ShaleTech: Argentina/Mexico Shales
Argentina and Mexico may share an oblique geographic connection, but their respective unconventional sectors are poles apart when it comes to near-term prospects: The former is going full speed ahead; the latter finds itself in a holding pattern.
As the only nation outside the U.S., Canada and China, with significant shale production, Argentina is in the throes of a government-induced, and atypical for the times, increase in activity. It is primarily targeting the world-class Vaca Muerta shale, which covers more than 7.4 million acres in the Neuquén basin. The active rig count is up from the beginning of the year and has held relatively steady (Fig. 1), thanks largely to a government-enacted oil price benchmark that is expected to average $76/bbl in the third quarter, while federally subsidized gas prices for new developments are said to average around $5.30/MMbtu. On the downside, the higher benchmarks also come with well-documented fiscal and logistical challenges, ranging from spiraling inflation and correspondingly high well costs, to tight currency controls, including restrictions on the free movement of cash.
Nevertheless, Argentina is providing fiscal relief of sorts, particularly for otherwise battered service companies. “Latin America revenue and operating income both declined 4% during the quarter, driven primarily by reduced activity in Mexico. Partially offsetting this decline was improved unconventional activity levels in Argentina,” Halliburton’s acting CFO, Christian Garcia, said during the third-quarter earnings call.
For now, however, operators and service companies are keeping a closer watch on the ballot box than they are on commodity prices. Argentina’s term-limited President Cristina Fernández de Kirchner, whose administration decoupled prices from international benchmarks to help allay a growing import deficit, will officially step down on Dec. 10. Argentineans went to the polls on Oct. 25 to choose between three presidential hopefuls, with a runoff on Nov. 22, as no single candidate received the required 45% of the vote. Given Argentina’s festering economy, the question remains how extensively the new president will dismantle his predecessor’s economic policies, but those in the petroleum sector remain confident that the new government will take no action to thwart exploitation of some of the world’s largest unconventional reserves.
“Of course, we have to be cautious and careful on how the elections are going to unfold,” Calfrac Well Services Ltd. CEO Fernando Aguilar told investors in early August. “But everybody that we’ve been talking to understands how important their operations in the energy business is for the country, and even opposition to the current government is not talking about going in a complete different direction to the one that Cristina Kirchner has today.”
Like Argentina, Mexico also has taken a bold initiative to shore up dwindling domestic production in the form of historic energy reform legislation, orchestrated to ensure that state-owned Pemex no longer remains the only player in town. However, just as the energy reform package became law on Aug. 2, 2014, oil prices began what is now a more than year-long nosedive, taking with them much of the bloom off the long-awaited welcome mat, and forcing Mexico in late April to scale down the number of potential shale blocks to be awarded, according to The Wall Street Journal.
As things now stand, international exploration licenses for 26 onshore areas are up for grabs on Dec. 15, as part of Mexico’s segmented first round of tendering. The unconventional and conventional areas being offered are estimated to hold upwards of 2.5 Bboe of remaining reserves.
If Argentina’s new government intends to continue encouraging development of domestic unconventional reserves to compensate for declining conventional production and growing imports, there certainly is no shortage of prospects. In what some now see as conservative, the U.S. Energy Information Administration (EIA) estimated in June 2013 that Argentina holds the globe’s fourth largest technically recoverable unconventional oil, and second largest shale gas reserves, at 27 Bbbl and 802 Tcf, respectively.
By far, the Vaca Muerta, which traverses more than 18,641 mi2 across the Neuquén basin of west-central Argentina, is the most prospective source bed of the country’s prodigious shale reserves, Fig. 2. The Vaca Muerta overlies the pressured and naturally fractured Quintuco-Loma Montosa carbonate formation, which historically is the basin’s primary conventional production source.
A mature black shale, the Vaca Muerta is similar to the prolific Eagle Ford of South Texas, in that it represents a classic inverted system with oil up-dip and gas down-dip, according to the Vaca Muerta Research Consortium of the Colorado School of Mines. Found at depths ranging from 9,186 ft to more than 14,000 ft, with thickness from 98 ft to 1,476 ft, the Vaca Muerta, according to state-owned YPF SA, possesses average total organic carbon (TOC) between 3% and 10%, higher than some of the most prolific U.S. shale plays.
Activity to date has been surprisingly upbeat, with the most recent tally showing 110 active rigs working onshore Argentina, up from the 106 that Baker Hughes reported in January. At the end of the second quarter, 75 of those rigs were operated by YPF, which controls more than 3 million acres—some 40% of prospective Vaca Muerta acreage—and is the premier shale producer by an overwhelming margin, Fig. 3. YPF operates upstream JVs with Chevron, Malaysia’s Petronas and, more recently, Russia’s Gazprom. Outside of YPF, a smattering of diverse international operators has been drawn to Argentina’s unconventional prospects, ranging from Exxon Mobil to Canadian independent Madalena Energy Inc., an international first-mover in the Vaca Muerta play.
