Argentinian oil company YPF's drilling chief Martin Costa observes two oil drilling rigs at his charge in Vaca Muerta Shale oil reservoir at Loma Campana, in the Patagonian province of Neuquen, some 1180 Km south-west of Buenos Aires, Argentina on December 4, 2014
High hopes: YPF drills for oil at Loma Campana in Patagonia

As Miguel Galuccio inspects the pores in a chunk of rock sitting on his office table, the chief executive of YPF, Argentina’s renationalised energy company, launches into an enthusiastic explanation of the finer points of hydraulic fracturing, more commonly known as “fracking”.

“This is Vaca Muerta,” he says, contemplating the sample of rock that was taken from 3,000m below the earth’s surface from the shale formation of the same name in the south of Argentina, whose name translates as “Dead Cow” in English. The area ranks as one of the largest reserves of unconventional energy in the world.

“The great challenge is how to generate conductivity in this rock,” explains the petroleum engineer, waxing lyrical about how his company’s focus on technology — traditionally the preserve of oil service companies — is one of the keys to unlocking Vaca Muerta’s enormous potential.

Despite the fall in global oil prices, which has called the viability of many shale projects into question, Argentina has been pushing ahead enthusiastically with the development of its shale resources — and YPF has been leading the charge. Argentina has joined a handful of countries producing commercial volumes of crude oil from shale, together with the US, Canada and China.

Not only are Argentina’s shale reserves some of the world’s largest — in shale gas it is second only to China, while its shale oil reserves are the fourth biggest — they are also considered to be some of the best in terms of their geological quality.

Further, they are located far away from large urban areas in a country with no serious security risks and a reasonably well-educated workforce, while much infrastructure is already in place. Also, opposition from environmental groups is unlikely to pose a serious obstacle to development, unlike in Europe and parts of US.

“The Vaca Muerta play could well be the best oil and gas shale opportunity outside of the US and Canada presently,” says Deborah Resley, manager for Latin America at IHS Energy, a consultancy.

“The recoverable resources are there, but there has to be a further reduction in well costs. Nobody has a magic bullet on efficiencies in Vaca Muerta exploitation yet,” she adds, pointing out that Argentina is not yet able to provide locally all the services and supplies needed to extract the resources economically.

YPF says it has cut the cost for basic “vertical” wells below $7m, down from more than $11m in 2011. But that is still well short of the $4m-$5m target, while in the US they cost as little as $2m-$3m.

Indeed, it remains unclear whether Argentina’s shale can be developed profitably — but it is early days. A concerted effort only came after the state seized majority control of YPF from Spain’s Repsol in 2012.

By contrast, the US began developing some of its biggest shale fields, such as Bakken, more than 30 years ago. Only a few hundred wells have been drilled in Argentina, while tens of thousands have been drilled in the big US shale plays.

So far, most of the wells have been drilled in one small section of Vaca Muerta, which is roughly the size of Belgium. But a dozen pilot projects under way across a wider area will shed light on what Ms Resley describes as “a very heterogeneous reservoir”.

Daniel Gerold, an energy consultant in Buenos Aires, says: “The first thing we need to do is prove that Vaca Muerta is economically viable. The second thing we need is more companies investing, with their different technologies and approaches, and exploring Vaca Muerta to see what kind of results we can get.”

Argentina is a long way from securing the $20bn in annual investment that officials want in order to achieve energy independence within the next 10 years.

Only Chevron has committed serious levels of investment after partnering with YPF in 2012, by injecting more than $3bn into their jointly owned Loma Campana concession, which has emerged as Argentina’s second biggest producing field.

Other oil companies with a foothold in Vaca Muerta include Petronas, Dow Chemicals, Wintershall, Total, Shell and ExxonMobil.

One of the biggest obstacles to foreign investment has been the complicated economic scenario, with companies’ room for manoeuvre severely limited by strict currency and trade controls which complicate the process of importing equipment and repatriating profits. Another serious barrier is the inability to borrow cheaply in Argentina, which last year defaulted on its sovereign debt for a second time this century.

That could all start to change if a new, more business-friendly administration takes power after presidential elections in October, as is expected. Even so, there are concerns that a new government could phase out generous subsidies on Argentina’s oil and gas prices, which are the highest in the world and are benefiting energy companies, says Ms Resley of IHS.

But encouraging shale development has become a central plank of the country’s energy strategy.

Analysts at Cefeidas, a risk consultancy in Buenos Aires, wrote in a recent report on shale: “Regardless of which administration takes the reins at the end of this year, shale will be firmly on their political agenda.

“With sufficient levels of investment and the right technological capabilities, the shale industry could take off within the next decade,” the report concludes.

Funding follows state control

Miguel Galuccio, YPF President & CEO
Miguel Galuccio © Javier Pierini

When Argentina seized a majority stake in YPF from Spain’s Repsol in 2012, few were expecting such positive results so quickly.

Under the leadership of Miguel Galuccio, an engineer who was handpicked by President Cristina Fernández from a senior position at Schlumberger, investment at Argentina’s biggest company jumped from $2bn to $6bn.

That has reversed a trend of declining oil and gas production that has left Argentina — previously self-sufficient in energy — with a large deficit.

Investors have taken note. Big names such as George Soros have taken stakes in the national oil champion. Increasing production has boosted profits, and YPF’s share price had tripled by last year, although it has since sagged with falling global oil prices. YPF has succeeded in raising more than $2bn on the capital markets despite Argentina’s sovereign debt being in default, preventing many companies from borrowing abroad.

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