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Vaca Muerta beginning to buzz

Argentina’s YPF is leading the development of one of the world’s biggest shale plays. The majors are building their positions, too

If Argentina is to see shale success it will be state oil champion YPF leading the way. Nationalised in May 2012, the company’s raison d’être is to help secure Argentina’s energy future, largely by tapping into the massive Vaca Muerta shale. But the company won’t be able to do it alone. More than a dozen international majors and independents from the US, Canada and Europe will have a key role to play, bringing cash and expertise into the country’s shale patch. 

YPF holds a dominant position in the Vaca Muerta shale play, thought to be one of the largest shale plays outside the US with an estimated 800 trillion cubic feet of shale gas. The company holds more than 12,000 square km of Vaca Muerta acreage, covering more than a third of the play. Most of that acreage is in the play’s oil window, but it also holds around 2,000 square km of shale gas-rich Vaca Muerta land, the largest of any company. YPF says that its position in the Vaca Muerta makes it the third largest unconventional acreage holder in the Americas, behind only the US’ two largest shale players Chesapeake and ExxonMobil. 

Miguel Galuccio, the former Schlumberger executive who has been YPF’s chief executive since the 2012 nationalisation, has charted an ambitious course for the company to develop the Vaca Muerta. He and YPF have the weight of the nation’s energy hopes on their backs. Argentina’s oil and gas output has been on a long-term decline as mature fields move past their peak, and in 2011 the country became a net importer. YPF’s shale development programme is still in its early stages, but it can count some successes. Investment levels rose from $380 million in 2012 to $1.1 billion in 2013 and should rise again significantly this year, though they remain far from the levels that would be needed to fund large-scale development. 

More investment has resulted in more drilling and production. The company is now pumping more than 20,000 barrels of oil equivalent a day (boe/d), including around 700,000 cubic metres a day (cm/d) of natural gas, from 161 shale wells. Nineteen rigs are working in the Vaca Muerta shale play, up from just four in April 2012. The company is making progress in finding Vaca Muerta’s sweet spots, the most productive areas. 

The company is also getting more for its money. A shale well with three fracturing stages cost $11 million in 2011. Today a five-stage fractured well costs around $7.6 million to drill, the company said. YPF says it will be able to continue bringing costs down by using local proppants in the fracturing process and making better use of casing-drilling technology, which allows it to case its wells as it drills, reducing the time it takes to finish a well. Crucially, YPF is moving forward with an important joint venture with Chevron. In April, the US major provided $1.6 billion dollars in new funding to continue a YPF-operated pilot development project covering 20 square kms in the Loma La Lata Block, the site of much of Argentina’s early shale drilling. 

YPF hopes the Chevron joint venture can serve as a template for future deals. So far, though, those deals have been slow to come, in spite of an aggressive campaign from Galuccio and the Argentine government to drum up investment. That campaign has seen them turn to the US, Europe and Asia for potential investors. 

Argentina, in particular, has looked to China with the hopes that one of its national oil companies will reach into its deep pockets to help fund development of Vaca Muerta. Yet no deals were announced during Chinese president Xi Jinping’s July visit to Buenos Aires, and there are signs that China’s state oil companies have been frustrated by their experiences in Argentina.  

Aside from YPF, some of the largest oil companies in the world are stepping up their own work in Vaca Muerta. ExxonMobil announced its first operated Vaca Muerta discovery in May at the Bajo del Choique Block and says it is carrying out testing at the well to determine if it is commercial. ExxonMobil has expanded its presence in Vaca Muerta in recent years, including a farm-in deal with independent Americas Petrogas, and now holds stakes in blocks covering 3,640 square kms of the Vaca Muerta shale. 

In December last year, Shell’s local boss Juan Jose Aranguren said it would increase its spending at Vaca Muerta from $170 million in 2013 to $500 million in 2014 to increase its test drilling activities. Aranguren added that Shell would be interested in expanding its position in the Vaca Muerta if fiscal and regulatory terms were improved. Total, which also holds a major position in Vaca Muerta and is Argentina’s second-largest gas producer, has echoed that position, saying it would be interested in investing more in Argentine shale on the right terms. On top of the international majors, a host of local and international independents are working in Argentina’s shale patch.

Local privately-held player Pluspetrol is now one of the largest acreage holders in Vaca Muerta after it paid $217 million to acquire US independent Apache’s assets in the play earlier this year. The company has been quiet about its operations, but is actively drilling on its acreage. 

Other notable independents that have been active in Vaca Muerta include Americas Petrogas, Azabache, Crown Point Ventures and Madalena Energy. These are smaller companies with outsized positions in Vaca Muerta that will likely need funding from larger partners to help them push forward development. 

Latin America shale abounds, but few takers

Potentially rich shale gas fields stretch across Latin America, but outside Argentina there has been little progress exploring the resource. Brazil has the largest shale gas potential outside Argentina, but interest has been cool. The government has initially estimated the country’s shale-gas resources at around 500 trillion cubic feet (cf), a huge number compared to proved reserves of 16 trillion cf. That combined with the country’s growing natural gas import dependence provides a powerful incentive for shale-gas exploration. But the industry has not been keen on a Brazilian shale gas revolution. Petrobras, the national oil company, is focused on developing its world-class offshore deposits. Shell drilled several test wells in the São Francisco basin in 2012, but decided against further exploration. The government tested industry interest in the nascent shale-gas sector last year with a licensing round that included a number of blocks with unconventional potential, but found few takers. Little is known about Brazil’s shales.

Chile, which is looking for ways to help reduce its costly natural gas import bill, is hoping a deal signed with ConocoPhillips will help spur new shale gas exploration. State-owned Empresa Nacional del Petroleo (ENAP) reached an agreement with ConocoPhillips that will see the US independent contribute its expertise and technology to a joint technical study of the Magallanes basin’s shale potential. If the study turns up promising results, the deal could help ConocoPhillips steal a march on others in Chile. The US Energy Information Administration has estimated Chile holds 64 trillion cf of recoverable shale gas. 

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