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Bringing Vaca Muerta to life

Argentina’s shale-gas trove could be one of the most prolific in the world. It has yet to live up to its promise

Shale gas deposits in Argentina’s southern Patagonia region are thought to be the largest in Latin America and potentially the largest outside North America. Argentina has a staggering 802 trillion cubic feet (cf) of “technically recoverable” shale-gas resources, according to initial estimates from the US Energy Information Administration (EIA). The figure dwarfs the country’s 12 trillion cubic feet (cf) of proved conventional gas reserves. It is third among the 42 countries assessed by the EIA, behind only China and the US, and accounts for 56% of estimated shale-gas resources across the whole of Latin America.

The majority of those resources are in the country’s Neuquén province, southeast of Buenos Aires along Argentina’s border with Chile, and that is where early exploration has focused. The Neuquén basin contains the highly touted Vaca Muerta (Dead Cow) formation, and the less-tested gas-rich Los Molles shale, which sits below Vaca Muerta. The Los Molles shale is estimated to hold 275 trillion cf of shale-gas resources, while the Vaca Muerta formation holds 306 trillion cf, accounting for nearly three-quarters of the country’s shale resources, according to the EIA.

Although it has attracted the spotlight, Neuquén is not the only part of the country with significant shale potential. There are at least two other basins showing major promise. The Austral-Magallanes basin, which spans the southern tip of Argentina, holds an estimated 129 trillion cf of resource. That is nearly as much on its own as the EIA’s estimate for Poland, which has attracted the most shale-focused investment in Europe.

The San Jorge basin’s estimated 86 trillion cf of shale-gas resources, also in Argentina’s vast Patagonian region between the Austral-Magallanes and Neuquén basins, represents another huge opportunity.

Neuquén, though, continues to attract nearly all investor and government interest. On top of to its vast resources, the area is a mature oil and gas province that has been producing for more than 100 years and already has much of the physical and service infrastructure needed to support shale development. There remains, however, a shortage of specialist hydraulic fracturing (fracking) rig equipment and expertise.

The Neuquén shale play covers around 30,00 square km, slightly smaller than the Bakken shale in North Dakota. The play has distinct oil, wet gas and dry gas sections, similar to the Eagle Ford shale in southern Texas.

The dry gas window is in the west and covers around 30% of the basin. To the east are the wet gas and then oil-rich sections of the play, which are about the same size. Early exploration discovered the gas window, but much of the subsequent drilling has targeted the potentially more lucrative wet gas and oil sections of Vaca Muerta.

US comparison

Neuquen’s shale geology has drawn positive comparisons with the US’ most prolific plays. The play’s thickness, in particular, holds important implications for future development. Vaca Muerta’s thickness ranges from 200 to 1,700 feet thick, with an average thickness of around 500 feet, while the Los Molles shale is as much as 3,300 feet thick, with an average thickness of around 800 feet. That compares to average thicknesses of around 200 feet in the prolific Bakken shale and around 200 feet in the Eagle Ford and Marcellus shale plays.

That density of the stratum is important because it means companies may be able to drill and frack vertical wells, which cost about half as much to drill as the horizontal wells often needed in shale development. State-run YPF has said that it prefers this approach in certain sections of Vaca Muerta, though further drilling will be needed to evaluate how successful the strategy is.

The Los Molles and Vaca Muerta shales also sit in the sweet spot for other key metrics used to evaluate shale plays, such as depth, organic content and areal extent, a measure of how large an area the shale covers.

That potential has stirred the industry’s interest. The Vaca Muerta is widely seen as one of the more attractive shale prospects outside North America, and a number of major companies have acquired acreage in the last three years.

Unlike in US shale plays, though, there are fewer players with much larger footprints in Argentina. In total around 20 companies have acreage in the Neuquén shale play, and around half of those companies have positions in the gas window (see table). Of those, just eight companies hold around 90% of the shale play’s acreage.

YPF, which was nationalised in May 2012, is by far the largest acreage holder and has taken the lead in developing Argentina’s shale resources. The company’s 12,000 square km cover more than a third of the play.

Since its nationalisation YPF has scoured the industry for partners to help it develop Vaca Muerta. In July 2012, YPF made a breakthrough, signing a joint shale development deal with US supermajor Chevron.

Under the terms of the deal, Chevron has committed to spend $1.24 billion through the end of 2014 on a pilot development scheme that includes drilling 100 wells. At the end of the pilot scheme, Chevron can choose to leave the venture, or press ahead with an accelerated development programme that would see around 1,500 wells drilled by the end of 2017 with production targeted at 50,000 barrels of oil a day and 3 billion cubic metres a day of gas.

YPF has also signed a $120 million deal to jointly develop shale deposits with Dow Chemicals and is in talks for another agreement with Bridas, a partnership between Argentina’s billionaire Bulgheroni family, BP and China National Offshore Oil Corporation.

