Argentina's Quintana Energy prepares to start drilling Vaca Muerta oil in Mendoza

Argentinian oil producer Quintana Energy is preparing to drill for Vaca Muerta oil in Mendoza province in the northern flank of the shale play, as more companies migrate that way, COO Juan Martín Gandolfo said Oct. 20 in an interview.

The company will invest $40 million to drill two wells, each with 2,000 horizontal laterals, to test the potential in Cañadón Amarillo. The block is on the border with Neuquén, a province that has so far led a surge in Vaca Muerta oil production from a core hub in its center-east.

"We have a lot of expectations in Mendoza," Gandolfo told Platts, part of S&P Global Energy, on the sidelines of the Argentina Oil and Gas Patagonia Expo in Neuquén.

These hopes are based on several factors. One is that YPF, the country's biggest oil producer, has an adjacent block called CN VII A that it plans to develop. The state-backed company had originally considered drilling one well there, then increased the plan to three, and now it is going to drill four, he said, adding that this is a sign of the potential in the area. YPF is also producing in this northern flank from two wells "with good production," Gandolfo added.

The second factor is that most of the bids in a recent auction for new Vaca Muerta acreage in Neuquén were for blocks in the north of Vaca Muerta, helping to expand drilling beyond the core hub in the center of the play.

"Today the industry is moving that way," Gandolfo said of the north.

A conventional advantage

Cañadón Amarillo lies within the oil window of Vaca Muerta. The block has long been producing conventional oil, as has Quintana's nearby El Portón Mendoza block where it has pipelines and processing facilities.

Gandolfo said the capacity of these facilities is for the first few thousands of barrels per day, meaning that the company only has to invest in drilling the wells and connecting them.

"We have installations to put into production and start the development" of Cañadón Amarillo's Vaca Muerta acreage, he said. "This is an advantage."

Financing out of cash flow

Quintana will finance the project through sales of its conventional crude from blocks across the country, many of which it acquired over the past few years from YPF, which has been refocusing its business on Vaca Muerta.

Quintana sells the Medanito sweet light crude it produces from conventional fields in the Neuquén Basin to Chevron and Trafigura, and it exported its first shipment of Cañadón Seco medium-heavy crude from Santa Cruz province in the south earlier this month, Gandolfo said.

That shipment was for 189,000 barrels to Los Angeles, according to company data.

These sales will provide the initial financing for its Vaca Muerta project, while the company is considering bringing on partners to increase drilling in the block in the future, he added.

Steady crude demand

Gandolfo said he expects local demand and exports of heavier crudes to continue, given that refiners need them for their blends.

This provides the company with cash flow to invest in Argentina at a time when local conditions are stable after years of ups and downs — and when international oil prices are above $100/b, as continuing tensions in the Middle East raise concerns about global energy supply.

Gandolfo said that while this is a "tailwind" for the industry to grow in Argentina, he warned that it could lead to complacency, with companies failing to push ahead with efforts to become more efficient.

"We have to continue working a lot on efficiency," he said. "We have to cut costs to be competitive."

This includes, he added, reductions in taxes, so that when oil prices drop again to the $65/b level they were at before the US-Iran war.