Further Cost Reduction Needed on Vaca Muerta Play

Argentina’s Vaca Muerta unconventional play ranks among the top shale plays in terms of rock quality, but high costs are inhibiting the pace of development.

When benchmarked against North American plays, Shell’s Argentina shale wells rank among the top one to two percent, Laurens Gaarenstroom, Royal Dutch Shell’s general manager, emerging basins, Latin America, told reporters during a media event Monday in Houston. But costs to develop Argentina’s Vaca Muerta resource are way too high versus North America. The high costs are due to a lack of native oilfield services industry in Argentina – meaning that most equipment has to be imported – and high labor costs.

Shell had to spend a significant amount of money initially on data acquisition to learn about the basin, the company said. But it has managed to reduce its well costs – which were running more than $30 million each – by 50 to 60 percent. Shell is continuing its journey to further reduce costs as it continues to learn about Argentina’s subsurface, Gaarenstroom said.

Gaarenstroom said Shell believes the estimated ultimate recovery for its black oil wells is close to one million barrels. Gaarenstroom credits Shell’s results in Argentina with the power of its shale operations and personnel being together in Houston as one unit, and the ability to learn from other operations.

In addition to lowering costs, the oil and gas industry will need to work with key stakeholders such as government agencies to try and stimulate more competition.

“While we won’t get the capitalism on steroids level that we see in the Permian, more choice for the industry is needed,” Gaarenstroom commented.

One area that needs to be addressed in the cost structure of labor. For example, Gaarenstroom requires 12 workers to man a rig in Argentina, while Shell’s Permian Basin operation requires six people for a rig. But costs in Argentina are higher than the Permian Basin.

Shell hopes by the end of this decade to have the Vaca Muerta positioned as a very firm growth opportunity. One thing that will help is the fact that Argentina’s exploitation concessions give an operator up to 35 years to explore a resource, meaning the company faces now pressure to drill to retain leases. That kind of flexibility ‘is quite handy to have in these times,’ Gaarenstroom noted.

So far, Shell has drilled 16 wells in its own blocks in Argentina, and 10 in partnership with Total S.A. Shell operates half of its 155,000 net acre position in conjunction with Total. The company has been initially focused on drilling horizontal wells in Vaca Muerta.