The company has actively courted other international investors as it seeks to bring fresh cash and technology into Argentina’s shale patch. And further deals will be needed for YPF to be able to carry out a plan to spend around $40 billion on shale development over the next five years. For now, the YPF-Chevron joint venture is the most ambitious going and it will be crucial to short-term development.

One major problem for the outlook for Argentine shale development is that for many top acreage holders in Neuquén, the position is a legacy of past conventional development in the region, and the region’s shale is not seen as a major driver of future growth. With the limited number of major acreage holders, that leaves few who are motivated to accelerate shale development, as the government would like to see. That is a particular problem for shale development. Because it is an expensive undertaking that requires sustained and intensive drilling over a long period of time, Argentina will need an active and competitive shale patch in which companies are invested in the sector’s success.

Stalled development

To date, that dynamic has not taken hold. In the past couple of years, less than 100 wells have been drilled in Vaca Muerta and Los Molles, more than in many shale plays outside North America, but nowhere near the numbers needed to spur development. By comparison, from the start of 2010 through September 2013, more than 11,000 drilling permits were issued in Texas’s Eagle Ford shale.

US independent Apache, for example, has among the top three acreage positions in Vaca Muerta. Argentine shale, though, does not look as if it will play a prominent role in Apache’s future.

The company recently sold a major stake in its Egypt business, the jewel in its international portfolio, and has said it plans to consolidate around its onshore unconventionals US business. The company has only completed one exploration well in Neuquén in 2013, far fewer than in previous years, according to government data.

Brazil’s state-owned Petrobras is another major acreage holder in Vaca Muerta, especially in the play’s gas window, with a top five position. It is another company for which Argentine shale is not likely to play a major role in its future. For Petrobras, its position in Argentina is a legacy of its international expansion. The company, though, is undertaking one of the most ambitious development programmes in the world offshore Brazil, and it is in no position to invest the billions of dollars that would be needed to develop its Argentine shale acreage.

Other companies that have entered Argentina’s shale but are moving cautiously include majors such as ExxonMobil, Total, Shell as well as international and domestic independents Pluspetrol, Tecpetrol, EOG Resources and Azabache Energy. Neuquén province owned Gas y Petroleo is another company that will play an important role in shale development, and has said it plans to list on the Argentine bourse to raise cash for shale development. One international company that has put Argentine shale at the centre of its growth strategy is Canadian independent Americas Petrogas. The firm has one of the largest acreage holdings in the Neuquén shale play with around 5,500 square km and it has signed joint development deals with Apache and ExxonMobil. Petrogas has touted its early drilling results and says that it could hold as much as 8.3 billion barrels of oil equivalent across its acreage.

Yet the company has been hit hard by the market’s turn against Argentina. The company’s share price has fallen from a peak of C$4.40 ($4.22) a share in early 2012 – just before the Argentine government nationalised Repsol’s share in YPF – to C$1.54 as of 28 October. That has forced Petrogas into a strategic review. It has hired investment bank Jeffries to explore a sale of the company or some of its assets.

Doubts over the government’s management of the sector have made companies reluctant to pin their fortunes on Argentine shale. Investors have long complained of the government’s hand in setting domestic fuel prices, restricting exports, strictly controlling the movement of cash and equipment in and out of the country as well as troubled relations with unions.

The nationalisation of Repsol’s majority stake in YPF in May 2012, and subsequent refusal to compensate the Spanish company for its stake, only exacerbated concerns over the government’s statist approach to the energy sector. It also added a new risk for potential investors, as Repsol has threatened to sue any company that works with YPF on shale development. There are signs that the government has heard the message. In recent months some significant concessions have been made. Significant progress has been in negotiations with Repsol, and a deal now looks to be within reach. (At press time details of the proposed settlement were not available) That would remove the threat of legal action against any company that wanted to work with YPF. It would also go some way towards re-establishing the Argentine government’s credibility with the industry.

Progress has also been made on improving fiscal terms. The government has increased the amount producers can earn from new gas projects to $7.50 per million British thermal units (Btu), up from around $2.50 per million Btu in recent years.

It has also said that companies that invest more than $1 billion in the energy sector over a five-year period will be allowed to sell 20% of their production at higher international prices. Earnings from those sales will also be exempt from foreign currency controls that require most companies to keep the funds from their Argentine operation in the country.

The sector could be in for some significant changes over the next couple years as Argentina faces elections in 2015. President Cristina Fernández de Kirchner was thought to be considering a run for a third term, but recent health problems and a significant setback in October mid-term elections now make that seem unlikely. Fernández has championed resource nationalist policies, but a new administration could choose to open up the sector. With so much on the line, energy policy is certain to be a major political issue. 

Table 1 and 2:  Acreage holders and shale gas plays
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