By Hugh Bronstein
BUENOS AIRES, Jan 11 (Reuters) - Argentina made a move tolower its high labor costs this week with a deal to reducebenefits for workers in the country's immense Vaca Muerta shaleoil formation, but the resource may remain largely untappeduntil world oil prices recover further.
Vaca Muerta, which is Spanish for Dead Cow, is a shale gasand oil formation the size of Belgium in the heart of the regionof Patagonia and is essential to Argentina being able to becomeself sufficient in energy.
President Mauricio Macri hopes a pact he has negotiated withunions and provincial authorities will jumpstart investorinterest in developing the field.
The government trumpeted signs this is already happeningwith $5 billion in planned 2017 investments from major oilcompanies including $2.3 billion from the state-owned YPF SA.
Other companies Macri named as signatories to the accord,including Chevron Corp and Royal Dutch Shell Plc, declined to comment.
Despite the initial spurt of investment, the pact looksunlikely to realize Vaca Muerta's potential on its own.
"The deal is a necessary but not sufficient condition," saidLuisa Palacios, energy specialist with Medley Global Advisors.
Ultimately, she said, unlocking private investment in VacaMuerta will hinge not just on improving investment conditionsbut also on higher international oil and gas prices.
"This deal goes in the direction of flexibilizing costs,which is important in the Vaca Muerta basin given that theystill have some ways to go on reducing the cost structure as theU.S. shale industry has done," Palacios added.
Brent crude oil was trading at about $55 per barrelon Wednesday, less than half the $115 price in June 2014,limiting the cash companies have to invest in a country withArgentina's history of policy and labor volatility.
Investment in Vaca Muerta, which got its name from theformation's shape resembling that of a side of beef hanging in abutcher shop, has been hobbled by decrepit infrastructure in itshome province of Neuquen, rigid labor contracts, and the threatof steep provincial tax and royalty increases.
One of the constraints removed by the deal has to do withthe minimum number of workers that union contracts say must beon hand to work at each well. The rule has been a disincentivefor companies to bring new fracking technology to Argentina,because that technology requires fewer employees to operate it.
"Labor reform is a key component to bring additional playersinto this market," said JP Morgan analyst Javier Zorrilla.
"There are still things that can improve but the agreementis a step in the right direction," Zorrilla said.
Argentina will offer a subsidized price of $7.50 per millionBritish thermal units of natural gas produced at new wellsthrough 2020. The price is more than double that of front-monthnatural gas futures on the New York Mercantile Exchange.
Some of the highest-producing wells can be profitable belowthe government-subsidized price, said Robert Lewis, seniorresearch analyst for Latin America upstream at IHS Energy.
"To the extent that those wells are repeatable, there's alot of money to be made," Lewis said. (Additional reporting by Luc Cohen; editing by Christian Plumb)
