Argentina: Shale, Expropriation, Potential

The latest Latin American resource nationalization, the taking by the government of Argentina of Repsol’s share of the former national oil company, Yacimientos Petrolíferos Fiscales, or YPF, has rattled the industry. This move came about within a few months of several highly successful shale well tests in the Neuquén Basin in Central Patagonia. What could it mean for shale development in Argentina?

Shale drilling increased rapidly beginning in 2009 and is currently centered in the Neuquén Basin in the Vaca Muerta and Los Molles shales; YPF is already producing oil and gas from the Vaca Muerta shale and Apache from the Los Molles.

There is little technical risk related to these shales; they are in many respects superior to the best North American shales and it is clear from the early test data that they are capable of producing enormous quantities of oil and gas. The Vaca Muerta shale has a productive area of 23,200 square miles and is 700 feet thick with total organic carbon (TOC) of 3% to 14%. The deeper Los Molles shale extends over 21,200 square miles, and is more than 3,000 feet thick in the basin center. Both shales have thermal maturities in the oil to dry-gas windows.

Roughly two-thirds of the Vaca Muerta is in the oil window, while the Los Molles is predominantly in the gas window.

Over 40 shale wells have been drilled in the Neuquén Basin, mostly vertical, and some produced without fracturing. At least two horizontals have been drilled, one in the Los Molles and one in the Vaca Muerta, with excellent results.

YPF, while it was still majority owned by Repsol, drilled 29 shale wells and planned to implement a shale-development project on 6,200 acres and delineate another 50,000 acres. Other companies with shale acreage include Apache, Total, EOG, ExxonMobil and several smaller companies.

Will there be more expropriations? Provincial governments recently revoked certain concessions because of lack of investment, most notably some held by Petrobras, but these have since been returned. Part of the reason the government took Repsol’s share of YPF was that company’s alleged lack of technical expertise, particularly upstream, and complaints of environmental violations and lack of investment in conventional resources. Thus, the expropriation spree may be limited to Repsol.

With Repsol out of the picture, YPF will have to find new partners to bring in investment capital and technical expertise to develop unconventional resources.

Argentina relies on natural gas for half its primary energy needs. Economic growth over the past decade has fueled demand growth as conventional gas production has declined. Argentina became a net gas importer in 2008, importing pipeline gas from Bolivia and liquefied natural gas on the spot market. Costs of natural gas imports reached $1.13 billion in 2010, and then more than doubled to $2.7 billion in 2011. These imports have severely depleted Argentina’s hard currency reserves.

Crude oil production is also declining, though Argentina still exports small quantities. Low, government-mandated internal oil and gas prices are primarily responsible for the decline in investment and production. The average internal gas price is about US$2 per MMBtu, well below the economic breakeven price for unconventional gas. The internal crude oil price is controlled by an export tariff.

The government instituted the “Gas Plus” program in 2009. It provides a higher price for unconventional gas, capped at the price of Bolivian gas imports, currently US$8 per MMBtu. However, plus contracts must be negotiated with industrial buyers, who are often willing to pay higher prices for secure supplies during frequent “brown-outs” in the industrial sector. This slow process will inhibit the pace of unconventional gas development.

Oil prices are better; the internal price is now about US$66 per barrel, adequate for shale-oil development as long as costs can be controlled. This brings up another risk in Argentina—inflation. Inflation rates are currently 20% per year or higher, and if not contained, will create havoc in the economy and depress margins for the industry.

Hart Energy’s outlook for shale-oil and condensate production in the Neuquén Basin, assuming a slow pace of development until after 2020 and a moderate pace afterwards, is a conservative 90,500 barrels per day by 2020 and 250,000 barrels daily by 2030, with natural gas production of 491 million cubic feet per day by 2020 and 1.55 billion d¬aily by 2030. If the government could initiate supportive policies, Argentina could become one of the world’s premier shale producers and return to energy self-sufficiency.