Argentina's YPF launching first shale oil pilot project in Mendoza

YPF, the biggest oil producer and second for natural gas in Argentina, said late July 26 that it is launching its first shale pilot project in Mendoza -- a western province at the northern end of the Vaca Muerta shale play -- and is seeking to squeeze more out of maturing conventional reserves.

The state-backed company will invest $17 million in the pilot to drill two horizontal wells in the CN-VII and Paso de las Bardas Norte blocks, according to a statement.

"This pilot opens new perspectives to the possibility of expanding the geographical limits for the development of this unconventional play," the company said.

YPF chairman Pablo Gonzalez said the project will start this year.

YPF is investing a total of $2.7 billion this year to return to production growth after its total hydrocarbon production tumbled 9.2% on the year in 2020, as a nearly eight-month lockdown due to the COVID-19 pandemic last year slashed demand and forced the company to shut-in wells as it could not sell all of the production.

The slump, however, hit bottom in the second quarter of 2020, and the company expects oil production to rise 5% and gas by 9% in the second half of 2021 compared with the year-earlier period, taking the full-year average output of oil to 208,000 b/d in 2021 and 35 million cu m/d in gas. That would compare with the average of 206,800 b/d of oil and 35.6 million cu m/d of gas in 2020, according to company figures.

The focus for long-term production growth is on Vaca Muerta, one of the world's biggest shale plays.

Mendoza is home to about 40% of the acreage in Vaca Muerta, while most of the rest is due south in Neuquen, a hotspot for drilling in the play by the likes of Chevron, Equinor, ExxonMobil, Shell and TotalEnergies, some projects in partnership with YPF.

The development of Vaca Muerta has been driving a recovery in the country's oil and gas production, which had been in decline since the late 1990s and early 2000s as conventional reserves mature. While production slipped last year from a most recent high of 520,000 b/d of oil and 144.4 million cu m/d of gas at the start of the COVID-19 pandemic, new drilling in Vaca Muerta has been leading the recovery.

Argentina was producing 504,129 b/d of oil in May, up from a pandemic low of 445,614 b/d a year earlier, according to data from the national Energy Secretariat. The latest data show that the country's total crude production averaged 504,129 b/d this past May. Gas production was still lagging at 121.3 million cu m/d in May, but has started to recover from a pandemic low of 114.2 million cu m/d this past April, the data showed.

Tertiary recovery

YPF said it also plans to invest $71 million in tertiary recovery projects, including in four polymer injection plants in its Chachahuen block and related efforts in Cerro Morado.

If the results are promising, the company said it could invest $400 million in a tertiary recovery project on those blocks, which would include drilling 300 new wells.

The province vowed to halve the royalty tax on production if the company makes this investment, according to the statement.

While YPF is focusing on shale for production growth, it has been stepping up its use of enhanced recovery techniques in maturing conventional fields to sustain conventional output, which accounted for 80% of its total crude output and 54% of its gas in 2020. The strategy is designed so that it can grow total output with shale, which has far more potential for growth

YPF said it also has asked for 10-year extensions to its concessions for Chihuido de la Salina, Chihuido de la Salina Sur and Paso de las Bardas Norte with promised to invest $25 million in the three blocks.

Refinery upgrade

YPF is the biggest oil producer in Mendoza, where it also operates a 105,500 b/d refinery.

The Lujan de Cuyo refinery is slated for a $103 million investment to boost run rates, expand distribution and adapt the processes to produce higher-quality diesel and gasoline, YPF said.