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Opportunities as Vaca Muerta shows signs of life

An end to the battle between Repsol and Argentina should spur development in one of the world's biggest shale oil plays

After stumbling at the start, Argentina's efforts to develop the Vaca Muerta shale oil and gasfield, thought to be one of the world's largest, are starting to show signs of progress. The turning point has been a breakthrough in negotiations between the Argentine government and Repsol over the Spanish company's stake in YPF, which was nationalised in May 2012. In late November, the board of Repsol said that it "views favourably" a preliminary agreement hammered out by negotiators from Repsol, YPF, the Spanish government, the Argentine government and Mexico's national oil company Pemex, Repsol's largest shareholder.

Details of the agreement have not been released, but it is believed to include around $5 billion in compensation, most likely in the form of Argentine government bonds. That is far short of the $10.5bn Repsol said the stake was worth, but it's more than most analysts thought the company would receive, too.

A deal, if reached, would do two things to attract new investment into Vaca Muerta. It would help rebuild the Argentine government's credibility with the industry and it would lift Repsol's threat of legal action against any company that invests with YPF. Repsol sued Chevron after it signed a shale-exploration deal with YPF, claiming in court that the deal was illegitimate. The Argentine state oil company desperately needs more foreign investment to realise an ambitious $40bn investment programme. "The all-but-certain resolution of the dispute will result in substantial opportunities for foreign oil operators interested in the country's Vaca Muerta shale basin," says Jimena Blanco, senior Latin America analyst at Maplecroft, a consultancy.

The Argentine government's increased willingness to strike a deal with Repsol was just the latest sign of pragmatism in the energy sector. The government has eased domestic price controls to make both shale oil and gas investments more attractive. It has also said that companies that invest more than $1bn over a five-year period would be exempt from some of the country's strict foreign-exchange rules and would be allowed to sell 20% of their production abroad at international prices. This is important. Selling domestically would earn a company around $75 a barrel, compared with international prices for comparable grades of $100/b.

Since the Repsol interim deal and the new financial incentives, deal-making has picked up in Vaca Muerta, which ranks fourth in a ranking of shale oil plays by the US' Energy Information Administration. Vaca Muerta, it says, holds an estimated 27bn barrels of recoverable resources.

Chevron and YPF finalised terms on their shale joint-venture agreement, allowing Chevron to inject $940m into the venture, the bulk of the total $1.2bn that will be spent during the initial phase of the companies' exploration and development plan.

Shell, which entered Vaca Muerta in 2011 but has been slow to invest in the region, said it would triple spending to $500m in 2014, up from around $170m in 2013. "Now we feel a different wind blowing and we are assessing our possibility to invest in exploring the resources," Juan Jose Aranguren, Shell's country manager, told Bloomberg late in 2013.

Arnaguren called on the government to overhaul its energy legislation to adjust to the country's new energy reality. The existing framework was developed when Argentina was self-sufficient and a regional exporter, but now it needs to attract more upstream investment in complex and costly unconventional and offshore projects to deal with a rapidly rising import bill.

The improving operating environment should also spur more activity. In 2011, when the scale of Vaca Muerta's potential was becoming clear, there was a wave of deals that saw international companies ExxonMobil, Total, Shell and others snap up acreage. That stopped with the Repsol nationalisation. But there are still plenty of opportunities for the landscape to shift in Vaca Muerta.

YPF management has been travelling the globe trying to drum up investment in the play, and it may now start to see the fruits of that work. The company holds acreage covering about one third of Vaca Muerta and will need a number of partners to see out a strategic plan that involves drilling hundreds of wells in the field's oil section with the aim of producing at least 100,000 barrels a day by the end of the decade.

Other companies are also looking to deal. Argentina-focused independent Americas Petrogas, which is the third largest acreage holder in Vaca Muerta, has launched a strategic review of its business and is looking for partners or takeover suitors.

US independent Apache, another top-five acreage holder, has said that it is looking to sell its Vaca Muerta assets as it turns its focus to its US onshore. Brazil's state-owned Petrobras, which has a large legacy position in Vaca Muerta, is going through a major international divestment programme that could include its Argentine assets. Others, such as independents Gran Tierra and Madalena Energy, are also looking to strike deals for their projects. There are also still a number of vacant blocks in Vaca Muerta that could be auctioned off by provincial authorities as soon as 2014. 

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