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Repsol’s huge shale oil haul in Argentina

Huge unconventional oil and gas resources and a welcome review of energy subsidies could herald a surge of much needed exploration investment in Argentina

REPSOL'S discovery of almost 1 billion barrels of unconventional hydrocarbons in Argentina’s Neuquén basin is welcome for a country hoping to boost investment in its energy sector.

The discovery almost doubles Repsol’s reserves base and boosts Argentina’s oil resources by 40%. And there is probably much more to come.

YPF, Repsol’s local subsidiary, found recoverable resources of 927 million barrels of oil equivalent (boe) – 80% oil – in a 428 square km area in the Loma La Lata Norte formation. Fifteen vertical wells in the Vaca Muerta area produced an initial 5,000 barrels a day (b/d) of high-quality 40-45°API shale oil. The company’s Vaca Muerta concession covers 12,000 square km of the 30,000 square km basin.

“For Repsol and Argentina it’s transformative,” the company said. “And this is only a tiny part of a massive area. We’ve found 1 billion barrels in 400 square km, we’re going by that order of magnitude.” The discovery is the largest in Repsol’s history – its reserves at the end of 2010 (excluding YPF) were 1.1 billion boe.

YPF, in which Repsol holds a 57% stake, has also started exploring a 502 square km area in the same formation that shows potential for “large volumes of high-quality hydrocarbons”. Repsol added that it is already producing 400 b/d of shale oil from just one well already drilled in the area. The company will continue investing in Vaca Muerta, but did not specify how many wells it plans to drill.

The latest discovery dwarfs YPF’s May find of 150 million barrels of shale oil at Loma La Lata – at the time, the largest discovery in Argentina for 20 years. The country’s proved conventional oil reserves stand at a steady 2.5 billion barrels, according to BP, with demand of 557,000 b/d met by domestic production of 651,000 b/d. 

Gas in decline … but not for long

Proved conventional gas reserves, however, have declined by nearly 50% over the past decade, to 12.2 trillion cubic feet (cf), and Argentina now relies on imports of liquefied natural gas (LNG) and by pipeline from Bolivia – 127 billion cf in 2010 – to meet gas consumption that has risen by 4% since 2006. 

But the US Energy Information Administration claims Argentina could have 774 trillion cf of recoverable shale-gas resources. YPF spudded the country’s first shale well in the Loma La Lata concession in June last year. And in December 2010, announced the discovery of 4.5 trillion cf in the Neuquén basin – Argentina’s biggest gas find in 35 years.

These new, unconventional resources could reverse a 13-year trend of declining oil and gas production – a result of falling upstream investment, in part because of state-capped gas prices. Prices have been curbed since the country’s 2001-02 financial crisis. The policy, designed to rein in inflation, triggered a slump in gas production, however, from a peak of 4.5 billion cf in 2006 to 3.9 billion cf last year.

But the government’s Gas Plus programme, designed to lure back investors, may be working. In May, Apache flowed 7 million cf/d from a tight-gas well in Anticlinal Campamento field, also in Neuquén province. The well is one of 70 unconventional-gas wells the US independent has drilled in the region since 2008.

Vice-president Jon Graham said at the time that the project was made possible only by Gas Plus, which was launched in 2008. The scheme aims to promote development of tight- and shale-gas resources by allowing producers to market output at prices above state-controlled levels of around $2.60/million British thermal units (Btu), at a more commercially viable $4-5/million Btu. The national oil company, Enarsa, is thought to have paid between $8/million Btu and $13/million Btu for spot LNG cargoes earlier this year.

Cutting energy subsidies

And the government’s decision to cut energy subsidies for commercial users could spur a new wave of much-needed upstream investment in Argentina. Planning minister Julio De Vido announced at the beginning of November that a number of large industries, including the energy sector, will no longer receive subsidies for gas and electricity supplies.

De Vido said that the subsidy rates would not change, but those available to “sectors that do not need them” will. The government will set up a commission to review subsidies and recommend changes to the system as soon as possible.

Goldman Sachs said the reduction would add pressure to Argentina’s already high inflation rate, but that it was “a necessary step in the right direction for budgetary and economic reasons”. Subsidies are placing a strain on the government’s budget deficit, which has almost doubled in the nine months to September to Ps1.9 billion ($450 million).

IHS Global Insight analyst Juliette Kerr described it as a “very positive” move, but remained cautious about whether it will have any immediate benefits for operators because tariffs are not changing. “It’s a step in the right direction,” she said, “but the practical effects will be limited.”

For the energy sector, the moves could signal a broader dismantling of government subsidies and the well-head price caps that have deterred investors – leading to reduced oil and gas production.

A recent report by the Economist Intelligence Unit (EIU) said pricing reform will be especially important for development of unconventional resources in Argentina, because exploration and production costs for shales are much higher than for conventional resources. Argentina has “enormous unconventional potential”, the EIU said, but artificially low gas prices have discouraged investment in the sector.

Although it was too early for Repsol to confirm YPF’s exact drilling schedule for the Vaca Muerta area, the size of the potential resources available means the company is committed to long-term investment in Argentina. Combined with the other large unconventional finds in Nequen province over the past year and a brighter investment outlook, a queue of new explorers may be about to form.

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