Shell, YPF target Argentina's Vaca Muerta for oil export growth, then gas

Buenos Aires — Shell is considering launching its second development in Vaca Muerta, helping to increase oil and natural gas production already on track to reach 40,000 boe/d over the next year, a senior executive said Oct. 14.

"We are about to make a decision" to build a plant for Bajada de Anelo next year, Sean Rooney, who runs Shell's operations in Argentina, said in an online conference by the Rio Negro newspaper. "It would be another development."

Shell is already producing some 13,000 boe/d its first development on the three adjacent blocks — Coiron Amargo Sur Oeste, Cruz de Lorena and Sierras Blancas — in Vaca Muerta's oil window, and plans to launch a plant that will take output there to 40,000 boe/d in 2021.

Vaca Muerta, one of the world's biggest shale plays, came into development in 2012-13, attracting majors like Chevron, ExxonMobil and Total for the potential to develop resources so large that it could make Argentina a global supplier of oil and gas. While the focus at first was on the gas window to plug a local deficit, attention has since shifted to the oil window for better prices and export potential.

Argentina is self-sufficient in oil — it hasn't imported crude since 2018 — and has excess capacity in pipelines, allowing companies to ramp up exports this year of Medanito, a light crude produced from Vaca Muerta and the Neuquen Basin where the play is located. Medanito exports shot up to an average of 10,500 b/d in the first eight months of 2020 from 1,340 b/d in all of 2019, according to Energy Secretariat data.

The other drivers of the increase were a drop in domestic demand during a now more than six-month lockdown for the coronavirus pandemic and a suspension in the 8% export tax since May.

Shell has made two international shipments of Medanito, helping to test market demand for the product.

"Our clients are asking for more because it is a high-quality crude," Rooney said.

According to market sources, the discount for Medanito has shrunk from Brent minus $10/b to less than $4/b.

Rooney said that if production increases enough to make consistent exports and enter into long-term supply contracts, Medanito could be sold without a discount.

"Argentina has a great potential to export oil and gas, beginning with oil," he said.

YPF AIMS TO RAMP UP CRUDE EXPORTS

YPF, the country's biggest oil and gas producer, is following the same strategy as Shell with plans to ramp up crude exports to 100,000 b/d over the next few years from sporadic amounts this year before gradually developing gas resources for future export growth.

"We want to begin to build a production base — approximately 500,000 boe/d — that will allow us in the next three to four years to export consistently some 100,000 or 150,000 barrels of oil per day," Pablo Iuliano, the state-backed company's unconventional upstream vice president, said at the conference. "We don't want to stop there, but continue to grow."

YPF, which produces a total of around 220,000 b/d of crude throughout Argentina, has been targeting the play for production growth, first to supply the local market and then increase exports. But for YPF to reach 100,000-150,000 b/d in exports on its own will require huge investments in drilling and and continued efforts to cut costs, in particular for frac sand, labor and services contracts so that projects can be sustained despite low prices, Iuliano said.

He estimates that to export these amounts, YPF will have to drill 400 wells per year and develop "five to six blocks in parallel."

GAS IS A LONGER-TERM BET

Companies likely will focus on oil for the export potential, but Vaca Muerta has more potential for gas with 300 Tcf of resources.

That likely will take longer to develop because of the huge investments needed to increase production, reduce breakeven prices and build infrastructure for exporting.

"Oil is easier to develop and the international market is easier to access," Rooney said. "To develop the gas potential of Vaca Muerta, you need big markets and big plants."

It will cost $5 billion-$10 billion to build a liquefaction plant to export the gas globally, plus billions of dollars more for drilling wells and building pipelines, he said/

"We need more time and special conditions," Rooney said.

In August, Argentina's government said it was preparing a 2020-2024 program for rebuilding gas production, including by creating a system of auctions for long-term supply contracts. Producers will be able to sell gas for delivery over four years — eight years from offshore gas projects — at market prices to be determined at the auctions, helping them to plan investments to increase output.

On Oct. 14, Argentinian President Alberto Fernandez said at a business conference that the program would be implemented in the next few days with the view to increasing exports, first regionally, then globally.

Rooney said Shell's strategy is to develop oil first to help finance its subsequent gas projects.

At YPF, Iuliano said gas can be developed slower to meet an expected rise in global demand as countries shift away from oil to cleaner sources of energy.

"Gas is going to be the energy of the transition," he said.

However, to develop the gas, costs must be brought down so that it can be produced profitably at less than $1.50/MMBtu so that exports can be competitive on the global LNG market, Iuliano added.

Most producers have said that the breakeven price is now at around $3.50/MMBtu.

Iuliano did not say what YPF's breakeven price is, but he said the company is seeking to cut costs by 30% compared with pre-pandemic levels by improving efficiency in processes, the value chain and labor.

There is a sense of urgency to harness the potential of Vaca Muerta, he warned.

"We don't have more than 10 years to develop Vaca Muerta to make it a platform for oil and gas exports," Iuliano said. "Gas has a slightly longer horizon as the transition energy for the future, but we have to do everything in no more 10 years."

—Charles Newbery, newsdesk@spglobal.com