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Argentina could be nearing a shale oil and gas boom similar to the one that transformed the US energy landscape as former state monopoly YPF eyes another 1bn barrel discovery adjacent to a Patagonian field whose reserves were more than six times bigger than thought.
YPF has almost finished drilling a 502 sq km area just north of the discovery zone and believes full results will be equally vast. Two of the three wells are in production and “the yield is exactly the same,” says Tomás García Blanco, YPF’s executive director for upstream.
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Asked if this heralded another 1bn barrel discovery, Mr García Blanco says: “Yes. But until the third well is drilled … I would like to be cautious. We hope to know by the end of the year or January 2012.”
The group, which is 57.43 per cent owned by Spain’s Repsol, announced in November that it had discovered 927m barrels of oil equivalent in a 428 sq km zone of the Vaca Muerta (“Dead Cow”) formation in south-western Argentina – more than six times higher than its initial estimate in May of 150m barrels. The discovery is three-quarters oil and one-quarter gas, it says.
That, Mr García Blanco notes, is based on “conservative” estimates that only 4 per cent of all the hydrocarbons will be extracted. Some in the US believe recovery rates of 8 per cent or even 15 per cent may be possible in time – something that will lead to eye-popping estimates of the potential for shale worldwide.
Argentina has some of the world’s biggest and best-quality reserves of shale hydrocarbons, which are trapped thousands of metres underground and released by fracturing rocks using high-pressured water, sand and chemicals. The US Energy Information Administration this year ranked Argentina third globally in terms of technically recoverable shale gas resources with 774,000bn cubic feet.
With the YPF results and intensive exploration by companies with shale experience in North America – such as ExxonMobil, Total, EOG Resources and Apache – Argentina believes it can emulate the US in going from a mature, but declining hydrocarbons producer to a shale superstar.
“The flood of companies started six months ago. Now we’re starting to get results,” says Sam Lee, portfolio manager of the $70m Melchior Resources Fund. It has 8 per cent of its assets in Americas Petrogas, which has a shale farm-out deal with Exxon, and some 5 per cent in other junior companies, and sees 2012 as “an inflection year for Argentina’s oil and gas industry”.
Hydrocarbons output has nosedived in Argentina in recent years amid market unfriendly policies and heavy regulation of the sector that discouraged investment. As a result, the government expects to import a record 80 cargoes of liquefied natural gas next year, a 20 per cent increase on 2011.
But industry observers note that royalties are low relative to other resource-rich countries and Argentina is offering higher prices for shale gas and oil under the Gas Plus and Oil Plus programmes, creating potentially advantageous conditions for a shale boom.
Vaca Muerta, which lies at a depth of 2,500m to 3,000m and had been ignored for decades as geologists long considered such rock unproductive, compares favourably to major US shale formations, says Mr García Blanco: it is three times as deep as Eagle Ford in Texas and yields could be double, he believes.
“It does seem to have some similarities to some very productive US plays,” agrees Robert Clarke, manager of the unconventional gas service at Wood Mackenzie, the energy consultancy.
YPF remains upbeat that there could there be more shale-rich bedrocks, such as Vaca Muerta in the Neuquén basin. Next year, it plans to spend $40m to drill three wells on the Molles formation, which lies below Vaca Muerta at a depth of 3,500m to 4,000m. “Our expectations are very high,” Mr García Blanco adds.
YPF is also looking further south, at the D-129 bedrock in the San Jorge basin, to explore shale potential there, he adds. In all, the company expects to drill 40 shale wells next year, at a cost of $11m to $12m per well.
“Until two-and-a half years ago, I thought we would maintain production but never grow in oil, and in gas we would maintain or decline a bit,” Mr García Blanco admits. Now, he reckons that within five years, a third of YPF’s production will come from the Vaca Muerta shale, and the company will be self-sufficient in supplying its refineries.
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