to Tomas and Maik. Fingers crossed, friends.

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