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YPF and Sinopec eye Argentina projects

Argentina’s YPF signed a preliminary deal with Chinese national oil company Sinopec in Beijing this week that paves the way for the companies to work together in the Vaca Muerta shale and other projects in Argentina

“This agreement is a breakthrough for us because it opens new possibilities for YPF and the country in the particular context of the global energy scene, and it is very important that a player like Sinopec is interested in us as a partner of choice,” YPF chief executive Miguel Galuccio said in Beijing. 

Few details of the potential cooperation between the companies were announced, and there was no timeline given for a final deal, but Sinopec has had Argentina and the Vaca Muerta shale, the most promising unconventional plays outside North America, in its sights for years. 

In 2010, Sinopec bought buy Occidental Petroleum’s Argentine business for $2.45 billion, making the Chinese company Argentina’s fourth-largest oil producer. Then, in the weeks before the Argentine government nationalised Repsol’s majority holding in YPF in April 2012, Repsol said that it had a $15 billion deal in place with Sinopec to buy out its YPF stake. 

The nationalisation, though, scuppered that deal and appeared to sour Chinese oil companies’ view towards new investments in Argentina. YPF officials have made several visits to China to try to drum up new investment over the past two-and-a-half years only to leave empty handed.

However, in recent months Argentina’s oil patch has started to look more attractive. 

Amendments to the country’s Hydrocarbons Law in October last year improved investment terms and created new financial incentives and oil export opportunities. 

Moreover, the country’s oil price controls policy, once the bane of the industry, has become an advantage to producers. The government has left domestic oil prices at around $77 a barrel (b) even as international crude prices have fallen below $50/b to encourage continued investment in new oil production, crucial to dealing with the country’s energy crisis. 

An election later this year also holds out the hope of a more business friendly administration than the Fernandez de Kirchner government.

Any agreement with Sinopec would likely mirror similar Vaca Muerta joint venture deals YPF has signed with foreign investors, in which an initial small-scale pilot scheme is developed with a subsequent multi-billion dollar full-scale project possible. 

YPF and Chevron have already invested more than $3 billion at their Loma Campana shale project, and will likely spend billions more in the coming years. More recently, YPF signed a Vaca Muerta joint venture deal in September with Malaysian national oil company Petronas. The companies will invest $550 million in a pilot development project over the next three years, with Petronas covering $475 million of the initial investment.

A deal with Sinopec would bring together the two largest shale developers outside North America. Both YPF and Sinopec have the rare experience of investing billions of dollars and drilling dozens of wells in shale plays outside the US and Canada, though neither has yet seen the success of their US counterparts. 

Sinopec invested heavily in the US shale patch in 2012 in a bid to gain operational experience and access to directional drilling and fracturing technology. It has since brought that experience back to China, where it has taken the lead in shale development. Progress has been slower than many in China had hoped, but Sinopec has drilled more than 100 shale wells and operates China’s first commercial shale-gas project at the Fuling field. The company says that it has the capabilities to carry out out much of the technically advanced drilling and completion at Fuling work itself.

YPF, meanwhile, continues to see progress in the Vaca Muerta shale. The company has drilled more than 130 shale wells and says it is bringing costs down quickly. By November last year, the company’s 5.5 million cubic metres per day of shale gas production accounted for more than 10% of its total gas output, and the Loma Campana field, where it is investing alongside Chevron, has become Argentina’s second largest oilfield.  

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