The Fuse

Will Argentina’s Shale Revolution Finally Begin?

by Nick Cunningham | May 18, 2017

Argentine President Mauricio Macri has promised to replicate the U.S. shale revolution in South America, and although the effort is unfolding slower than expected, Argentina remains the most attractive country for shale drilling outside of North America.

After some frustrating years, the outlook for Argentina’s Vaca Muerta is arguably more positive than it has ever been, with some oil majors recently giving the go-ahead on big shale investments in the country.

Argentina is believed to hold more than 800 trillion cubic feet of shale gas and 27 billion barrels of tight oil, according to the EIA. Despite those heady figures, high drilling costs, above-ground constraints, and infrastructure bottlenecks have deterred large-scale investment. However, after some frustrating years, the outlook for Argentina’s Vaca Muerta shale is arguably more positive than it has ever been, with some oil majors recently giving the go-ahead on big shale investments in the country.

Improved political climate

Some oil executives credit the more business-friendly government of President Mauricio Macri for the surging interest in Argentina’s shale.

Up until a few years ago, exploration for Argentina’s oil and gas was largely confined to the state, with restrictions preventing international companies from building up a presence in the Vaca Muerta. However, a ballooning energy deficit combined with growing needs for new revenue led to the former government of President Cristina Fernandez de Kirchner to crack open the door for private investment. The election of President Mauricio Macri in 2015 accelerated economic liberalization—he lifted currency controls and resolved a longstanding dispute over missed debt payments with outstanding creditors. The moves paved the way for a freer movement of capital, opening up the possibility of increased investment from international oil companies.

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“I am really encouraged by what I hear and what I see, so I think there is a lot of future here,” BP CEO Bob Dudley said in a Bloomberg interview in September 2016. Dudley said that the Macri government is “saying all of the right things and in nine months they’ve done a lot of the right things.” The shale revolution is taking some time to unfold in Argentina, but “the engine is just starting up, the momentum is just starting.”

Ironically, even as the oil industry decried the regulatory red tape and strength of labor unions as main deterrents of investment, Argentina is attractive right now because of its regulated oil and gas prices.

Ironically, even as the oil industry decried the regulatory red tape and strength of labor unions as main deterrents of investment, Argentina is attractive right now because of its regulated oil and gas prices. In January 2017, the government inked a deal with labor unions and the oil industry in order to break down barriers to new investment and drilling. Included in that agreement is a guaranteed price for natural gas at $7.50 per million Btu (MMBtu) through 2018, which is more than double the prevailing front-month contract price in the U.S. The price will be gradually lowered over the next several years before being allowed to float freely in 2022. The generous price is “indispensable for attracting long-term investment,” the government said in a statement. Moreover, a longstanding duty on crude oil exports was allowed to expire. In return, the government was able to secure commitments from several high-profile companies to invest $5 billion in the Vaca Muerta this year.

Oil majors increase investment

As a result, after years of hype, the rush is on for the Vaca Muerta. Production stands at a meager 62,000 barrels of oil equivalent per day, according to Morgan Stanley, but this is just the beginning. Even as the oil majors including BP, Chevron, Royal Dutch Shell, and ExxonMobil have had a presence in Argentina for years, they are now stepping up investment in a big way.

ExxonMobil, for example, has been keeping an eye on a pilot project for a few years and will begin formal shale gas production in May. Through Exxon’s subsidiary XTO, it will “accelerate gas production” up to 5 million cubic meters per day over the next two to three years. Also, the company said last year that if the pilot project offers promising results, it would invest more than $10 billion in the Vaca Muerta over the next 20 to 30 years.

One of the more recent statements came from French oil giant Total SA, which gave the greenlight to a $500 million shale gas venture a few weeks ago. The move was portrayed by Total’s management as the initiation of a growth phase for the company, after years of cost-cutting. “We have giant resources of non-conventional gas under our feet in Argentina,” Total CEO Patrick Pouyanne told reporters in April. “It’s the beginning of a nice story.” Pouyanne added that with the oil market still languishing and only starting to rebound, investing today would allow the company to take advantage of slack industry conditions. “The costs are low, so it’s the right time to invest,” Pouyanne said. “Our strategy is to take advantage of this market, where you have a lot of weak players.”

In addition to political hurdles, drilling costs have scared away investment to date.

In addition to political hurdles, drilling costs have scared away investment to date. The Vaca Muerta is still largely unexplored, so it takes time to learn the geology and find the sweet spots. Also, the lack of pipelines, roads and processing facilities add to costs and hold back a quick ramp up in production.

Progress over the past several years, though, has been impressive. Chevron is working with Argentine state-owned YPF in the Vaca Muerta, a joint venture that has already reported steady declines in drilling costs. For example, in the fourth quarter of 2015, Chevron said costs at its Loma Campana field fell from $14 million per well to just $11.2 million.

Drilling costs have since declined by even more, falling to under $10 million per well in many cases, although they still remain roughly 30 percent higher than the U.S. “If the costs come to where we want them, this will happen,” Royal Dutch Shell’s Global Upstream Director Andrew Brown told reporters, referring to the potential for an authentic shale boom in Argentina. Shell says it drilled a horizontal well earlier this year for just $5 million. Shell signed a $300 million pilot project with YPF in February.

Still early days

Despite the enormous improvements in drilling economics, it will take time for the shale revolution to play out in Argentina.

Despite the enormous improvements in drilling economics, it will take time for the shale revolution to play out in Argentina. The investment to date has been relatively minor, and YPF says that its production will be flat this year compared to 2016. Higher spending levels will be needed in order for production to truly ramp up.

Fortunately for Argentina, that finally appears to be imminent. President Mauricio Macri visited Houston in April to sell investors and oil companies on his country’s shale potential. His outreach, and more importantly his dramatic policy overhaul, is starting to bear fruit. Argentina’s energy minister projects the Vaca Muerta will attract $6-$8 billion in investment this year, which will double to $12-$15 billion in 2018, and up to $20 billion from 2019 and beyond.

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