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Feature: Argentina faces big challenges to develop Vaca Muerta for export growth

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Feature: Argentina faces big challenges to develop Vaca Muerta for export growth

Highlights

Bottlenecks are holding back production growth

To unleash investment, economic stability is crucial

New government eyes how to emerge from a deep financial crisis

Buenos Aires — Argentina is suffering growing pains as it seeks to become a major oil and natural gas exporter, a goal thought feasible thanks to huge shale resources, but which also requires taking on big challenges.

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Argentina has the second largest shale gas resources in the world, and the fourth in oil. It is one of only four countries to put shale into mass-scale production along with Canada, China and the US. Vaca Muerta has surged from zero production in 2012-13 to more than 100,000 b/d of oil and 35 million cu m/d of gas at the end of 2019, with still less than 10% of the play in full-scale development.

The growth has turned around a decline in the country's oil and gas production, taking crude to 514,000 b/d from a 28-year low of 479,000 b/d in 2017, and gas to 140 million cu m/d from a 16-year low of 113.7 million cu m/d in 2014. The result: production is now enough to meet local demand and export the surplus.

Mariano Gargiulo, South America vice president of Baker Hughes, an oil services company, estimates that with enough investment, Vaca Muerta's production could rise fivefold over the next five years, taking exports from minor amounts in 2019 to $20 billion a year in 2024, maybe sooner.

"Many people say we can do this in five years, but if we do it well, then we can do it in a lot less time," he said.

According to S&P Global Platts Analytics, Argentina could increase oil production to 1.3 million b/d in 2040, led by the development of Vaca Muerta and offshore projects now in the early exploration phase. The forecast is supported by the large resource base and the quality of the shale in Vaca Muerta, as well as the experience of the operators, including multinationals like Chevron, Equinor, Total and Shell.

LONG HISTORY

Argentina also has a long history in oil. The country has been producing oil and gas for more than 100 years, meaning it has engineers, services experts and rig operators to ramp up production, plus a supportive culture and universities training new talent.

This puts Argentina in a unique position, like the US, of having both the resources and the capacity to build the infrastructure to get the output to the domestic and global market, Gargiulo said.

Tecpetrol, a local company, has shown that this is possible. It invested $2 billion to take a block in Vaca Muerta from zero to 17.5 million cu m/d of gas production, or nearly 13% of the national total, in 18 months.

"When the conditions are in place, we can do things like this," said Tecpetrol CEO Carlos Ormachea.

CHALLENGING CONDITIONS

Putting these conditions in place for investment is a challenge facing the new government of President Alberto Fernandez, a left-leaning moderate who took office December 10.

It won't be easy. Argentina fell into a financial crisis in 2018 that doubled inflation to 55%, pushed borrowing rates above 60% in pesos and 10% in dollars, and tightened access to credit. Most companies sidelined rigs and laid off workers after local oil and gas prices fell in 2019 to nearly breakeven levels in Vaca Muerta, hurting profits.

While oil prices -- not gas -- have started to recover, the economy is in its third year of recession and a sovereign debt default is looming, challenges that the new government must take on if investment is to pick up in Vaca Muerta.

Daniel Montamat, a former national energy secretary, said that for Vaca Muerta to achieve its full potential, $10 billion to $15 billion a year must be invested in fracking, plus another $2 billion to build a pipeline to move more gas out of the play and $5 billion in building an LNG export facility.

"If the economy doesn't recover and interest rates don't come down to a reasonable level for projects, we are not going to get the magnitude of the investment resources that are needed to move forward with an intensive development of Vaca Muerta," he said.

Economy Minister Martin Guzman said his plan is to restore economic growth, boost productivity and increase exports to generate dollars to pay to public debt and balance the national budget.

This is a step toward what the oil sector wants in order to revive investment: economic and regulatory stability, access to capital markets and reasonable oil and gas prices.

Daniel De Nigris, head of ExxonMobil's operations in Argentina, said well productivity in Vaca Muerta is similar "to the best wells" it is developing in the US plays. But in costs, Argentina is behind, and that is a hurdle for justifying investment.

"As an industry, we have to be focused on being competitive over the long term" so that investment flows are steady "year after year" in order to grow production and exports, De Nigris said.

Horacio Marin, director general of exploration and production at Tecpetrol, said well costs in Vaca Muerta are still 30% to 35% more than in the US.

The cost of shale oil production from Vaca Muerta fell to about $56/b in 2018, including drilling and completion, taxes and a 10% return on investment, from above $75/b in 2014, according to Platts Analytics. While costs are expected to continue to decline as operators gain more drilling experience, the breakeven is still higher than the $45/b for US shale oil and most other key oil supply areas except Canadian oil sands, the data show.

A SENSE OF URGENCY

There is not much time to improve the conditions so investment can increase. Montamat estimates that shale wells naturally decline in production by 70% after two years, so steady drilling activity is key for sustaining and growing production.

Making things harder, conventional oil and gas reserves are naturally dwindling by more than 3% per year, according to the Energy Secretariat. This means shale production needs to rise to two-thirds of total production "in the next four years" to compensate, said Tecpetrol's Ormachea.

Vaca Muerta is producing 20% of the country's oil and 25% of its gas, so there is a lot yet to do.

Gabriel Lopez, deputy secretary of energy in Neuquen province, home to 60% of Vaca Muerta, said that while Argentina's financial crisis has forced some small companies to exit the play for lack of financing, he is optimistic that the majors and big local players like Tecpetrol and state-backed YPF can lead the surge in production and exports.

"With a few wells, you can produce a lot, and this is what is sustaining production," he said.

But if Fernandez fails to put in place the conditions for companies to increase fracking, production could start to fall in a couple of years. "We have a margin for a little while, but we will have to start drilling again," he said. "If the low level of drilling lasts for more than two years, then production will start to decline."

Will that happen? Daniel Ridelener, CEO of Transportadora de Gas del Norte, a leading gas transporter, is confident that it won't.

"The last few years have shown that these resources are available and can be can be developed at reasonable costs," he said. "If the economy improves and there is a legal framework for Vaca Muerta, then we are surely going to see all of these projects prosper, including the gas pipeline and the liquefaction plan. Today we are in a period of transition."

-- Charles Newbery, newsdesk@spglobal.com

-- Edited by Gary Gentile, newsdesk@spglobal.com