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Argentina seen at ‘tipping point’ for more shale investment

Argentina is poised to attract more investment to its oil sector as rising crude prices improve the profit potential of its shale resources even as the government contends with financial problems.

“We see very good economics in shale oil,” Marcos Pourteau, the Energy Ministry’s secretary of exploration and production, said at a conference of the Society of Petroleum Engineers of Argentina in Buenos Aires running Tuesday to Wednesday. “My impression is that production should accelerate because of the economics and the prices of oil today.”

The ministry has forecast that shale oil should be a driver of a surge in overall oil production to 700,000 b/d in 2030 from 479,000 b/d in 2017, and natural gas production should shoot up to as much as 200 million cu m/day from 125 million cu m/day over the same period.

Vaca Muerta, one of the world’s biggest shale plays, has lured majors like Chevron, ExxonMobil, Shell and Total to projects, helping to stabilize oil and gas production after more than a decade of decline.

“If we continue to reduce costs, the play will be very attractive,” Pourteau said.

YPF is making headway in cost reduction as the busiest company in Vaca Muerta, with two projects in mass development and another three poised to start this year.

The state-run energy company has cut its shale oil development costs to $12.60/b from $22.60/b in 2012-13, when it was the first company to enter Vaca Muerta. Its target is to reach $10/b in the near term, said Pablo Bizzotto, YPF’s vice president of upstream.

“We are close,” he added.

The advances are gaining the attention of oil companies.

Sebastian Borgarello, vice president of upstream consulting at Wood Mackenzie, said the cost decline and rising oil prices have put Vaca Muerta at “the tipping point of a wave of investment.”

Other attractions for investment are a business-friendly government and relatively low entry costs. Borgarello estimates it costs less than $10,000 per acre to enter Vaca Muerta, compared with $40,000-50,000 in the Permian Basin in Texas and New Mexico.

At the same time, a ramp-up in drilling over the past year has been helping to de-risk the play to confirm its potential, as more companies like Schlumberger and Statoil take on projects.

“The quality of the rock is comparable to the best plays in the US in both oil and gas, in all of the windows,” Borgarello said.

Nathan Meehan, managing director of consultancy Gaffney, Cline & Associates, said that with the large resources, the rise in oil prices and high domestic gas prices at around $5/MMBtu, “there is no question that there will be increased production and activity.”

Meehan said he expects Vaca Muerta to grow faster than other oil and gas resources in Argentina.

“Vaca Muerta gives the fastest payout and the highest initial rate of return,” he said.


To ramp up production, however, Meehan said more infrastructure is needed, from roads to trains and pipelines, as well as frac sand and rigs.

“The good news is that there is a lot of interest from a lot of players because of the quality of the resource,” Meehan said. “None of those are technical problems that we need a new solution for. We know how to do everything. It’s just a matter of doing it.”

The government plans to launch a project for building a cargo train from the Atlantic port of Bahia Blanca to the heart of Vaca Muerta drilling in the next month, increasing the capacity to move sand into the play to meet a rise in demand as more companies step up drilling.

Even so, there still is some reticence to investing in Argentina because of the country’s history of economic and political volatility, including during a 2003-15 populist regime that had imposed capital, pricing and trade controls on the sector, driving some companies to pull out.

To rebuild confidence, Guimar Vaca Coca, an energy business adviser, said production royalties should be cut by 10% in the first five years of a development project in Vaca Muerta, and taxes slashed by 30% over the same period.

“It is the only way to awaken the interest of investors to bring in the capital we need in the country,” he said.

Argentina’s right-of-center president, Mauricio Macri, and the provinces may not be able to do that anytime soon, though. Most are running fiscal deficits, leaving little room to cut taxes, and inflation is running at a stubborn 25%.

Indeed, the country’s financial problems have flared over the past few weeks, as a surge in the dollar since mid-April weakened the peso, stoked inflation and pushed up interest rates, with the benchmark rate now at 40%. This has raised concern about Macri’s ability to sustain power to win a second term in 2019 as the economy looks on track to fall into recession.

Wood Mackenzie’s Borgarello said this may be on investors’ minds if it increases the perceived risk of investing in Argentina. But if Macri can resolve the “mini-crisis” then it will be just be remembered as noise, he said. “Oil companies think in the long term.”
Source: Platts

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