The 2024 BRICS Expansion: Risks & Opportunities
With its 15th summit on August 2023 BRICS gained increased attention. The main focus of the summit was on the potential enlargement of BRICS by admitting new members. During the summit, it was announced that 6 countries - Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates - had been invited to join the group, with their official entry into the bloc set to take place in January 2024.
The expansion of BRICS has raised questions regarding the implications for international politics and economics. And while most analysts seem to agree that it means something significant, it remains unclear what exactly. This report, therefore, analyses the potential risks and opportunities of the expansion, with a particular focus on the commodities sector. Our analysis addresses questions regarding the interests of BRICS+ countries, the challenges and opportunities for the bloc itself, and the wider commodities sector.
Catching Up to The Rat Race: Operation Expansion in Vaca Muerta
Argentina is home to the second and fourth largest non-conventional shale oil and gas deposits in the world, respectively. Known as Vaca Muerta, this shale field spans over 7.5 million acres and harbours around 308 trillion cubic feet of non-conventional gas and an estimated 16.2 billion barrels of oil. Since extraction activities began in 2011, Vaca Muerta has been the subject of political and social strife, causing setbacks in production and infrastructure development, preventing it from reaching its output potential. In recent years, joint efforts from the Argentine government with gas and oil companies, namely Yacimientos Petrolíferos Fiscales (YPF), Exxon and Petronas, have reinvigorated expectations for a new 'shale boom'.
YPF’s Ambitions
At the forefront of production revitalisation efforts lies the majority state-owned company YPF. Earlier this March, the energy company announced their five-year plan to double their oil output and raise natural gas production by 30% through the expansion of operations in Vaca Muerta. Of the $5 billion in capital expenditure guidance put forth by the company, $2.3 billion will be allocated to operation expansions in Vaca Muerta.
Nearly $700 million will be invested in infrastructure to support the growth in output, namely oil and gas facilities, with the main growth expected in unconventional reservoirs. YPF has also partnered with major oil superpowers on various projects. Shell revealed plans to invest $300 million in YPF's five year plan, seeking to reach daily production of 15,000 barrels by 2024. A $10 billion joint venture with Petronas will develop a 640 km pipeline from Vaca Muerta to the Buenos Aires province, connecting with the north pipeline systems. This pipeline will be concluded in 10 years and will provide a liquified natural gas (LNG) capacity of 25 million tons per year.
On June 20 2023, the construction of the Presidente Nestor Kirchner (PNK) pipeline began, requiring a $2.7 billion investment that will allow a daily gas transport increment of 11 million cubic metres. This investment is arguably the most important development in terms of infrastructure, as it will provide ease of transport within Argentina to neighbouring countries. This represents the Argentine government’s ambition to make Argentina an energy exporter, establishing itself as the main gas and oil provider to South American countries.
Illustration of Presidente Nestor Kirchner Gas Pipeline (Yellow Line)
Source: Energía Argentina
Shale Déjà Vu
Vaca Muerta has been touted as the protagonist of a new Shale boom by many, yet its performance as of late has contradicted these bold claims. Unlike the United States, site of the latest Shale revolution, Argentina struggles with immense political risk and economic instability. In this year alone, annual inflation is forecast at 146%, and the economy is set to shrink by 3% relative to 2022. The country is extremely polarised and ideologically divided, causing parties with conflicting ideals to come into power and then deviate from the previous governments' efforts. This lack of consistency and stability has led to various defaults, rising deficits, and stagnant projects that have inhibited the growth of the oil and gas extraction sector.
