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Total and Shell push ahead in Argentina’s Vaca Muerta shale

The companies will invest $550 million in the Argentinian projects

Total and Shell will invest a combined $550 million to set up pilot production projects in Argentina’s Vaca Muerta shale, their local partner Gas y Petroleo has announced in the last week. The announcements come at the same time questions are being raised over whether companies would continue to invest in the promising shale play in the face of a plunging oil price and political uncertainty.

Shell and Gas y Petroleo, which is owned by the Neuquén provincial government, will invest $250m drilling wells on the Sierras Blancas and Cruz de Lorena blocks, Gas y Petroleo said. The companies will also build a 10,000 barrels a day (b/d) gathering and processing plant for early production at the blocks.  

The companies have already drilled four horizontal and vertical wells at the Sierras Blancas Block and a horizontal well at the Cruz de Lorena Block, where extended production testing has been done. Through the pilot programme the companies hope to bring drilling and completion costs down and determine the area’s production potential. 

If the pilot programme goes well, the companies will take a final investment decision on a larger development plan, Gas y Petroleo said, though it did not provide a timeframe. 

In late 2013, the head of Shell’s Argentine business Juan Jose Aranguren said his company would increase its spending in the Vaca Muerta shale to around $500m in 2014. 

French major Total is also stepping up its investment in the Vaca Muerta shale alongside Gas y Petroleo. The companies will invest around $300m on a pilot development project at the Total-operated Rincón La Ceniza and La Escalonada, Gas y Petroleo said on 1 December. The companies have drilled several wells across the blocks, and will now carry out more 3-D seismic surveys, drill a series of horizontal wells testing a wet gas section of the Vaca Muerta formation and build processing facilities. 

Like the Shell project, Total and Gas y Petroleo will decide on further development after the pilot stage. Shell also has a minority stake in the Rincón La Ceniza and La Escalonada blocks. 

The companies, and others in Argentina’s shale patch, will be keeping a keen eye on the tricky politics of energy in Argentina and the direction of oil prices, both of which threaten investment in the Vaca Muerta shale, which has emerged as one of the most promising shale plays outside North America. 

Confronted by a worsening energy crisis, Cristina Fernández de Kirchner’s government passed a new Hydrocarbons Law in October this year that addressed many of the concerns raised by foreign operators working in the Vaca Muerta shale. The legislation extended the length of concessions, streamlined the regulatory framework and enshrined a series of fiscal incentives for shale developers.“Argentina’s growing energy crisis has a high financial and political cost for the Fernández administration. This has effectively benefited foreign operators by instigating the rapid adoption of incentives that promote long-term investment,” said Jimena Blanco, a senior analyst at Maplecroft, a risk consultancy.

Blanco also warned, however, that next year’s election, which analysts expect will see Fernández and her ruling Peronist party ousted from power, could bring renewed uncertainty for the oil industry. The Hydrocarbon Law was pushed through congress and signed into law with little opposition support, and it could be significantly altered after the December 2015 election, Blanco said.

Meanwhile, a sustained period of low oil prices could also hit investment as costs remain relatively high in the early stages of development in the Vaca Muerta shale. The threat of lower oil prices, however, is blunted somewhat by Argentina’s policy of actively managing domestic oil prices. That has worked against operators in the recent past as the government has kept domestic prices significantly lower than international prices when they were around $100 a barrel (/b). However, more recently operators have benefited, as domestic Argentine prices have not been affected by the steep fall in international oil prices. 

Andes Energia, an independent producer that has seen promising test results recently at its Vaca Muerta acreage, said recently that it will get between $82/b and $85/b for its production in December even though WTI prices have fallen to around $70/b. 

It also argued that the Argentine government has good reason to keep prices high enough to encourage continued investment in domestic shale oil. Argentina has the potential to become a shale powerhouse, and restore its energy independence in the process, but it will need to drawn in tens of billions of dollars of new investment in the coming years. “The country is running with a shortage of foreign currency in the Central Bank reserves, so there is an incentive to promote the consumption of local crude oil instead of imported oil, even at a higher price than import parity,” Andes Energia said in a statement.

Moreover, analysts say the economics of development in the Vaca Muerta shale are improving as costs come down. Drilling days per well have fallen from around 43 days in 2011 to around 24 days in 2014, Deutsche Bank says. That has helped to bring well costs ways down. Wood Mackenzie, a consultancy, says that drilling and completion costs for Vaca Muerta wells have come down to around $7.5m per well, compared to $11m per well in 2011. That is comparable to costs in some US shale plays, though Wood Mackenzie says that it thinks costs will have to come down to around $6.5 million per well to make the Vaca Muerta profitable. “We expect activity in the Vaca Muerta to accelerate in early 2015 thanks to recent reforms to licensing terms, royalty rates and sales contracts. But the real breakthrough will likely occur after the 2015 general election,” Wood Mackenzie says.

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