Argentina's Shale Industry Lures International Oil Companies

The whole world knows that shale revolutionized the U.S. energy industry. Now oil and gas executives are salivating when they think of Argentina’s booming shale industry.

Argentina ranks second in the world, behind China, in potentially recoverable shale-gas reserves, with 802 trillion cubic feet, according to a study last October by the U.S. Energy Information Administration. Argentina also ranks fourth in shale oil with an estimated 27 billion barrels.

In July, YPF and Chevron inked a deal to spend $1.2 billion to further develop shale oil and gas resources in the Vaca Muerta  formation. The deal calls for an initial phase in which 100 wells will be drilled in a 5,000-acre tract in the Loma La Lata Norte and Loma Campana areas.

Chevron said the deal gives it the chance to grow production beyond its 2017 target of 3.3 million barrels per day. Chevron says shale will help it make Argentina energy independent.

Chevron Argentina currently produces an average of 21,000 barrels of crude oil and 4 million cubic feet of natural gas in the Neuquen Basin. The Loma La Lata area is currently producing more than 10,000 barrels of oil-equivalent per day.

“This strategic investment will allow Chevron to take part in the Vaca Muerta, one of the most exciting shale oil and gas plays in the world today,” Chevron vice chairman George Kirkland said in a statement.

YPF said that Chevron will spend the first $300 million of the total planned outlay once a concession is granted by local officials. After that, both companies may continue with the total development of the areas, YPF said.

YPF said that including money it has already spent on the project together with the new contribution outlined in the deal with Chevron marks a total investment of $1.5 billion.

Royal Dutch Shell Plc Argentine unit plans to triple shale investments on prospects that the government will change energy policies to spur development of the Vaca Muerta formation and cut fuel imports.

Shell Argentina will increase its shale capital expenditures to about $500 million next year from $170 million at year-end, Chief Executive Officer Juan Jose Aranguren said. The company that mainly refines crude in Argentina will boost test drilling in Vaca Muerta with a long-term goal of producing light crude from its shale operations, he said.

Argentina will need $300 billion to develop Vaca Muerta in a six-year period that would make the country oil sufficient starting in 2020 and will keep producing for as many as 40 years, Aranguren said yesterday in an interview at his Buenos Aires office.

Vaca Muerta, the world’s second-largest shale gas and the fourth-largest shale oil formation, is in the Neuquen province in southwestern Argentina.

An Argentine-Chinese group called Bridas announced recently it will invest $500 million to explore for shale oil in Vaca Muerta.

Argentine billionaire Eduardo Eurnekian announced that his company Corporation America continues to work with government controlled oil company YPF “to develop projects” which could involve a $500 million investment in the country’s rich shale deposits.

 “We will establish a strategic partnership with YPF to develop oil and gas resources. A time-table has not yet been set up but we will start working on it. It will be an investment on areas agreed to with YPF,” said Eurnekian whose Corporation America manages Argentina’s airports, along with Uruguay and Italy, among other investments.

YPF is in advanced talks with Dow Chemical Co. about finalizing a shale gas development joint venture at Vaca Muerta, and is expected to be completed in the next few months. A preliminary accord with Dow Chemical is already in place.

Argentina’s state oil concern YPF two years ago started production at Loma la Lata, a windswept Patagonian plain under which lies clay-rich soil that contains shale oil. It is part of a larger shale-rich expanse Vaca Muerta.

To produce it for market, unconventional oil requires the same hydraulic fracturing  and horizontal drilling techniques as shale gas.

And now, YPF is using its shale oil know-how to speed into operation about 200 unconventional wells in the Loma la Lata, Vaca Muerta area every year. It plans to spend $15 billion in a decade, reaching 1,500-2,000 of these wells.

"With just two of these areas of 2,000 wells each, Argentina can fully meet its domestic oil demand, and even have some left over to export," Pablo Iuliano, YPF's unconventional oil manager, told Rigzone.

Energy reserves that lie below Vaca Muerta—in the provinces of Neuquen and Mendoza—have become the country's great hope for turning around its energy sector, and achieving a trade surplus.

"Developing our unconventional resources is our top challenge ...  and the key to our oil and gas independence," YPF said on its website.

YPF was brought back under state control in 2012 when it was expropriated from Spain's energy giant Repsol.

The reserve area YPF is working in at Vaca Muerta is 77 percent oil and the rest is natural gas, according to the company.

While the volume may not be massive, Argentina is a mid-sized economy with just 42 million people. In July, YPF was producing about 8,000 barrels of unconventional oil per day.

YPF expects to increase production to 17,000 barrels of oil per day (bopd) later this year, 38,000 bopd in 2014 and 60,000 the following year.

By 2017, authorities hope Argentina will be producing 100,000 bopd, as well as 13 million cubic meters a day in natural gas.

Unconventional oil is petroleum produced or extracted using techniques other than the conventional (oil well) method. Oil industries and governments across the globe are investing in unconventional oil sources due to the increasing scarcity of conventional oil reserves.

YPF is hoping to unlock its country’s vast resource potential, and its eyes are squarely on the giant Vaca Muerta formation, said CEO Miguel Galuccio.

“Road blocks in producing oil and gas in the South American country include regulatory and cost issues, as well as problems importing equipment because of high tariffs, and YPF is working hard to remove these obstacles,” said Galuccio.

YPF controls more than a third of the acreage at Vaca Muerta, and it has been aggressively pursuing partnerships, in particular with U.S. companies, to develop the play, YPF executives said.

Argentina energy analysts say that “lawmakers are inclined to write a new energy law in the next two years to establish a solid legal framework to attract investment. Argentina needs to offer some confidence to investors in order to bring capital back to Argentina.”

Argentina’s existing hydrocarbons law was adopted in 1967, when the country didn’t have any offshore or unconventional operations and environmental concerns were less of an issue.

According to environmentalists, fracking uses large amounts of water that must be transported to the fracking site, at significant environmental cost. Potentially carcinogenic chemicals used may escape and contaminate groundwater around the fracking site. Environmental campaigners also say that fracking is used by firms and governments to encourage a reliance on fossil fuels.

“A large amount of wells need to be drilled, which leads to a larger space taken up by the project. Aquifers may be affected due to filtrations of the chemical water used. Companies say these are safe techniques but they don’t provide any concrete evidence,” Hernán Scandizzo, member of Observatorio Petrolero Sur, told the local press.

Responding these accusations, YPF released a press report and assured that all its operations are done “taking care of the environment” and that “a remediation plan has been applied according to the province legislation.”

Neuquén has approved a set of rules regarding the extraction of shale oil and gas, which “have the objective of preventing and minimizing the environmental impact,” according to Act 1483/12.

The Argentine Oil and Gas Institute (IAPG) assured that the fracking technique poses no environmental risks since “the groundwater reserves are well protected” and “the water that remains after the extraction is correctly treated.”

The region is currently working on a strategy for a second phase of exploration activity in the Vaca Muerta in 2014. Apache holds 1.2 million net acres in the Vaca Muerta shale, of which approximately 950,000 net acres are in the oil and wet gas window of the play.

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