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Is This Argentinian Shale Play The Next Permian?

Viktor Katona

Having inked a $300 million investment deal with the Argentinian YPF, Shell reiterated its claim to join the ranks of the various oil & gas majors engaged in tapping the plentiful shale resources of the Vaca Muerta (“Dead Cow”) formation in Neuquén Province. Competitors abound – ExxonMobil, Chevron, BP (Pan American Energy), Total, Petrobras, Wintershall and others all stand to consolidate their hold on Latin America’s largest shale development, with reserves of 8.7 TCm of gas and 16 bn barrels of oil. After the discovery of several large-scale fields between 2010 and 2012, Vaca Muerta came to be known as a top-potential project that simply took too long to develop. The ultimate root cause of the delays can be traced back to the complex system of relations between the Argentinian state and companies operating within its territory. YPF controls approximately half of the Vaca Muerta acreage and after its 2012 nationalization it is now the State’s responsibility to develop the Eagle Ford of Latin American.

When asked about the prime cause of the nationalization, Repsol’s CEO quipped that it is all because a “cow has died”. However, YPF, now-state-owned, has tried to wrestle its path towards energy independence, among widening negative spreads between its consumption and production. The Kirchner-led governments tried to manifest their professional worth by trying to ramp up production, but went for all the short-term decisions. Instead of wedding hydraulic fracturing and horizontal drilling, it opted for a cheaper variant, horizontal drilling, although most analysts noted 6that it is the former which would prove to be the most advantageous. Vaca Muerta is still a long way off Eagle Ford in terms of well costs. Total well costs at Eagle Ford dropped from $7.5 million in 2014 to $6.5 million in 2015-2016, companies operating around Vaca Muerta now fluctuate within the $10-12 million interval.

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The New Macri government tried to take the bull of inefficiency by the horns and scored some successes. By settling a 14-year sovereign debt default settlement with main creditors, the Casa Rosada has managed to ease Argentina’s access to capital markets. In its quest to revamp production, Macri also cut a tri-partite deal in January 2017 between the State, oil & gas companies and trade unions, clearing the way for annual $5 bn investment in Vaca Muerta development. The new administration sweetened the deal by maintaining a natural gas subsidy fixed at a healthy $7.50 per MMBtu, more than double what it pays neighboring Bolivia for its gas. Macri also mothballed a long-obstructive oil and oil product export duty, bringing internal pricing more in-line with international trends. Yet the new president’s energy policy also suffered several major setbacks.

Previous currency and capital controls, which made it very difficult for Argentina-based companies to import equipment, were partly eliminated only to give way to unprecedented 21st century levels of inflation, 41 percent in 2016. Social tensions will make it more difficult for oil & gas companies to focus on purely drilling-related issues. In conjunction with the public disclosure of the YPF-Shell contract, almost 500 striking workers blocked the El Orejano shale gas field, thus objecting to YPF’s tearing up contracts with several gas services companies. Overdue salaries and non-payment of service fees are an omnipresent phenomenon in Argentina’s energy landscape, as are vigorous and sweeping protests. Argentina’s oil & gas investment appeal will therefore depend upon the outcome of the October 2017 legislative elections, which might give a parliamentary majority to Cambiemos, the President’s political party. In such a case, a new shale boom will spring up in a matter of a few years as the immediate specter of energy protectionism will fade away.

Argentina has sufficient ties and platforms to build on. During Rex Tillerson’s 11-year tenure as ExxonMobil CEO, the current Secretary of State pledged to invest more than $10 bn in Vaca Muerta and has built up a healthy net of contacts. Consequently, further convergence of U.S.-Argentinian relations should be expected. The hottest play currently, the Chevron/YPF Loma Campana, is ramping up production steadily and will peak around 2025 with production reaching annual volumes of 2.5 million tons of oil and 1 BCm of gas. If Argentina manages to start up a few plays similar to Loma Campana, it might draw itself really close to self-sufficiency in oil & gas. To this end, regional authorities promised to solve the issue of transporting sand by rail (as there is no sand available in Neuquén), whilst YPF vowed to finish its first sand-refining facility this year. Also, the first refineries for processing the light shale oil (40-44° API) Vaca Muerta possesses are being constructed.

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Oddly enough, it was rarely the geology of shale deposits that encumbered the development of Vaca Muerta plays. Vaca Muerta displays a lot of similarities to Eagle Ford, hence the frequent comparisons – similar age, similar depth (2-3km), shale thickness (30-100m), reservoir pressure (6000-8000psi), organic content (3-7 percent) and porosity (4-12 percent). Vaca Muerta has been thoroughly researched, yet the area exhibits vast potential for new sweet spots. Numerous Argentinian analysts reckon that Los Molles, a geological formation at 5km depth, below the Vaca Muerta plays that are currently appraised, contains much more than the latest estimates of 8 TCm. Argentina possesses shale resources elsewhere, too – the San Jorge and Austral formations in Patagonia, as well as promising plays in the Chaco province might entail a flurry of activity in other parts of the country.

By Viktor Katona for Oilprice.com

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