Flat and parched, with scrubby vegetation, red earth and little else, the world’s hottest energy prospect is not much to look at.
But if Argentina’s state company YPF has its way, within a few years a vast area beyond the western city of Neuquén will be studded with rigs and wells, pumping shale oil and gas from the Vaca Muerta or “Dead Cow” rock formation round the clock.
The company, expropriated six months ago from Repsol of Spain, has as CEO Miguel Galuccio, a savvy oilman, and a smart plan to ramp up production of the world’s third-biggest shale reserves.
Vaca Muerta is considered as exciting as Eagle Ford, Haynesville, Barnett and Marcellus in the US and far more advanced than China’s vast prospects.
But YPF and others will need to spend billions to extract oil and gas from the formation and many still consider Argentina risky a decade after its default on nearly $100bn in debt.
Instead of a shale rush, investors are biding their time – and those already present are executing, but not expanding, plans as they wait for domestic gas prices and policy conditions to become as attractive as Argentina’s prospects.
“At the moment, shale in Argentina is like an aeroplane on the runway. The turbines are turning, but the aeroplane has got the brake on,” says one senior industry figure who asked not to be named.
With some 774tr cubic feet of gas and 741m barrels of oil, according to the US Energy Information Administration, the shale is not only big enough to turn it into a hydrocarbons producer but also an exporter.
But state regulation of the sector is tightening, low gas prices are a longstanding disincentive to investment, foreign exchange restrictions make it hard to repatriate profits, a government clampdown on imports delays the arrival of equipment, there is political uncertainty and inflation around 24 per cent.
Moreover the expropriation of YPF without compensation in May and the lingering threat of legal action from Repsol mean Argentina’s credentials have taken a belting.
One oil executive eyeing shale says: “I haven’t taken a cent out of Argentina in 10 years, everything I’ve made I’ve reinvested. But we aren’t reinvesting any more because we aren’t making any money.”
Besides YPF, majors including ExxonMobil, Apache, Chevron, EOG, Shell, Total and juniors such as Americas Petrogas and Madalena Ventures have targeted Vaca Muerta.
YPF has drilled some 60 wells and others around 15. “But there are a few different factors stopping people jumping in with both feet,” notes the industry figure.
They include import hurdles. The rigs are imported, as is the proppant – a kind of special sand – used to blast the underground rocks with water and chemicals in hydraulic fracturing, or “fracking”.
Proppants are currently imported from Brazil and the US and YPF is also looking at China.
Some of the logistical hurdles have been tackled. YPF has built a giant reservoir to fill with water from a nearby river to supply the 1,800 cubic metres used for every frack stage – and there can at least 10 per well. But the shale revolution will also need new roads and an army of trucks and drivers.
In addition, companies face a Catch 22. YPF has gained a valuable head start on securing rigs. Later entrants will face delays unless they plan ahead, but forward planning can be tough in Argentina.
YPF is optimistic that the sheer importance of shale for Argentina, which cannot continue spending nearly as much as its annual trade surplus on energy imports, will be a catalyst for the government to provide the incentives to calm investor qualms.
The company is negotiating a partnership with Chevron, and hopes the US major will sign on the dotted line by the year-end to allow it to launch its first intensive shale “cluster”.
Within YPF, the excitement at the opportunity is palpable and the company exudes a can-do professionalism, despite some market doubts about how easily it will raise financing.
It is budgeting $1.5bn to launch a 132-well pilot shale oil pilot in the Loma La Lata and Loma La Campana fields and 16 shale gas wells at the nearby El Orejano field next year, to test well spacing and other technical factors.
According to an investor roadshow, YPF then wants to ramp up to “factory-mode” from 2014-17, investing some $12bn – half from Chevron or partners – to drill 2,000 shale oil wells and about $1bn for more than 100 shale gas wells.
“Just developing 15 per cent of Vaca Muerta would balance the country’s energy deficit and stop the need for imports,” says Juan Garoby, head of YPF’s unconventionals business.
The area’s emptiness today is a boon, limiting the impact on the country’s thriving fruit and wine industries. But environmental opposition is growing and one leftist politician has submitted a bill to outlaw fracking nationwide.
Can Vaca Muerta fail? Argentina will find it hard to look a gift cow in the mouth, but one fund manager, whose stake in one company has fallen 60 per cent since February, says the government has “shot itself in the foot”.
Oil executives understand the risk reward trade-off. But as Bernard Weinstein of the Maguire Energy Institute at Southern Methodist University’s Cox School of Business in Texas notes: “No company is going to bet the farm on Argentina.”
Copyright The Financial Times Limited 2012. You may share using our article tools.
