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YPF strikes Vaca Muerta deal with Petronas

The two companies are to jointly invest in a pilot project

Argentina’s state-owned oil company YPF and Malaysia’s Petronas have agreed a deal to jointly invest up to $550 million in a pilot development project in an area of the Vaca Muerta shale, YPF has said in a statement.

The companies will jointly develop the 187 square km La Amarga Chica Block, located in the oil-rich eastern section of the Vaca Muerta shale formation in Argentina’s Neuquén province. The initial pilot programme will last three years, with Petronas covering most of the early spending. Of the $550m in expected spending, Petronas will contribute $475m with YPF covering the remaining $75m.

Petronas has the option to exit the project during the pilot stage, but if it stays on it will have a 50% stake in the La Amarga Chica Block. YPF says it hopes to start work at the block in the first quarter next year, but no further details of the work programme were released. The companies had signed a memorandum of understanding for the block in February this year.

YPF has previously said that La Amarga Chica holds 14.7 billion barrels of oil in place. Assuming a 6% recovery rate, which some geologists think will be the average for oil production from the Vaca Muerta shale, the block could eventually produce a total of around 880m barrels. YPF has drilled and fracked two vertical wells in the block. The first produced 182 barrels a day (b/d) of oil during a 10-day test, and the second produced 296 b/d. 

The deal looks to be modelled on a similar agreement YPF signed with Chevron last year, though it is not as large as that deal. Chevron agreed to pay $1.2bn to start a pilot development programme at a relatively small 20 square km section of the Loma Campana Block, which is near La Amarga Chica. Chevron and YPF have said large-scale development would see the companies invest more than $16bn in the area over the next 35 years. Petronas and YPF will be working on a smaller area, but full-scale development would require billions of dollars of investment.

YPF has been keen to bring more partners into Vaca Muerta to help it accelerate development of the shale play. The state company has by far the largest acreage position in the shale play, but it does not have the financial muscle to develop its position on its own. Analysts say that more than $200bn in investment would be needed in the coming decades to develop the Vaca Muerta.

Petronas will bring some much-needed cash in Argentina’s shale patch. It will also bring some useful shale expertise. In December 2012, Petronas bought Canadian shale specialist Progress Energy for $5.25bn, though Progress has more experience developing shale gas in northeastern British Columbia rather than shale oil.  

YPF has shown signs that their development efforts are gathering momentum. The company has invested more than $2bn in the Vaca Muerta shale so far. More than 200 development wells have been drilled, with the number of producing wells rising from just 10 in 2012 to 93 in 2013. That is far short of the thousands of wells a year that will be required, but shows some progress. In the second quarter of this year, production from Vaca Muerta was 23,200 barrels of oil equivalent per day (boe/d), up from less than 9,800 boe/d for the same period in 2013.

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