Moreover, with narrow pressure gradients between 0.67 to 0.97 psi/ft, the overlying Upper Quintuco and the Vaca Muerta pose daunting well construction challenges, making the play especially conducive to underbalanced and managed pressure drilling (UBD-MPD) applications, says Weatherford Secure Drilling Services (SDS). Specifically, the Quintuco is heavily fractured and overpressured at up to 7,500 psi, while the underlying Vaca Muerta is more heterogeneous with pore pressure up to 9,500 psi. Since 2009, SDS says it has drilled more than 200 UBD-MPD wells, primarily to combat the depletion-driven lost circulation and other non-productive time (NPT) issues typical of unconventional wells drilled in the basin.
“In the early days, the primary challenges we faced were narrow drilling windows, pore pressure uncertainty and lost circulation. The UBD and MPD packages used on the first wells were successful, and we have now proven the technology works for this basin, and especially helps in the shale plays by optimizing mud weights and overall drilling efficiency,” said Eduardo Durán, SDS country manager for Argentina, Bolivia and Chile. “Operational experience over the past six years has given us better insight on the operating windows of individual wells throughout the basin.”
Durán said the technique has evolved steadily in the basin from basic UBD-MPD to closed-loop MPD combined with casing-while-drilling, which was initiated between 2013 and 2014 for drilling directional “S” wells in the Loma Campana multi-well pad development, which also saw the inauguration of MPD cementing of Vaca Muerta targets.
He said the MPD-casing-while-drilling tandem has reduced the construction time of average 10,499-ft MD Vaca Muerta wells to 13 days from the 20-plus days required for conventional open-to-atmosphere drilling. “There has been a little slowdown in activity since 2014, but Argentina is still quite active. With the elections, it’s difficult to forecast the activity for next year, but we do have seven MPD and UBD packages in place to catch operations we foresee for the second half of 2016,” Durán said.
For the time being, Argentina also is providing an attractive market for those on the stimulation and completions side. “All-in-all, this is a very exciting place to be and, for now, the outlook appears to be very good,” says Jim Foster, Latin America regional manager for Calgary’s Packers Plus Energy Services. “Argentina, by far, has maintained the highest level of ongoing activity in Latin America. Frankly, Argentina and Saudi Arabia are the only two areas where you’re seeing real increases in activity.”
Reflecting its long-term outlook, Packers Plus is putting the finishing touches on two newly opened sales-and-service centers in Neuquén and Buenos Aires. “As an importer of both oil and gas, Argentina has to continue to explore its reserves, which are quite substantial, especially when you consider the tight gas and unconventional oil reserves. These plays are tailor-made for our equipment and technology,” he said.
Over the past eight years, Packers Plus has completed more than 190 frac stages in Argentina, including a national open hole, multi-stage stimulation record earlier this year on a Madalena Energy well. Foster said the company’s StackFRAC HD multi-stage open-hole completion system was used in combination with the SF cementor stage collar to complete the 12-stage stimulation job in 6 hr.
Completed as part of the independent’s Loma Montosa oil resource play on its Puesto Morales Block, the well was drilled and completed at 13,107 ft, MD, including a 3,593-ft lateral, Madaleana said.
Fellow Canadian Calfrac, citing an Argentina-driven boost in second-quarter Latin American revenue, likewise, expanded its local footprint, adding a third pressure pumping fleet in the second half of 2015, with an additional 32,500 hp of capacity, Fig. 4.
With the uncertainties that come with the installation of a new government, the general sentiment appears to be “get it while you can,” as operators ramp up production to take advantage of Argentina’s made-to-order commodity price regime.
In its most recent earnings report, YPF, says it closed out the first half of the year, increasing its gross shale production to 43,300 boed, up from 41,700 boed in the first quarter and nearly double the 22,700 boed put online during second-quarter 2014. During the second quarter, YPF drilled 46 net wells, including eight cumulative horizontal shale wells in the east area of its Loma Campana development with Chevron and the El Orejano Block, which is being developed under a two-year JV with Dow Chemical. YPF says this year it extended its average lateral lengths from 3,937 ft to 4,921 ft with 18 frac stages—a three-stage increase.
As for tight gas, YPF says it nearly doubled year-over-year production from its Loma La Lata and Rincón del Mangrullo fields. In the second quarter, the two plays delivered an aggregate 6.2 MMcfgd, up from the cumulative 3.4 MMcfgd produced in the second quarter of 2014.
YPF partner Chevron, meanwhile, said 2015 plans call for a total of 150 wells to be drilled on the Loma Campana development, targeting the Vaca Muerta shale. During 2014, an average 19 rigs per month drilled 166 gross horizontal and vertical wells in the resource play. Updated numbers are unavailable, but Chevron said at year-end 2014, the Loma Campana had delivered net oil and gas production of 7,000 bpd and 17 MMcfd, respectively.
