Argentina’s Potential Shale Boom

Since shale plays began revolutionizing the oil and gas industry, North America has been the dominant continent in making them successful. But a strong contender some 5,000 miles south of the U.S. border is beginning to turn heads.

Geologically speaking, Argentina is considered a rising star in the shale oil and gas industry because of its Vaca Muerta formation, discovered to be a world-class shale gas/oil play in 2010 and believed to contain an estimated 16.2 bbo and 308 tcf of recoverable natural gas by the Energy Information Administration.

“That’s enough for the country to emulate the U.S. shale boom,” reported Platts last August.

With an incredible thickness of 1,000 feet in its northern reaches, Vaca Muerta has operators contemplating stacking horizontal wells in each pay zone to optimize production.

Yet, the play is in the early stages of production and some fear it might stall there.

While Vaca Muerta has no doubt cleared the geology hurdle, standing in its way are obstacles of economics and national policies that could keep Argentina’s bountiful resources in the ground.

International operators with stakes in the play remain hopeful that the country will continue a trend of revamping policies to help make long-term investments in Vaca Muerta attractive and safe.

And as they wait, they are surprising many in the industry by sharing proprietary seismic and well data to speed up the exploratory process with the hope of kicking production into high gear and eventually placing Argentina in a prominent position on the shale map.

Vaca Muerta Shale

Named after a hill called the “Dead Cow” in the foothills of the Andes Mountains in west-central Argentina where the Vaca Muerta Formation outcrops, this geological unit covers approximately 12,000 square miles in the Neuquén Basin.

It has been one of the main source rocks of conventional oil and gas in the Neuquen basin since 1918. Yet it wasn’t until 2010 that the first Vaca Muerta unconventional oil discovery was made in the shale itself by then Yacimientos Petroliferos Fiscales (YPF)-Repsol, the former parent of Argentina’s newly nationalized YPF.

The largest shale operator in the country, YPF reported in April 2015 that production had reached 43,000 bpd of oil equivalent in its most prolific field, Loma Campana, which is being exploited with a subsidiary of Chevron. It is the first shale oil development project outside of North America.

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Since shale plays began revolutionizing the oil and gas industry, North America has been the dominant continent in making them successful. But a strong contender some 5,000 miles south of the U.S. border is beginning to turn heads.

Geologically speaking, Argentina is considered a rising star in the shale oil and gas industry because of its Vaca Muerta formation, discovered to be a world-class shale gas/oil play in 2010 and believed to contain an estimated 16.2 bbo and 308 tcf of recoverable natural gas by the Energy Information Administration.

“That’s enough for the country to emulate the U.S. shale boom,” reported Platts last August.

With an incredible thickness of 1,000 feet in its northern reaches, Vaca Muerta has operators contemplating stacking horizontal wells in each pay zone to optimize production.

Yet, the play is in the early stages of production and some fear it might stall there.

While Vaca Muerta has no doubt cleared the geology hurdle, standing in its way are obstacles of economics and national policies that could keep Argentina’s bountiful resources in the ground.

International operators with stakes in the play remain hopeful that the country will continue a trend of revamping policies to help make long-term investments in Vaca Muerta attractive and safe.

And as they wait, they are surprising many in the industry by sharing proprietary seismic and well data to speed up the exploratory process with the hope of kicking production into high gear and eventually placing Argentina in a prominent position on the shale map.

Vaca Muerta Shale

Named after a hill called the “Dead Cow” in the foothills of the Andes Mountains in west-central Argentina where the Vaca Muerta Formation outcrops, this geological unit covers approximately 12,000 square miles in the Neuquén Basin.

It has been one of the main source rocks of conventional oil and gas in the Neuquen basin since 1918. Yet it wasn’t until 2010 that the first Vaca Muerta unconventional oil discovery was made in the shale itself by then Yacimientos Petroliferos Fiscales (YPF)-Repsol, the former parent of Argentina’s newly nationalized YPF.

The largest shale operator in the country, YPF reported in April 2015 that production had reached 43,000 bpd of oil equivalent in its most prolific field, Loma Campana, which is being exploited with a subsidiary of Chevron. It is the first shale oil development project outside of North America.

A year ago, the operator YPF reported an investment of more than $3 billion to drill roughly 350 vertical wells and roughly 50 horizontal wells in Vaca Muerta.

“Vaca Muerta rivals U.S. plays in having similar reservoir properties, like porosity, areal distribution, geomechanical properties, a wide range of fluid types – such as oil, condensate and gas – but a much higher thickness than other plays.

It is essentially like having multiple shale plays stacked one on top of the other,” said AAPG member Hernán Reijenstein, an earth scientist and stratigrapher at who has worked on Vaca Muerta for nearly three years. “However, Vaca Muerta is on an earlier exploratory stage compared to most North American shale plays. There is still a lot to do!”

Initially, most operators in the basin believed the best approach to exploiting the thick portions of Vaca Muerta was to drill numerous vertical wells and hydraulically fracture them, Reijenstein said.

That thinking is now changing, partly influenced by proven horizontal drilling and fracturing practices in the United States, and partly because horizontal wells – although more expensive to drill – typically yield twice the productivity.

Of course, stacking horizontal wells – a design that would be required by Vaca Muerta’s multi-layered pay zones – would be an exercise in trial and error, as few plays in the world are similar – the Montney shale play in Canada being one.

“It is a nice problem to have,” Reijenstein said of the challenge.