The Argentine shale reserves are comparable to the US', with an estimated 30 billion fewer recoverable oil barrels and 137 trillion more cubic feet of shale gas. It was the US’ superior pipeline infrastructure and favourable government policy, however, that facilitated its shale expansion. Current estimates provided by McKinsey & Company place Vaca Muerta breakeven prices at $36 per barrel of oil and $1.6 per million British thermal units for gas, providing ample opportunity for investment payoff. The current potential output of shale reserves in Vaca Muerta far exceeds the capacity of pipelines and extraction systems. In fact, production is already overwhelming workers in extraction facilities, and the expansion initiatives will only be able to meet output growth in the long run. The US, on the other hand, was able to expand its pipeline infrastructure to meet growth and output standards. The use of subsidies, tax credits, and reductions in drilling expenses also provided increased profitability that drove investments and allowed drilling operations to grow rapidly in the US. The previous Argentine government changed the interpretation of subsidies and removed support from energy companies, causing millions in losses for foreign companies. The current government has reinstated many subsidies to the sector, yet these changes between governments cause uncertainty that deters foreign investment and opportunities for growth.
Risks
Argentina is set to have elections in October, where the country will change its president, vice president, members of Congress, and governors. The current president has announced he will not run for president, and the remaining prospective political parties differ greatly in their approaches to governance. The fierce opposition between these parties will generate issues within Congress and make passing laws and approving state projects more difficult, potentially harming government projects or regulation changes to incentivise growth in Vaca Muerta. One of the main presidential candidates, Javier Milei, has voiced his plan to completely privatise YPF to prevent it from being used as a political tool. His plans for Vaca Muerta include implementing a consistent long-term production growth plan that alters the legal framework of the sector. This approach aims to reduce the power of the government, much like many of his other policies, and clashes greatly with the other political parties. The main opposition party, Juntos Por El Cambio, aims to foster the sector's growth by increasing the government's involvement in the form of subsidies and state investments, ultimately driving economic growth. The differences between candidates, and the current economic conditions, create uncertainty that makes Vaca Muerta a poor investment choice for many. Fear of privatisation also weighs on the sector, as a reduction of the state’s involvement would interfere with the current pipeline projects that are dependent on government funding.
For years on end, local indigenous people have voiced their disapproval of oil and gas extraction activities in Vaca Muerta. The Mapuche people have asked the government to review their plans for the new PNK pipeline to make sure it does not interfere with indigenous communities. Their concern for the environmental impact of these activities is also shared by various activist groups. Although the issue has not caught the attention of international organisations yet, many anti-fracking associations have begun to take notice. Various domestic activist groups, such as Greenpeace and Confederación Mapuche de Neuquén, have worked in cohort with local communities to cause disruptions by blocking extraction and construction sites, resulting in great losses in production. The construction of new pipelines has greatly aggravated these groups, promising issues in the near future. The extraction sector relies heavily on these pipelines, so the vulnerability to protests and further delays in construction is extremely high.
Recently, the International Rights of Nature Tribunal opened a case against fracking activities in Vaca Muerta. A delegation of the organisation concluded their visit to Vaca Muerta and presented their findings to the Deputy Chamber of the Argentine National Congress. In the presentation, the delegation highlighted water pollution, lack of water availability, damage to wildlife, and loss of fertile land in Rio Negro and Neuquen were a direct result of extraction activities. This initiative is one of many attempts to pressure Congress to enact laws that will safeguard the environment and surrounding indigenous communities. The laws and regulations that could result from these efforts would hinder extraction activities by disincentivizing companies from investing in the region through legal and financial sanctions, greatly impacting the development and profitability of the Vaca Muerta project. As extraction operations continue to expand and oil and gas production increases, these groups will likely intensify their efforts and take advantage of the delicate break-even balance of projects to pressure relevant authorities.
Future Prospects
Argentina still has the chance of experiencing a shale boom. All major political parties have expressed their interest in developing Vaca Muerta to facilitate the country’s economic recovery, although their methods differ. Taking the US as an example would suggest that parties that increase subsidies and tax breaks would be the most successful, but Argentina’s situation differs vastly from the US and should not follow the same exact path. Both approaches to expansion, privatisation and increased government involvement, seek to foster growth and monetise Vaca Muerta to establish Argentina as a shale powerhouse. As long as the government’s ambitions remain constant and funds don’t falter, a path to growth is possible.
