American companies cautiously optimistic about Argentina’s shale reserves

Argentina’s recently-nationalized oil company YPF has announced “satisfactory” results coming from the first vertical well drilled in the Bajo del Toro block of Neuquen’s Vaca Muerta, a shale formation that is estimated to contain over 21 billion barrels of oil and gas reserves. Tapping into this vast basin in northern Patagonia could mean at least another century of oil and natural gas for Argentina.

YPF’s announcement was made last week alongside Houston-based EOG Resources, who have been drilling exploratory wells in Vaca Muerta since early 2012. EOG Resources secured exploration rights to 100,000 acres of the Neuquen Basin in late 2011. Though Vaca Muerta could mean substantial profits for EOG Resources, CEO Mark Papa has underlined several obstacles companies like his are confronting in Neuquen. In spite of them, he’s cautiously optimistic.

“We need to apply the technology we’ve learned in the U.S. to the shale in Vaca Muerta and see what the cost is for this well, and what type of production it will have, and then do the economic analysis,” said Papa in an interview with Neuquen newspaper La Manana. “But first we need to look at the technical details.”

Papa was in Argentina’s Neuquen province last month for the Cluster Shale Neuquen 2012 summit, where he expressed optimism about Vaca Muerta’s potential, saying it would change Argentina’s energy panorama. The United States Energy Information Administration has assessed Argentina’s shale gas reserves at 774 trillion cubic feet, which makes it the third largest country by shale potential behind China and the U.S. YPF and partners like EOG Resources hope to be extracting 130,000 barrels of oil per day and 565 million cubic feet of natural gas per day in the next three years.

“Vaca Muerta is going to be an elephant compared to Eagle Ford,” said Papa, referring to EOG Resources’ south Texas crude oil field, which holds an estimated 1.6 billion boe. He stressed that EOG would use the lessons learned in Texas to tackle Argentina’s shale reserves.

At the current rate of extraction, Vaca Muerta means at least another century of oil and natural gas for Argentina

But Papa also expressed concern about operating in Neuquen, pointing out that a lack of equipment, not financing, was holding back production. “If the province wants to develop Vaca Muerta it’s going to have to solve the restrictions on equipment imports,” Papa was quoted as saying by La Mañana.

Papa also underlined the lack of water in the region, a crucial ingredient for the fracking necessary to extract oil and gas from Vaca Muerta’s shale reserves. Fracking requires 15 times the amount of water that a conventional oil well needs. Argentina’s first shale gas well required the simultaneous use of 16 water tankers, according to Argentina’s National Academy of Engineers. This is a large obstacle for developing Neuquen’s unconventional reserves; water scarcity in the region is such that for these exploratory wells, water is currently being trucked in.

Ricardo De Dicco and Federico Bernal, directors of the Latin American Center for Scientific and Technical Investigations (CLICET), study the energy sector in Latin America and have been following Vaca Muerta closely.

“With regard to this geological formation, it is calculated that the proven reserves could reach 22.8 billion barrels, which is to say more than 10 times the remaining proven oil reserves in all of Argentina,” De Dicco and Bernal told me. And the proven reserves for natural gas are 6.8 trillion cubic meters, they say, which is 20 times the country’s remaining proven reserves of natural gas. At the current rate of extraction, Vaca Muerta means at least another century of oil and natural gas for Argentina.

Of course, this hinges on proper investment and mobilization of resources to the formation, which is why YPF is teaming up with companies like EOG Resources and ExxonMobil. De Dicco and Bernal point out that ExxonMobil has agreed to make an initial investment of US$25 billion, which will be administered by YPF, with all future profits split down the middle.

With YPF’s recent nationalization—the details and purchasing price of which are still being negotiated—the company is looking to drastically increase the production that Repsol couldn’t deliver. YPF’s newly-appointed CEO, 44-year-old Miguel Galuccio, cut his teeth in unconventional reserves at multinational oil services company Schlumberger. Now back in Argentina, his priority is developing the country’s unconventional reserves and converting it into a net exporter of energy again.

“The Argentine state has regained the energy planning that had been irresponsibly delegated to the private sector in the 1990s, which resulted in a structural energy crisis in 2003 and 2004, because of a lack of investments during the preceding 15 years,” De Dicco and Bernal point out. Argentina has since invested US$24 billion in energy infrastructure and the country is now in a second round of public investments that total US$12 billion for 2012-2015. Federal investments, coupled with strong interest from veteran companies experienced in unconventional reserves (EOG Resources, ExxonMobil, Shell, Wintershall, Total, Statoil, Americas Petrogas, among others) will expedite production at Vaca Muerta.

As for solving the water problem, De Dicco and Bernal propose constructing an aqueduct and a desalinization plant, and utilize seawater from the Argentine coast, 250 miles away.

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