Argentina's push to mimic Permian success faces long road ahead
BUENOS AIRES (Bloomberg) -- Argentina’s Vaca Muerta, one of the largest shale formations outside of North America, offers tons of promise for the country’s energy future. Just don’t hold your breath waiting for it.
Energy Minister Juan Jose Aranguren, billionaire investor Paolo Rocca and bullish Morgan Stanley economists all predict lightning fast growth in the region, comparing it to the Eagle Ford and Permian basins in the U.S., oil and natural gas-saturated plays that have spurred billions in revenue.
The reason: Vaca Muerta offers Argentina, which has struggled for years with rampant inflation, an economic lifeline for the future. Still, before the field reaches its potential, gas and oil pipelines need to be built, roads, train lines and power networks need upgrading, and drilling costs that run 30% or more higher than in the U.S. need to drop, industry insiders say.
“It’s all about building momentum, and that will take years,” Royal Dutch Shell Plc’s Global Upstream Director Andrew Brown told reporters at an April 18 event in the Sierras Blancas area of the shale deposit. “If the costs come to where we want them, this will happen.”
Argentine President Mauricio Macri will meet with oil and gas executives in Houston on Wednesday as he seeks to drum up investment in Vaca Muerta. So far, the shale play is luring about $4 billion a year, when about $15 billion of annual spending is needed, Emilio Jose Apud, a board member at state-run YPF SA, told Telam news agency on Monday.
Expensive wells
The average drilling and completion cost of a horizontal well in Vaca Muerta was $11.2 million as of 2015, compared with $6.5 million to $7.8 million in the Eagle Ford, the U.S. Energy Information Administration said in a report in February. YPF said it’s now spending about $8.2 million to drill a horizontal well in the region, and Shell pegs it at little under $10 million.
Drilling for so-called tight gas, produced from reservoir rocks with extremely low permeability such as sandstone and limestone, is cheaper because Argentine drillers already have some experience in that kind of terrain. That’s why Pampa Energia SA, which says it owns eight to 10% of Vaca Muerta’s acreage, is currently making strides in developing tight gas, while taking only baby steps in drilling for its shale gas assets. It will dig its first shale wells this year with Exxon Mobil Corp.’s XTO Energy.
“We think there’s going to be a boom,” Pampa Chairman Marcelo Mindlin said in an interview, “But you always have a learning curve at the beginning.”
Cutting costs isn’t easy when inflation is seen at 23% this year, according to the median estimate of economists surveyed by Bloomberg, and logistics are expensive because of poor infrastructure links to the isolated shale fields.
Far out
Neuquen, the oil town around which operations are centered, is more than 700 mi from refineries in Buenos Aires and 350 mi from Puerto Rosales, where state-run Energia Argentina SA is canvassing interest in building a port to export Vaca Muerta’s gas.
The main roads in the area, including the 200-mi Route 7, have just one lane going each way. Other roads remain unpaved. Meanwhile, the government wants to revive a train line that would hurry the arrival of fracing equipment and materials such as sand from the Atlantic ports. Plus, more gas pipelines are needed.
“There are some promising signs,” said Mariano Lamothe, an energy consultant for Buenos Aires-based Abeceb, which advises oil companies. “The first wells have had good productivity, but there needs to be a big reduction in costs to get to a point of economies of scale.”
Translated into English, Vaca Muerta means "dead cow," and you can see how it might have gotten that name. The sparcely populated 11,600-mi2 region, located in southern Argentina, is mostly made up of plains with a shale geography similar to those in Texas. But the region’s economy revolves mostly around vineyards and apple and pear orchards.
Slow development
In Anelo, a tiny town that became the base for some oil-service providers in the region, work is still being completed on a hospital, and electricity networks need to be upgraded after its population more than tripled to about 8,000 people since the first shale wells were drilled.
“We’re working against the clock to get utilities in place,” said Alejandro Nicola, Neuquen province’s energy minister.
Lack of development turned Argentina, which once sold its surplus gas production to its neighbors, into a net importer in 2008. It currently buys the fossil fuel by pipeline from Bolivia, as well as liquefied gas by tanker from other countries.
Vaca Muerta is now producing the equivalent of about 62,000 bopd, according to a March 29 report from Morgan Stanley analysts led by Bruno Montanari. That’s a fraction of the over 5 MMbopd extracted from the top shale plays in the U.S., according to EIA data.
Investment pace
This year, Shell and YPF committed to spending about $300 million in a joint venture, while Schlumberger Ltd. announced a $390-million pilot project, also with YPF. Rocca’s Tecpetrol SA’s $2.3-billion investment to drill 150 wells, announced in March, will be spread over three years.
But the overall capital spending seems to be slowing, not accelerating as Macri’s government would hope, according to the Morgan Stanley report. The bank’s analysts estimate investment is at about $3 billion a year at the current pace, down from $4.3 billion in the 2014-15 period.
Shell, which is only spending about $180 million a year in the area, is currently losing money, according to Maximiliano Hardie, venture manager for Shell’s Argentine upstream business.
In a bid to to drive investments, Macri’s government recently extended a program that ensures companies will receive a minimum price for the gas they produce until 2021 and brokered an accord with unions. That could bring labor costs down by 20 to 25 percent, Energy Minister Aranguren said in a March 9 interview.
He also believes Vaca Muerta is on a quicker development curve than U.S. shale.
“If you look at what happened in the last five years in Argentina with Vaca Muerta, development was quicker than non-conventionals in the U.S.,” he said.