Cry For Me Argentina: What the current soybean rally tells us about climate change and food security
Soybeans are a fundamental commodity for the global food chain. While only a tiny fraction of the crop is used directly for human consumption, soybeans are a crucial component of animal feed, and as such indirectly significant for human consumption. This means that soybeans can have a substantial impact on food prices in general. For this reason, the out of season increase in price of soybean futures (ZSH3: CBOT) and exchange-traded funds (ETFs) like the Teucrium Soybean Fund ($SOYB: NASDAQ) could be a potential warning sign of how climate change might adversely impact global food security. This is because many analysts are associating the increase in price to the ongoing summer drought in Argentina and Brazil – two key exporters, accounting for half of global supply of soybeans. Cultivation of the crop in Brazil occurs traditionally in the state of Rio Grande do Sul, whereas in Argentina cultivation is spread across the Argentine Pampas and the province of Santiago del Estero.
Reuters reported on January 12 2023 that up to 90-per-cent of the expected harvest in Rio Grande do Sul will be wiped out in the absence of heavy rainfall – this lack of rainfall in Rio Grande do Sul was also highlighted in the latest agroclimatic monthly report published by the Brazilian Meteorological Institute. Likewise La Bolsa de Cereales (Buenos Aires’ grain exchange) reports that in the event of a severe drought the country will miss its expected harvest by 12.5 megatons, while a mild drought would dampen this loss to seven megatons. According to the same report, the impact of this dry winter could be a reduction of two per-cent of the value of Argentina’s entire agricultural industry this year. The impact this has had on futures is not so pronounced, however. Since December 1 2022 the value of ZSH3 futures contracts maturing in March 2023 increased 3.75 per cent from $1,489.40 to 1,435.60, peaking at $1,546.40 on January 17 2023. Likewise in the same timeframe, $SOYB has risen a modest 1.48 per cent from $27.05 to $27.45, finding resistance at $28.50 on January 12 and January 17 2023.
In the context of near-record global inflation over the last year and a summer drought in South America, it is difficult to pinpoint the exact causal mechanism of the higher-than-average prices of soybean futures. However, the arid weather conditions in Argentina and Brazil have sprung short-term supply shocks which could be driving this out of season rise in soybean prices. Furthermore, other grain ETFs focussing on different crops, such as wheat ($WEAT) and maize ($CORN) are seemingly returning to pre-covid price fluctuations, although they are still dealing with spillover from the Russian invasion of Ukraine. In the long-term, increasing temperatures and decreasing rainfall will potentially reduce supply. Nevertheless, the impact on price remains unclear. Whether climate change will impact harvest cycles, and by extension price fluctuations, or if harvest cycles and price fluctuations occur with the same seasonality as they have done, thus far, remains to be seen.
The untimely nature of this modest increase in soybean prices and the timing of the droughts in Argentina and Brazil do raise concerns for the long-term supply and price of grains in the context of deteriorating climate change. Both in Argentina and Brazil, average temperatures have increased by over 1 degree celsius since records began in the 1930s. Although historical rainfall data for Brazil is not as readily available, the decrease in average rainfall in Argentina since record-keeping began has been around 50mm/year.
Whilst the recent links between extreme climate events, crop cycles, and commodity prices are cause for concern in the long-run, we ought to be prudent in overstating the negative impacts on crop prices and food security. Yield gaps – the difference between attainable/expected yield and actual yield – in economically developed countries exporting barley, maize, soybeans, and wheat have been decreasing as total output has marginally increased. Other environmental and physiological concerns impacting crop health – such as disease and crop resilience – have also been improving yields with the help of new technologies.
In summary, the current supply-side issues will probably make for a very expensive year for soybean futures and, because of the crop’s use in animal feed and oils, probably will have some impact on supermarket shelves too. The impact of the current drought could well be corrected if inflation subsides or indeed, if a recession occurs. But this remains to be seen. With this and next week’s forecasts pointing to some rain in Junín, Buenos Aires – one of the larger soybean pastures in the province – and Rio Grande do Sul in Brazil, there is still hope that some of the South American soybean harvest can be rescued.