The U.S. pioneered shale gas and oil. The stratospheric rise in oil and gas production from the Marcellus, Bakken, and Eagle Ford formations has prompted producers to look abroad for other shale plays. After all, the U.S. isn’t the only holder of enormous shale resources. But the unique conditions in the U.S. – huge capital markets, home of fracking and horizontal drilling innovations, and landowner mineral rights – kept the shale revolution confined to the United States. Yet, as Ed Morse writes in the upcoming issue of Foreign Affairs, because of the massive shale deposits around the world, the shale revolution will almost certainly spread abroad at some point. But where will it happen next?
The most likely candidate is Argentina. Long known for beef, soy, soccer, and the tango, Argentina may soon make a name for itself in the world of unconventional oil and gas production. According to the U.S. Energy Information Administration, Argentina potentially holds the world’s fourth largest shale resources, behind only Russia, the U.S., and China. The South American country could hold up to 27 billion barrels of technically recoverable oil and 800 trillion cubic feet of natural gas.
It is not as if this has come out of left field. Argentina has long been a significant producer hydrocarbons, albeit a middling one compared to global energy superpowers. It is already South America’s largest producer of natural gas, and the continent’s…
The U.S. pioneered shale gas and oil. The stratospheric rise in oil and gas production from the Marcellus, Bakken, and Eagle Ford formations has prompted producers to look abroad for other shale plays. After all, the U.S. isn’t the only holder of enormous shale resources. But the unique conditions in the U.S. – huge capital markets, home of fracking and horizontal drilling innovations, and landowner mineral rights – kept the shale revolution confined to the United States. Yet, as Ed Morse writes in the upcoming issue of Foreign Affairs, because of the massive shale deposits around the world, the shale revolution will almost certainly spread abroad at some point. But where will it happen next?
The most likely candidate is Argentina. Long known for beef, soy, soccer, and the tango, Argentina may soon make a name for itself in the world of unconventional oil and gas production. According to the U.S. Energy Information Administration, Argentina potentially holds the world’s fourth largest shale resources, behind only Russia, the U.S., and China. The South American country could hold up to 27 billion barrels of technically recoverable oil and 800 trillion cubic feet of natural gas.
It is not as if this has come out of left field. Argentina has long been a significant producer hydrocarbons, albeit a middling one compared to global energy superpowers. It is already South America’s largest producer of natural gas, and the continent’s fourth largest oil producer. But Argentina’s production levels could dramatically jump if drillers can unlock the rich shale formation 1,100 kilometers southwest of Buenos Aires.
A World Class Play
The Vaca Muerta formation is the largest prize in South America when it comes to unconventionals. The formation located in Neuquen province holds an estimated 16.2 billion barrels of technically recoverable oil and 308 trillion cubic feet of natural gas. For a bit of context, these numbers surpass those of the Maracaibo basin (14.8 billion bbl of oil and 202 tcf of natural gas) that has long made Venezuela an energy powerhouse. Also in Neuquen is the Los Molles formation which holds a further 3.7 billion barrels of oil and 275 tcf.
The Vaca Muerta consists of an estimated 7.4 million acres, which is bigger than the Eagle Ford (4.1 million acres) and about the same size as the Bakken (7.3 million). YPF (NYSE: YPF) is the major operator in the area, a company in which the Argentine government owns a 51% stake. It controls 3 million acres in the Vaca Muerta, enough to make it the number two holder of proven shale acreage, behind only Chesapeake Energy, which owns and operates over 4 million acres of shale, largely in the Marcellus.
And one of the most exciting aspects about the Vaca Muerta is that the geology looks good too. Vaca Muerta has greater thickness than the Bakken, Marcellus, or Eagle Ford. It has high organic carbon, similar to levels seen in the Marcellus, and it is highly pressurized.
YPF’s preliminary results also proved promising. In 2011, it saw its initial monthly rates rise from less than 200 barrels per day per well up to 500 barrels. As drillers continue to learn about the play, production will continue to rise.
Neuquen has long been Argentina’s major oil producing province, so roads and other infrastructure are already in place. “We have the equipment, logistics, and commitment to repeat what happened in the United States,” said YPF CEO Miguel Galuccio during the presentation. “We need more resources and more partners to advance at an even faster pace.”
Geopolitical Risk?
Despite the prodigious quantities of oil and gas, Argentina has not yet replicated the shale revolution. The government of Cristina Fernandez de Kirchner has pursued various socio-economic goals that have sought to keep consumer prices from fluctuating. This means that energy prices have been largely frozen for years, protecting consumers but deterring upstream investment.
The investment climate remains highly regulated which has kept many international oil and gas companies away. The geopolitical risk reached its peak when the Argentine government expropriated YPF in May 2012 from the Spanish firm Repsol, which owned a 51% stake in the company. The government in the Casa Rosada has since agreed to compensate Repsol with $5 billion, but the move likely made other firms think twice about pouring money into Argentina.
Moving Forward
Smarting from the international backlash after the expropriation, the Argentine government has passed a series of reforms intended to ease the concerns of intentional business. These reforms will make investment more palatable, such as allowing foreign firms to export 20% of their production without having to pay export taxes. The Argentine government also maintains controls on the movement of capital, but has decided to exempt those restrictions for companies that invest more than $1 billion in the country over a five-year period. Also, budget deficits recently forced the government to pare back subsidies for energy and water. Its decision to let natural gas prices rise from a cap of $5 per million Btu to $7.50 million Btu will allow producers to earn more.
With the expropriation apparently put to rest, several major companies are moving in, and the exemption on capital controls for companies spending over $1 billion means it will remain a big boy’s game. Chevron (NYSE: CVX) agreed to a joint venture in 2013 with the state-owned YPF to develop Argentina’s shale gas and oil reserves, and decided to invest an initial $1.24 billion investment. In 2012, Chevron was already producing 21,000 barrels of oil per day and 4 million cubic feet of natural gas.
On April 10, 2014, Chevron announced a deal with Argentina’s YPF SA to continue cooperating to develop the vast Vaca Muerta shale oil and natural gas field. Through its subsidiary, Chevron will invest $1.6 billion this year, and together with YPF, will drill 170 wells. “This is a significant step in our subsidiaries' joint efforts with YPF to develop one of the most exciting shale plays in the world today,” said George Kirkland, vice chairman of Chevron Corporation. “Vaca Muerta could become an important contributor to Chevron's long term production growth.” The decision to spend more money means that Chevron is thus far pleased with the results it is getting.
While Chevron has made the biggest bet among international companies, there are several others sticking their toes in. ExxonMobil (NYSE: XOM) has also invested $250 million. Total SA (NYSE: TOT) committed to a $400 million pilot project in the Vaca Muerta. Germany’s Wintershall committed earlier this year to spend $110 million to drill six wells this year.
The spread of the shale revolution is almost inevitable, but the trick for traders and investors is when and where it will happen. Although the exact timing is unknown, Argentina is a strong bet for the place.