Please don’t cut articles from FT.com and redistribute by email or post to the web.
But if Argentina’s state company YPF has its way, within a few years a vast area beyond the western city of Neuquén will be studded with rigs and wells, pumping shale oil and gas from the Vaca Muerta or “Dead Cow” rock formation round the clock.
The company, expropriated six months ago from Repsol of Spain, has as CEO Miguel Galuccio, a savvy oilman, and a smart plan to ramp up production of the world’s third-biggest shale reserves.
Vaca Muerta is considered as exciting as Eagle Ford, Haynesville, Barnett and Marcellus in the US and far more advanced than China’s vast prospects.
But YPF and others will need to spend billions to extract oil and gas from the formation and many still consider Argentina risky a decade after its default on nearly $100bn in debt.
Instead of a shale rush, investors are biding their time – and those already present are executing, but not expanding, plans as they wait for domestic gas prices and policy conditions to become as attractive as Argentina’s prospects.
“At the moment, shale in Argentina is like an aeroplane on the runway. The turbines are turning, but the aeroplane has got the brake on,” says one senior industry figure who asked not to be named.
With some 774tr cubic feet of gas and 741m barrels of oil, according to the US Energy Information Administration, the shale is not only big enough to turn it into a hydrocarbons producer but also an exporter.
But state regulation of the sector is tightening, low gas prices are a longstanding disincentive to investment, foreign exchange restrictions make it hard to repatriate profits, a government clampdown on imports delays the arrival of equipment, there is political uncertainty and inflation around 24 per cent.
Moreover the expropriation of YPF without compensation in May and the lingering threat of legal action from Repsol mean Argentina’s credentials have taken a belting.
One oil executive eyeing shale says: “I haven’t taken a cent out of Argentina in 10 years, everything I’ve made I’ve reinvested. But we aren’t reinvesting any more because we aren’t making any money.”
Besides YPF, majors including ExxonMobil, Apache, Chevron, EOG, Shell, Total and juniors such as Americas Petrogas and Madalena Ventures have targeted Vaca Muerta.
YPF has drilled some 60 wells and others around 15. “But there are a few different factors stopping people jumping in with both feet,” notes the industry figure.
They include import hurdles. The rigs are imported, as is the proppant – a kind of special sand – used to blast the underground rocks with water and chemicals in hydraulic fracturing, or “fracking”.
Proppants are currently imported from Brazil and the US and YPF is also looking at China.
Some of the logistical hurdles have been tackled. YPF has built a giant reservoir to fill with water from a nearby river to supply the 1,800 cubic metres used for every frack stage – and there can at least 10 per well. But the shale revolution will also need new roads and an army of trucks and drivers.
In addition, companies face a Catch 22. YPF has gained a valuable head start on securing rigs. Later entrants will face delays unless they plan ahead, but forward planning can be tough in Argentina.
YPF is optimistic that the sheer importance of shale for Argentina, which cannot continue spending nearly as much as its annual trade surplus on energy imports, will be a catalyst for the government to provide the incentives to calm investor qualms.
The company is negotiating a partnership with Chevron, and hopes the US major will sign on the dotted line by the year-end to allow it to launch its first intensive shale “cluster”.
Within YPF, the excitement at the opportunity is palpable and the company exudes a can-do professionalism, despite some market doubts about how easily it will raise financing.
It is budgeting $1.5bn to launch a 132-well pilot shale oil pilot in the Loma La Lata and Loma La Campana fields and 16 shale gas wells at the nearby El Orejano field next year, to test well spacing and other technical factors.
According to an investor roadshow, YPF then wants to ramp up to “factory-mode” from 2014-17, investing some $12bn – half from Chevron or partners – to drill 2,000 shale oil wells and about $1bn for more than 100 shale gas wells.
“Just developing 15 per cent of Vaca Muerta would balance the country’s energy deficit and stop the need for imports,” says Juan Garoby, head of YPF’s unconventionals business.
The area’s emptiness today is a boon, limiting the impact on the country’s thriving fruit and wine industries. But environmental opposition is growing and one leftist politician has submitted a bill to outlaw fracking nationwide.
Can Vaca Muerta fail? Argentina will find it hard to look a gift cow in the mouth, but one fund manager, whose stake in one company has fallen 60 per cent since February, says the government has “shot itself in the foot”.
Oil executives understand the risk reward trade-off. But as Bernard Weinstein of the Maguire Energy Institute at Southern Methodist University’s Cox School of Business in Texas notes: “No company is going to bet the farm on Argentina.”
Copyright The Financial Times Limited 2012. You may share using our article tools.
Please don’t cut articles from FT.com and redistribute by email or post to the web.
