Argentina’s Vaca Muerta shale oil and gas offers tough lessons
Just five years ago, the full-scale development of Vaca Muerta, one of the largest deposits of shale oil and gas in the world, was little more than a dream. But now that some tough lessons have been learnt, it is becoming a reality.
At first, Argentina’s leading oil company, YPF, blazed the trail by identifying the most efficient drilling techniques for horizontal wells, where costs have fallen more than half in the past three years, the government says. Now more companies are beginning to follow its example.
“YPF learnt how to do it, and that helped us all. We were able to take advantage of that,” says Carlos Ormachea, chief executive of Tecpetrol, whose pioneering project at Fortín de Piedra started operating just over a year ago. It now accounts for 10 per cent of the gas produced in Argentina, with $1.4bn invested so far, he adds.
“As well as our production, we have contributed by reducing the risk for all the other projects in Vaca Muerta, just as YPF made an initial contribution by identifying how to produce — and how not to,” Mr Ormachea says. Among problems YPF faced was that it initially drilled vertical wells, but soon realised horizontal wells were more efficient. Mr Ormachea adds that Tecpetrol’s advances have helped confirm the quality of Vaca Muerta rock for other companies following its lead.
Even so, there is a way to go before Vaca Muerta rivals the efficiency of the US shale plays with which Argentina aims to compete. The question is how many other companies will be able to emulate the remarkable speed with which production was raised this year by Tecpetrol. Present output of 11m cubic metres a day, says Mr Ormachea, is expected to reach a plateau of 17m cu m by the end of this year.
Most other companies will not have the advantage enjoyed by Tecpetrol of being part of Argentina’s Techint conglomerate, which has other divisions specialising in engineering, construction and the manufacture of steel tubes.
Also, Tecpetrol was able to take advantage of a subsidy programme that is now closed to new entrants. Designed to propel gas output in Vaca Muerta, the government scheme committed to paying gas producers the difference between the current sale price — about $4 per million btu — and $7.50 per million btu this year, falling each year to $6 by 2021 when the programme ends.
“Gas production has increased so much that you could argue that the subsidy programme is not really needed any more,” says Amanda Kupchella, an analyst at energy consultants Wood Mackenzie. She points out that this summer, when seasonal demand is much lower, the market could be balanced or even slightly oversupplied.
“That’s a huge change,” she says of demand satisfied for the first time in years by local output, thus removing a need for imports. She explains that subsidies played a key role in helping Vaca Muerta reach the economies of scale needed to bring costs down. Break-even costs of $3 to $5 per million btu, she adds, are “pretty reasonable” at current prices of more than $4 per million btu.
The rapid expansion of shale gas production in Vaca Muerta explains why Daniel Gerold, at G & G Energy Consultants in Buenos Aires, says companies will now start to invest more in shale oil, which is much simpler to export than natural gas — not least because, for now, Argentina lacks the gas pipelines and liquefaction plants that would make exporting over long distances possible.
“If Argentina exports oil, it will generate the dollars needed to pay for gas imports,” Mr Gerold says, expecting investments in Vaca Muerta to increase from about $3.3bn this year to as much as $4bn in 2019, with new investments mostly linked to oil projects.
One of the companies betting on shale oil is Vista — run by Miguel Galuccio, the chief executive of YPF until 2016 who pioneered Vaca Muerta’s development — which plans to invest more than $2bn over the next five years. Already producing small amounts of shale oil since this year, it expects to be pumping at least 45,000 barrels a day by 2024.
“With just 10 companies like Vista — which it is not crazy to assume, given what happened in the US — you could double current oil production with Vaca Muerta [in five years],” says Juan Garoby, Vista’s chief operating officer. He was in charge of drilling YPF’s first shale wells under Mr Galuccio.
“Today Vista is the only independent company in Vaca Muerta, but it’s not illogical to think that others with the same profile could follow. We could be a showcase,” adds Mr Garoby, pointing out that the US shale revolution was powered by independent oil companies backed by private equity, like Vista.
Even so, many urge caution. Beyond its problems in gas, where Argentina needs to develop its export capacity, concerns continue across the board, with costs in particular remaining higher than many are comfortable with. For example, the high cost of sand, a key ingredient for hydraulic fracturing, or “fracking”, often prompts complaint.
More and better infrastructure would certainly help to bring costs down, but this is complicated by the fact that many infrastructure companies in Latin America have been hit by corruption scandals. Financing is another barrier, making matters highly perplexing for local companies at a time when interest rates in Argentina are 60 per cent. This is not to mention concerns about labour costs, despite a productivity agreement signed in January 2017 with powerful labour unions that encouraged companies such as Tecpetrol to invest.
“We have to realise that the US is where it is after 20 years, and that’s with the economy and legislation of the US,” says one senior oil executive with decades of experience. “We are taking the technology off the shelf, but each well is different — it’s trial and error. I’m very optimistic, but the timeframe has to be managed with care.”