Other operators are willing to try as well. It is reported that companies with partnerships, contracts or memorandums of understanding with YPF include ExxonMobil, Shell, Total, Medanito (of Argentina), Tecpetrol, Pan American Energy, Petrobras, Wintershall, Dow Argentina, Petronas (the Malaysian state oil company), Helmerich & Payne, Gazprom and Sinopec.

Tricky Economics

As some of the players move into the pilot phase of the play, the “slow progression” they are making is a sign of the difficulties that exist when doing business in Argentina, reported Platts, stating that the most difficult challenge is reducing drilling and completion costs to profitable levels.

YPF has brought down the cost of drilling a vertical well from $11 million in 2011 to $7 million in 2015. Yet, the cost of a typical horizontal well in the Eagle Ford or Bakken formations is $4 or $5 million.

Without profits, the reported $20 billion a year needed to develop Vaca Muerta won’t be met. “Without the investment in drilling tens of thousands of wells, the economies of scale won’t be reached on the fields to cut costs,” Platts reported.

The roughly 400 wells drilled to date must still be tested for several years before companies will likely commit to investing a serious amount of capital – especially during an economic downturn.

To attract investors, Argentina has made some changes in light of the country’s well-known economic and political turmoil. It has raised gas prices to $7.50/MMBtu, fixed light crude at $77 a barrel, introduced tax breaks on importing rigs, and extended shale field licenses to 35 years, according to Platts.

More importantly, though, the country must regain access to international financial markets after severely defaulting on loans. “It is hard to raise money for drilling in Argentina – and expensive,” reported Platts. “Borrowing costs run about twice that of neighboring Brazil.”

Without access to lower interest rates, developing Vaca Muerta will be difficult without funding from international investors.

Attracting Investors

As director of the Latin America and Caribbean Energy Program at the Jackson School of Geosciences at the University of Texas at Austin, Jorge R. Piñon has visited with countless financial leaders from various governments and understands the challenges of countries that are rich in resources but poor in capital and technology.

Piñon explained that, more often than not, these countries change agreements mid-game, making it difficult for international operators to stay on budget and generate anticipated long-term profits in order to recover capital investments.

Common game-changers have been:

  • Changing royalty agreements.
  • Upping concessions yet still requiring third-party investors to act as operators.
  • Raising taxes on produced oil, among other assets.
  • Increasing local content requirements.

“The issue with Argentina is the same as the issues with many other countries in Latin America. It’s not an issue of geology. It’s an issue of having the right ‘shovel’ to access those resources,” Piñon said.

“They need to have the right model for private capital and technology to come in and monetize those resources. It’s an issue of continuity and having a political system that somehow guarantees a long-term investment and commitment so that the rules of the game are not going to change every time there is a political change in the host country.”

He added, “International companies have had doubts about Argentina because in the past, politically, they have changed the rules of the game.”

However, Piñon believes that the newly elected President Mauricio Macri’s choice of former oil industry executive Juan José Aranguren as Energy Minister (the former head of Shell Argentina), will bring much needed business experience into the policy position.

Having had several conversations with senior federal and provincial officials, Piñon said he believes that Argentina is ready to commit to a contract model that will attract long-term foreign capital and technology.

Importing much of its natural gas from Bolivia, Argentina needs a successful shale play to provide power to its people. “This is an opportunity they cannot throw away,” he said.

In the Meantime

Despite the uncertainty, a number of operators who have leased blocks in Vaca Muerta agreed to press ahead in their ventures and share data and standardized interpretations from one of their exploration wells in addition to their 2-D seismic data to help piece together the regional geology of Vaca Muerta as a whole.

Such transparency saves each operator about two years of time, Reijenstein said. “Once you understand the geographical distributions of the rock properties throughout the basin and the regional context of the play, you can be more predictive in knowing where you will find sweet spots and more productive areas in your own blocks. And also, it can save some operators from losing money in marginal areas.”

The idea of sharing information came from several geologists in advance of the November 2014 Argentine Institute of Oil and Gas (IAPG) congress, known as CONEXPLO. They proposed generating a regional, multi-company well transect that would run 250 kilometers long and span roughly 15 blocks of the basin.

The idea was quickly accepted by most of the operators, including Chevron, and eventually expanded to include 2-D seismic data and detailed outcrop descriptions from the western edge of the basin, Reijenstein said.

The regional seismic transect, which included tied well logs and mineralogical interpretations, was hung on the wall at the congress and ran 3 meters tall by 15 meters wide.

“You could see the different wells along the transect and see how the mineralogy changes from the base to the top,” Reijenstein said. “It allowed people to gather in front of this huge panel, make observations, and discuss their own interpretations during the congress.”

Reijenstein said he has never experienced this type of collaboration before and is grateful companies agreed to share proprietary data that many typically hold so sacred.

“From a scientific point of view, it’s always much better when you are working with more data,” he said.

Since the congress, those who participated in the transect agreed to have their well and seismic data published in a book with a working title of “Transecta Regional de la Formacion Vaca Muerta.” The book incorporates integrated outcrop studies from Diego Kietzmann at the University of Buenos Aires with subsurface data from the industry to facilitate understanding of the Vaca Muerta play.

“The sharing information efforts between companies, universities and consortia are quickly advancing the Vaca Muerta knowledge at an industry level in Argentina,” Reijenstein said.

The book will be published this year by the IAPG.

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