VACA MUERTA: ACHIEVING ITS FULL POTENTIAL

The Investor Argentina 2017  I  Energy I Analysis

“WITH THE ELECTION OF PRESIDENT MACRI, FOREIGN INVESTORS ARE MORE THAN EVER LOOKING TO TAP INTO VACA MUERTA'S VAST ENERGY POTENTIAL.”

Roughly the size of Belgium, Vaca Muerta is one of the world’s largest shale gas reserves with 16.2 billion barrels of shale oil and 308T cf of shale gas. It has remained mostly undeveloped due to high production costs and a lack of labor flexibility. Once a natural gas exporter, Argentina now imports around 25 percent of its needs, including some costly liquefied natural gas imports, a major contributor to its gaping fiscal deficit. That came after years of stagnant production as consumption remained high. 

 

With the election of President Macri, challenges have become opportunities for foreign investors in a move to guarantee investments in exchange of greater labor flexibility and wellhead price subsidies. According to the Ministry of Energy and Mining, Argentina’s Vaca Muerta shale field has received investments of nearly USD8 billion in 2017. The country expects between to reach USD 15 billion in investments in 2018 and USD 20 billion annually from 2019 onward. The boost in investment would come from the companies transition from pilot projects to the development phase. Currently, there are 700 unconventional wells drilled in Argentina, which will likely increase by a factor of 10 when projects move to development, in order to stimulate production and substitute imports. 

Vaca Muerta is a prospect that can compete with the best reservoirs in the world and the main players in the sector seem to be in line with this fact. Until recently, it was the state-controlled YPF that controlled the majority of Vaca Muerta’s riches. That has changed as IOCs and mid-sized players seize on President Mauricio Macri’s commitment to drive shale developments. While that means increased E&P activity moving forward, by no means will YPF let its acreage simmer down. 

 

In an attempt aimed at emulating the US shale boom, YPF will invest more than USD 30 billion over the next five years. It aims to increase unconventional production by 150 per cent, reaching half of total production within the next five years. Overall oil and gas production is hoped to rise by 5 per cent a year, to reach 700,000 barrels of oil equivalent a day in 2022. Exploration efforts will be ramped up, with reserves targeted to rise by 50 per cent.

 

Once by far the biggest local player in the sector, YPF has seen increased competition recently, with both Pan American Energy and Pampa Energía growing through mergers and acquisitions over the past two years. In September 2017, British Petroleum has agreed with Argentina’s Bridas Corporation to form a new integrated energy company by combining their interests in the oil and gas producer Pan American Energy and the refiner and marketer Axion Energy. The new company, Pan American Energy Group, will be the largest privately-owned integrated energy company operating in Argentina. 

 

Pampa Energía is investing USD 150 million in a 35-year extension to develop the Rincon del Mangrullo Block in Neuquen province. The company’s pipeline unit TGS has proposed an USD 800 million pipeline and gas treatment plant for Vaca Muerta shale fields that could be constructed in 18 months. Chevron will add a third drilling rig to its 96,000-acre Loma Campana concession in Argentina’s Vaca Muerta in 2017 and will be investing USD 500 million in 2018. Statoil is set to enter Vaca Muerta shale play after reaching an agreement with YPF in a 50-50 venture to jointly explore the Bajo del Toro block in the Neuquen basin.

 

Argentina’s promising Vaca Muerta unconventional energy play could deliver approximately 560,000 barrels–per-day of liquids and 6 billion cubic feet of gas per day by 2040, increasingly meeting the country’s growing demands for energy with domestic production and helping reduce its dependence on imports. 

 

Vaca Muerta’s energy potential translates to a cumulative production of 2.8 billion barrels of oil (liquids), and 33 trillion cubic feet (TCF) of gas by 2040. It would need about 140 drilling rigs operating when it reaches peak activity levels. Therefore, it can not only reverse Argentina’s conventional production declines and satisfy its growing domestic energy demand, but also enable Argentina to regain its position as an oil and gas exporter. For these investment to materialize, the government must continue to provide both assurance and a regulatory environment that gives long-term stability to investors.