Calgary’s Madalena Energy, which derives 95% of its total production from the more than 950,000 net acres it holds in Argentina, produced just under 4,000 boed in the second quarter, representing a 155% year-over-year increase. Madalena expects production to increase further in the fourth quarter, as newly drilled horizontal wells come online within its four unconventional resource plays, prospective for the Vaca Muerta, Agrio, Loma Montosa and Mulichinco formations.
Madalena has initiated a three-well horizontal drilling program on its Sierras Blacas asset in the federal Coiron Amargo Block, where it holds a 35% interest, with first production expected in the fourth quarter or early 2016. Along with an ongoing block-wide 3D seismic survey, plans also are underway for a Vaca Muerta horizontal well in the first quarter of 2016. Elsewhere, in September, Madalena launched re-entry operations on the Lower Agrio shale and Mulichinco formations within its Curamhuele Block holdings, with plans for multi-stage frac completions. The independent also recorded second-quarter production of 1,745 boed from its wholly owned Loma Montosa play on the Puesto Morales Block.
Germany’s Wintershall Holding GmbH is drilling its second operated Vaca Muerta well on the Aquada Federal Block, which it acquired last year in a 50-50 JV with provincial gas producer Gas y Petróleo del Neuquén S.A. (GyP). Wintershall spudded its first wholly operated Argentina well on the Aquada Block earlier this year. A company spokesperson said up to six horizontal and hydraulically fraced wells are expected to be drilled on the asset. “There is a great deal of potential in shale rock in Argentina, but we need additional insights regarding the exact nature of the reservoir,” Mario Mehren of the Wintershall board of executive directors said in a release. Wintershall has operated onshore and offshore Argentina for more than 35 years, and is a leading producer with annual conventional production of roughly 25 MMboed.
Exxon Mobil, through its subsidiary XTO Energy, holds interests in a reported 900,000 acres in the Neuquén basin, where exploration drilling on the adjacent Bajo del Choique and La Invernada Blocks has yielded “very good results,” Exxon Mobil’s Argentina CEO, Daniel De Nigris, told Platts on Oct. 8, during the Argentina Oil & Gas Expo.
In August, Shell managed to soothe long-running disputes with the Neuquén provincial government and was awarded two highly prospective Vaca Muerta blocks, according to the Buenos Aires Herald. Shell has said it will invest at least $250 million to develop the Sierras Blancas and Cruz de Lorena Blocks, but no further details have been made available.
The provincial government-owned GyP in December also signed a separate $300-million agreement with Total Austral for development of an 18,641-mi2 swath of the Vaca Muerta play. With the planned drilling of up to nine wells this year, Total would have 30 total wells targeting the Vaca Muerta, according to Reuters. No current production figures or targets have been released.
The near-term outlook is altogether different in Mexico, where the momentous legislation that ended the 75-year dominance of Pemex became the victim of bad timing. While the constitutional amendment that cleared the way for international operators was signed in December 2013, the secondary legislation that actually implements the sweeping overhaul did not become law until August 2014, coinciding with the beginning of the collapse in oil prices and leaving a glaring question mark over the upcoming tender.
The EIA earlier estimated technically recoverable shale resources at 13.1 Bbbl of oil and 545 Tcf of gas. While Pemex has identified no less than four prospective shale prospects that it claims closely mimic the most prolific U.S. plays (Fig. 5), it has drilled only a handful of unconventional wells with reportedly modest results, and at completed well costs said to run as high as $25 million. Prior to oil prices falling into the cellar, however, operators were gushing over the prospects of getting drill bits into the southern extension of the Eagle Ford in Mexico’s Burgos basin, which the EIA says could hold 6.3 Bbbl and 343 Tcf of recoverable oil and gas, respectively.
However, with oil prices showing no sign of recovering anytime soon, the number of operators willing to accept Mexico’s work-in-progress licensing terms remains up in the air. Operators that have publicly announced their intention to get a foothold in the nascent unconventional play include Calgary independent International Frontier Resources Corp. (IFR), which in October formed a JV with Mexican petrochemical giant Grupo Idesa S.A. de CV (IDESA). In a release, IFR said in part that the joint agreement will focus on “opportunities in the Mexican oil and gas sector, in particular the first bidding round of the onshore blocks.”
A local affiliate of American Energy Partners (AEP), for another, has joined forces with Mexico City-based EIM Capital, jointly operated by former Mexico President Vicente Fox in hopes of gaining ground in shale oil and gas blocks. According to a joint release, the agreement stipulates that Oklahoma-based AEP, which is headed by former Chesapeake Energy chief Aubrey K. McClendon, “will make a significant investment into EIM Capital to jointly pursue investments in Mexico’s energy industry and explore unconventional oil and gas development.”
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