Argentina's Neuquén Basin is fast becoming a world hotspot for shale exploration, and it is already well known as an area that is rich in tight-gas potential.

On the oil side,Repsol YPF has made an oil-prone shale find in the Neuquén. The operator drilled and fractured five vertical wells in the Loma La Lata area in the Late Jurassic Vaca Muerta formation, and preliminary tests yielded initial flows ranging from 200 to 560 barrels per day. Repsol YPF was comfortable enough with its drilling results and seismic data to prognosticate a find of 150 million barrels of recoverable oil.

The Vaca Muerta reservoir is a major source rock for the Neuquén, which is Argentina's most prolific basin. The formation is a mixture of bituminous shales and interbedded limestones, and its basal section is particularly attractive in high total organic carbon content.

Geological characteristics appear to put the thick, rich Vaca Muerta shale in the league of South Texas' Eagle Ford play. And, as in the Eagle Ford, the Vaca Muerta shale (translated as "dead cow" in English) exhibits both oil and gas windows, grading from gas in its western extent to liquids on its eastern side.

Repsol YPF will now develop a pilot project in a 25-square-kilometer area, and delineate another 200-square-kilometer portion. This year, it plans to drill 17 new wells and fracture-stimulate 14 existing wells. The total capex for this work is estimated at $270 million.

The company says the Vaca Muerta project will be the first major development of an oil-prone shale reservoir outside of North America.

The Neuquén Basin is also rich in shale-gas potential, and Houston-based Apache Corp. is actively involved in two unconventional projects.

In the first, Apache is investigating the Vaca Muerta. A vertical well on the Huacalera Block is probing the source rock in the gas window, and will also test a shallower tight-gas objective in the Cretaceous Mulichinco formation. Interests in this test are owned by Apache, Americas Petrogas and Gas y Petroleo de Neuquén.

Apache is also drilling a horizontal gas test in the Jurassic Los Molles shale, a sister source rock to the Vaca Muerta. Currently, the operator plans to fracture-stimulate the lateral in 10 or more stages. The Los Molles is rich and thick—up to 2,000 feet—and is deeper than the Vaca Muerta.

In addition to its attractive geology, the Neuquén Basin has other attributes that favor unconventional development. It has a long history of oil and gas operations and is home to an established, thriving service sector, says Laura Atkins, Hart Energy's director of petroleum research and author of a study on global gas shales. Atkins also resided in Argentina from 2006-2010.

"The foundation exists to develop a healthy supply chain for unconventional gas and oil in the Neuquén," according to Atkins.

Another plus for the Neuquén is its excellent market access. The basin is laced with existing gathering and transmission infra­structure, and is connected to Buenos Aires by two major transmission lines.

Naturally, there are hurdles to unconventional development. Perhaps the highest one is the regulation of oil and gas prices in Argentina. Crude oil prices within the country have recently risen from some $42 a barrel to near $60 a barrel.

Natural gas prices are likewise controlled, and recently the government set a price band of $4.50 to $7.50 per million Btu for unconventional gas production that is sold to industrial users.

Furthermore, Atkins cautions that some gearing up will certainly be needed for widespread unconventional work, as fracturing services and rigs suitable for drilling long horizontal sections are in short supply, and it can be difficult to get equipment into the country.

"How quickly the service sector can evolve—and in doing so drive down costs—will depend on activity levels and government policies related to labor costs and import restrictions," Atkins notes.

Right now, companies are engaged in exploration and assessment of this new resource class. The hard number-crunching of costs versus reserves, of cash flow versus production levels, will come soon.