December 2018

The last barrel

Vaca Muerta slowly comes to life
Craig Fleming / World Oil

Argentina’s slumbering Vaca Muerta play is similar in many ways to the development of the Appalachian basin in the eastern U.S. Both geological features were identified in the 1800s by earth scientists searching for hydrocarbon-bearing formations. Both basins languished underdeveloped/unnoticed for decades, and both were brought to life through recent technological developments.

The name Vaca Muerta was introduced in 1931 by American geologist Charles Weaver, but the bituminous shales in the Salado River valley were first described in 1892 by Dr. Guillermo Bodenbender. The Jurassic/Cretaceous formation consists of mature black shales, marls and lime mudstones. The shales are part of the greater Neuquén basin, and are best known as the host rock for major oil deposits. Although Neuquén has been producing oil since 1918, it was a large Vaca Muerta oil discovery in Loma La Lata field by Repsol-YPF that opened the shale play in 2010.

Vast potential, remote location. After the initial discovery, natural gas price controls and logistical bottlenecks hampered progress. Despite the setbacks, the Vaca Muerta is still the only unconventional play outside of North America, where activity has made the transition from exploration to full-scale development. And the potential prize is huge. Geographically, the Vaca Muerta is three times the size of the prolific Permian basin, and could yield enormous returns, if the right conditions are established.

Steady progress. YPF will produce more oil and gas than originally planned over the next five years, as shale output from the play gains momentum, according to the company’s top two executives. Average growth through 2023 will be as much as 7% a year, said CEO Daniel Gonzalez and Chairman Miguel Gutierrez in a Bloomberg interview. That’s up from 5% forecast last year. While YPF has been suffering from declining output at conventional fields, production will start to bounce back in 2019, and substantial growth will come later, as Vaca Muerta accounts for an increasing share of the company’s production. The company produced about 54,450 boed from the shale in the second quarter of 2018.

Challenges remain. Although a foothold has been established, there are several major bottlenecks that are hampering Vaca Muerta development, including shortages of proppant, lack of water transportation infrastructure and pressure pumping crews and equipment. Also, Argentina’s economy is forecast to contract 1.6% this year and get even worse in the first quarter of 2019. Even before the recession hit, drillers were already bracing for the problem of seasonal demand fluctuations. To cope with the issue, YPF has shut-in some natural gas wells, as the nation’s second recession in three years curbs demand (Bloomberg).

The oversupply problem is exasperated by a government contract to import gas from Bolivia through 2026, and the emergence of rival Tecpetrol, which is flooding the market with gas from its Fortin de Piedra project. “There’s no doubt about the geological characteristics of Vaca Muerta. The rock can deliver, and Fortin de Piedra is a clear example,” said Juan Vazquez, head of equity research at Puente Hnos. in Buenos Aires.

Path forward. The Vaca Muerta has gone “from a great opportunity to a fact.” The shale formation is beginning to deliver on high expectations, according to German Macchi, Argentine country manager for PlusPetrol. Results from recent test wells “were better than the upper case,” producing more and higher-grade gas. PlusPetrol is one of nine operators who reported equally strong results at a meeting on the Vaca Muerta in Houston.

Vaca Muerta should see between 140 and 150 fraced wells this year. Only three are expected to be vertical, while all others are projected to be high-density horizontal operations. Longer laterals are being tested in Loma Campana in 2018, and initial oil production appears to be competitive with typical 2-mi. designs in U.S. liquid basins. It is projected that fracing will grow 20% per year from 2019 through 2021, reaching 250 wells in 2021. The additional activity should increase Vaca Muerta oil production from 60,000 bpd, up to 160,000 and 200,000 bpd by the end of 2021. Most of this growth will come from the liquids-rich Loma Campana portion of the play, operated by YPF.

According to Ed Kruijs, Shell technical manager, Argentina, the rock is really productive, but “it will take many other ingredients than the rock to make it a global super basin.” Now operators are concerned about the need for more rigs, roads, pipelines, water and sand. With promising results and high commodity prices, operators see problems ahead. The equipment available for drilling and completions “needs to improve significantly,” said Javier Gutierrez, operations manager for Tecpetrol. If not, “new operators coming into the Vaca Muerta will stretch those resources to the breaking point.”

Service costs/availability. Service companies have been asked to expand, to sustain a decades-long development effort. Although the cost of drilling a well in Vaca Muerta is down 50%, the reduction is lagging reductions in the Permian, where there have been similar decreases from a lower base cost. “We are in a position within our company, where we are competing for capital,” said James Blaine, ExxonMobil (XTO). “Although costs of Argentine operations are high, compared to the Permian, these are early days, and we do see a path to success. The question is, how fast will we get there?”

The prize. So, 126 years after the discovery of oil-bearing shales by Dr. Bodenbender in the Salado River valley, the region’s enormous potential is finally being tapped and exploited. The U.S. EIA estimates total recoverable hydrocarbons from the Vaca Muerta to be 16.2 Bbo and 308 Tcfg. Only three words left to say—drill, baby drill! wo-box_blue.gif

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Craig Fleming
World Oil
Craig Fleming
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