Investment pace picks up in Vaca Muerta

31 October 2016
25 October 2016, Week 42, Issue 636

Investment is beginning to ramp up in the Vaca Muerta shale in Argentina, though drilling costs still need to come down, reports Charles Newbery from Buenos Aires.

WHAT: Investment in Argentina’s shale plays is speeding up. 

WHY: Some block restructuring by YPF and new investment plans by IOCs are driving development. 

WHAT NEXT: The government still has to remove some fundamental investment barriers to expedite development. 

Investment in the Vaca Muerta shale in Argentina is continuing to grow, as confidence in the country’s business environment improves. 

State-run YPF said last week that it would lead a US$452 million project to develop two new production pilots and explore another nine blocks. At the same time, Dow Chemical said it would spend US$2 billion on a shale gas project that is already under way in the play in partnership with YPF. 

Vaca Muerta is often compared to the Bakken and Eagle Ford shales in the US, and it has become the big hope for Argentina to turn around more than a decade of flagging oil and natural gas production that has led to shortages and driven up imports. 

“I think that we can really put Vaca Muerta into development,” Argentine President Mauricio Macri said last week on LU5, a radio station in Neuquen, the southwestern province where the play is located. 

Vaca Muerta has already attracted billions of dollars in investment, led by YPF. The company has teamed up with Chevron and Dow Chemical on the first projects to enter mass development, with output now at more than 50,000 boepd. 

BP-controlled Pan American Energy, ExxonMobil, Petrobras, Royal Dutch Shell, Total and other companies are in the exploration or pilot stages, with Gazprom also taking a look.

Renewed impetus

YPF last week unveiled some restructuring moves that will set the stage for new partnerships to emerge. It rearranged a handful of blocks it has in Neuquen in an agreement with Gas y Petroleo del Neuquen (GyP), the province’s state-owned oil company and a large acreage holder. 

Under the terms of the deal, YPF agreed to undertake production pilots on two blocks and explore another nine, with investment of US$452 million projected. 

One pilot will be carried out on the Pampa de las Yeguas I block, located to the northwest of Loma Campana, the first big shale development in Argentina by YPF and Chevron. The other pilot will be on the combined La Ribera I and II blocks, which are located adjacent to Loma Campana. 

YPF will invest US$170 million of the US$220 million for the five-year pilots under 36-year development licences. 

Other pilots are also planned for Bajada de Anelo, Bandurria Sur and La Amarga Chica. These will be carried out with several partners, the latter with Malaysia’s state-run Petronas. The partners for the other blocks have not been named. 

YPF also said it would explore Aguada de Castro, Bajo del Toro, Cerro Arena, Cerro Las Minas, Chasquivil, Las Tacanas, Loma del Molle, Pampa de las Yeguas II and Salinas de Huitrin over the next four years with capex of US$232 million, of which US$155 million will be stumped up by YPF. 

As part of the deal, GyP will secure rights for 14 blocks: Cerro Avispa, Cerro Partido, Loma del Mojon, Los Candeleros, Santo Domingo I, Santo Domingo II, Cortadera, Huacalera, Buta Ranquil I, Buta Ranquil II, Rio Barrancas, Cahpua Este, Corralera and Mata Mora. 

GyP will now be able to look for companies to join it in developing the blocks. The company often retains a 10% stake in such ventures, but its overriding aim is to find companies to develop Vaca Muerta. 

YPF said it had decided to let these blocks go, even though the move reduces its net acreage in the Vaca Muerta by 16%, because the company wants to focus “on the strategic blocks where YPF sees the most potential.” Its potential partners for the blocks are ExxonMobil, Total and local player Pluspetrol. 

The deal-making comes as Dow Chemical vows to press on with developing shale gas in partnership with YPF, with US$2 billion earmarked for drilling work on El Orejano. A US$700 million slice of that total will have been spent by the end of 2017. 

Gaston Remy, CEO of Dow Argentina, said the decision to continue developing shale gas stemmed from the promising results. “The development has surpassed our expectations,” he told Argentine state newswire Telam. 

He called on other companies to invest in shale to make more gas available as feedstock for manufacturing petrochemicals, Dow’s main business. 

“We’re hopeful that others imitate us and also get excited about investing in Vaca Muerta,” he said. 

The upshot could be that Argentina follows the lead of the US, where shale development is turning that country into a net energy exporter and giving it an edge in petrochemical manufacturing.

Ambitious goals

Macri expressed his belief that enhanced shale oil and gas extraction could also make Argentina a net exporter of energy, though that target remains some way off. His first goal is to wean the country off costly LNG imports by 2021-22. 

The government is raising the wellhead price of gas gradually to reach import parity of about US$7 per million Btu by 2019. It has also lifted capital and currency controls, sorted out a US$100 billion sovereign debt default and ended trade restrictions. 

Despite these positive steps, investment of US$20 billion per year is necessary over the next 20 years for Argentina to achieve energy independence and become an exporter, said Ernesto Lopez Anadon, president of the Argentine Oil and Gas Institute (IAPG), an industry group. 

Attracting this high level of investment will require the government to reduce the high cost of doing business in Argentina, where excessive taxes, strong unions, infrastructure constraints and inflation of 40% are significant impediments. 

“All of this makes the costs too high and has put the brakes on some projects,” said Anadon. 

Macri’s government has set a target of cutting drilling and completion costs to US$7 million per barrel from above the current US$11 million rate. 

Oil companies like YPF are incorporating walking rigs to speed up development and cut costs, while also using more local sand and improving worker efficiency. These steps have cut drilling costs by 40% since the first wells in Vaca Muerta in 2010-11. 

But more must be done, said Daniel Rellan, director of oil and gas at IAPG. “We still need to cut costs by another 30%.”

It is an ambitious target, but recent developments suggest that both investors and the government are serious about moving things forward fast. 

Edited by

Ryan Stevenson

Managing Editor

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