Argentina's shale boom
The country's play is set to witness a quick rise in gas output as drillers look to lock in higher subsidised prices
Gas will lead the pace of production growth from Argentina's
Vaca Muerta shale play over the next several years, as state-owned YPF and international majors line up test projects in the gassier areas of the basin.
The Vaca Muerta is the most vibrant shale region to take root outside North America, with output rising steadily over the past couple of years as activity has picked up and costs have fallen. To date, that production has been roughly half light oil and half natural gas, with total Vaca Muerta shale output growing 60% in the 20 months from the start of 2016 to 76,000 barrels of oil equivalent a day in August last year.
That strong pace of growth should continue over the next few years, led by natural gas. Analysts at
Rystad, a consultancy, reckon total output will rise by a third every year from 2017 to 2020, reaching around 165,000 boe/d, with 65% of production coming from gas by then. That works out to 0.64bn cubic feet per day, equivalent to around 20% of current Argentine gas output. That is a far cry, of course, from the 20bn cf/d-plus being pumped from the massive Marcellus shale-gas play in the US, but it will help bring Argentina closer to its primary goal of energy self-sufficiency.
YPF will continue to lead the way. The company operates more than 90% of Vaca Muerta output, and accounts for most spending in the play. That market dominance will diminish somewhat in the coming years as others start up their own projects, but the company will remain the largest operator. In October, the company told investors it plans to spend around $3.5bn a year over the next five years on its exploration and production business, with a sizable chunk going into the Vaca Muerta. Rystad expects the company to drill around 60 wells a year in the Vaca Muerta through 2022, around a third of the total expected to be dropped in the shale play annually.
0.64bn cf/d—Vaca Muerta gas output by 2020
Many of the company's key new projects are focused in the gas-rich area of the Vaca Muerta, which much like the Eagle Ford in the US has distinct windows of gas, natural gas liquids and light oil producing sections. The El Orejano Block, which YPF is developing jointly with
Dow Chemical, finished its first six-well pad in recent months. The company reckons development costs are only around $1 per million cubic feet at El Orejano, though Dow has reportedly cooled on the shale joint venture, which strayed far from the chemical company's core business. YPF is also starting to pump more money into Rincón del Mangrullo, a gas-rich block it's developing alongside Pampa Energia, where three wells have been finished. The companies have pledged to spend $150m through 2019.
Tecpetrol, an Argentine driller, will be the most important private investor in Vaca Muerta's shale gas for the next couple of years. The company plans to invest $2.3bn at the Fortín de Piedra gas block through 2019 to lift production to 340m cf/d, around half of current Vaca Muerta gas output and a tenth of total Argentine production. The company plans to spend $1.6bn on drilling around 150 wells and another $0.7m on infrastructure to carry the gas to consumers. IOCs join in
International majors will play an increasingly important role as well.
ExxonMobil recently kicked off a $200m, seven-well pilot project at the gas-rich Los Toldos 1 Block. Total commissioned a $0.5bn development of its Aguada Pinchana Este licence in 2017, with an eye towards ramping up output to 0.56bn cf/d by 2021. Other potentially major shale-gas projects from Shell, BP and others are in earlier stages of exploration.
Drillers will have to continue to reduce costs to make Vaca Muerta a truly world-class shale play. YPF has been the most transparent on costs in Vaca Muerta. The company has shown marked improvement in recent years, but costs remain significantly higher than in the US. YPF reported third-quarter drilling costs at the Loma Campana project, a joint venture with
Chevron and the most advanced in the play, at $1,620 per lateral foot, down 20% from a year earlier, but still around 50% higher than wells drilled in the Marcellus—though the much higher gas price in Argentina means Vaca Muerta wells don't have to be as cheap as US ones to make money.
The biggest threat to medium-term gas output is a tweak to the gas subsidy programme announced in late 2017. Under the Gas Plan, companies were guaranteed a wellhead price of $7.50 per million British thermal units at shale-gas fields, falling gradually to $6 in 2021 when the programme is due to end, a healthy price that encouraged companies to move quickly to start pumping gas. However, the government struggled to keep up with the costly subsidy and partially backtracked, saying only new production ventures would now be eligible for the higher price. That shouldn't affect the crop of new projects from private investors, but could slow the pace of drilling at some of YPF's early shale-gas projects.
"We might decide to cut investments on those unconventional areas under development where we don't believe we can get that price of $7.50 to $6/m Btu," YPF's chief financial officer, Daniel Gonzalez told analysts back in November. "We expect to make up for this loss by redeploying capital towards crude oil projects that are now more compelling."
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