(Bloomberg) — YPF SA, Argentina’s state-run energy producer, is closing the tap on some of its natural gas wells as the nation’s second recession in three years curbs demand, according to people with direct knowledge of the matter.

The company had been investing heavily in shale gas as the government subsidized production to reverse a costly energy trade deficit. But the economic slump means it’s now having to pare back supply, said the people, who weren’t authorized to speak publicly.

Argentina’s economy is forecast to contract 1.6 percent this year and get even worse in the first quarter of 2019, after investor concerns over the fiscal deficit triggered a currency rout. Even before the recession hit, drillers were already bracing for the problem of seasonal demand surges.

Argentina consumes far less gas in summer than in the colder winter months and it has recently made sales to neighboring Chile to mitigate the situation. The oversupply is compounded by a government contract to import from Bolivia through 2026. There’s also the emergence of a rival to YPF, Tecpetrol SA, which is flooding the market with gas from the Vaca Muerta shale play — Argentina’s answer to the Permian Basin — at its Fortin de Piedra project.

“There’s no doubt about the geological characteristics of Vaca Muerta. The rock can deliver, and Fortin de Piedra is a clear example,” said Juan Manuel Vazquez, head of equity and credit research at Puente Hnos. in Buenos Aires. “However, there is a demand problem due to seasonality and the drop in economic activity.”

YPF’s gas production in the second quarter of the year — when the recession began — averaged 44 million cubic meters a day, 1.3 percent lower than in the same period in 2017, “because of lower demand,” according to an earnings report.

The company’s American depositary receipts rose 1.3 percent to $15.40 as of 10:06 a.m. in New York.

To contact the reporters on this story: Jonathan Gilbert in Buenos Aires at jgilbert63@bloomberg.net; Pablo Gonzalez in Buenos Aires at pgonzalez49@bloomberg.net. To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net Simon Casey, Christine Buurma.





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