The Fuse

Historic Election and Early Successes Inspire Confidence in Argentina’s Vaca Muerta Shale

by Nick Cunningham | November 24, 2015

Expectations of the North American shale revolution spreading abroad have so far disappointed, but Argentina is often cited as a bright spot against an otherwise dim outlook for international shale. Argentina sits on an estimated 800 trillion cubic feet of shale gas, according to the U.S. Energy Information Administration, ranking it second behind only China for the world’s largest shale gas reserves. Argentina also sits in fourth place for the world’s largest shale oil reserves with 27 billion barrels.

While the resource potential is enormous, companies plying Argentina’s shale basins have yet to replicate the production boom that took place in North Dakota and Texas. But the industry has reasons to believe that its best days are ahead.

“The Vaca Muerta play could well be the best oil and gas shale opportunity outside of the U.S. and Canada presently,” Deborah Resley, manager for Latin America at IHS Energy, told the FT in September.

Shale politics

The geology looks favorable, but shale production has faced a series of “above the ground” problems that have prevented drillers from moving forward in a major way.

The governments of President Cristina Fernandez de Kirchner and her late husband Nestor Kirchner have undoubtedly held back shale investment. In 2012 President Cristina Kirchner nationalized YPF, an oil company that was majority owned by the Spanish oil company Repsol. In a brutal expropriation, the Argentinian government seized Repsol’s majority stake in YPF, which culminated in a $5 billion settlement last year. At the same time, bad memories from a wave of industry privatization in the 1990s made Kirchner’s decision to reclaim “energy sovereignty” a popular move.

For foreign investors, the fight with Repsol has loomed large: Not only did it serve as a cautionary tale, but Repsol issued legal threats against other oil companies interested in the asset, which was discovered while YPF was its subsidiary.

The business climate in Argentina is notoriously challenging, as capital controls and taxes have deterred investment, but the YPF nationalization put a chill on shale development in Argentina. But in 2013, only a year after the move, President Kirchner realized that foreign investment would be critical to increasing oil and gas production in the Vaca Muerta beyond nominal levels. The Vaca Muerta is Argentina’s largest shale formation, which has sparked excitement and raised expectations of another shale revolution. YPF does not have the $200 billion it estimates will be necessary over the next decade to tap the Vaca Muerta and erase Argentina’s energy deficit. Furthermore, for foreign investors, the fight with Repsol has loomed large: Not only did it serve as a cautionary tale, but Repsol issued legal threats against other oil companies interested in the asset, which was discovered while YPF was its subsidiary.

Moreover, the standoff between President Kirchner and an American hedge fund over outstanding debt related to Argentina’s 2001-2002 debt default have all but locked the country out of international financial markets, which has essentially blocked the ability to borrow the capital needed for shale development.

Unable to go it alone, the Argentine government sought international investment. With the administration’s blessing, in 2013 YPF and Chevron agreed to a joint venture on shale development. Chevron promised to invest billions of dollars in drilling, and the Kirchner government loosened tax rules to seal the deal and repair relations.

The joint venture has yielded some modest success. The companies are producing 43,000 barrels of oil equivalent per day (boe/d) in the Vaca Muerta, and have managed to bring down the cost of drilling. Interest in the Vaca Muerta is picking up, and international companies including ExxonMobil, Royal Dutch Shell, Total and Wintershall have all scooped up acreage and are implementing modest drilling programs.

The development of the Vaca Muerta in some ways mirrors the initial phases of shale development in the United States. For example, the 30-day initial production average in the Loma Campana block in the Vaca Muerta saw flow rates from individual horizontal wells of around 443 boe/d in 2014, according to Wood Mackenzie, which is roughly on par with figures from the Eagle Ford in South Texas when horizontal drilling began in earnest. The average production in the Eagle Ford has easily doubled since then, and the Vaca Muerta is on its way: Average initial production over 30 days has jumped to 646 boe/d in the Loma Campana block.

Argentina’s 2015 oil production is flat over 2014 at .63 million barrels per day, and Vaca Muerta output is still nothing more than a trickle.

But Argentina’s 2015 oil production is flat over 2014 at .63 million barrels per day, and Vaca Muerta output is nothing more than a trickle compared to the more than 2 million barrels per day produced from Texas’s Permian basin alone, for example. The roughly 400 wells drilled to date in Argentine shale also pale in comparison to the thousands of shale wells drilled in the United States each year. While Argentina holds promise, shale is still very much a North American game, so far.

Election creates new potential

The oil and gas industry is hoping this will change.

Pro-business candidate Mauricio Macri won the Argentine presidency in a runoff election on November 22, putting an end to the 12-year rule of the leftist Kirchners.

Macri could usher in a new era for Argentina. He promises to be friendlier to foreign direct investment to enable the flow of capital. He has vowed to resolve outstanding issues with creditors, which he says will lift the clouds hanging over the Argentina economy and allow a return to international financial markets. He promises to cut spending, attack inflation and “adjust” currency controls. His election was hailed by international investors—the Bueno Aires stock exchange has soared in anticipation of his rise to power, jumping by 40 percent since the beginning of October.

Oil and gas companies will welcome the change in government, as they weigh investments in the Vaca Muerta. The timing of political change could be fortuitous, as the billions of dollars in investment from YPF and Chevron have already demonstrated the formation’s tremendous potential.

A new report from Wood Mackenzie predicts that the Vaca Muerta will see production double by 2018.

“YPF and its [joint venture] partners continue to decrease drilling and completion costs aiming to move into ramp-up and development phases,” Horacio Cuenca, Wood Mackenzie research director for Latin America, said in a statement.

As is true in every shale region, low oil prices will hold back upstream spending, a factor likely to prevent Argentina from continuing to ramp up output. Wood Mackenzie sees only modest development and drilling activity in 2016, with rapid expansion towards the end of the decade.

However, even if Wood Mackenzie is right and Argentina can double shale production over the next three years, it will still amount to a pittance compared to North American shale. But for the only country producing commercial volumes of shale oil and gas outside of the United States and Canada, it is a start.