August 2019

The last barrel

Patience is a virtue
Craig Fleming / World Oil

Argentina’s Vaca Muerta shale play is starting to come to life, more than a century after bituminous shales in the Salado River valley were first described in 1892 by Dr. Guillermo Bodenbender. The Jurassic/Cretaceous formation consists of mature black shales, marls and lime mudstones. The shales are part of the greater Neuquén basin, and are best known as the host rock for major oil deposits. Although Neuquén has been producing oil since 1918, it was a large Vaca Muerta oil discovery in Loma La Lata field, by Repsol-YPF, that opened the shale play in 2010.

Vast potential, disappointing results, until now. After the YPF discovery, Chevron, Total and Royal Dutch Shell poured approximately $13 billion into exploration over the next nine years. However, none of them had much to show for it. Logistical bottlenecks hampered progress, obstacles kept popping up, and production was marginal—until now. In the last few weeks, two companies have exported two small cargoes from the formation, one of light oil, the other of liquefied natural gas, foreshadowing what industry officials say will be a steady flow of shipments by the end of the year.

It’s too early to declare victory—any number of logistical and economic hurdles remain. But it’s the first sign that the investment in capital and time is starting to pay off, and could turn Argentina back into a global energy provider. “The system is going to change from one of importing oil and products to one of exporting,” said Sean Rooney, Shell’s chief in Argentina. “And that’s going to grow over time. It’s going to be some hundreds of thousands of bpd.” Shell announced, in December, a scale-up of operations and, in a seal of approval for the first intensive shale drilling outside North America, ExxonMobil this month made a similar commitment. Argentina’s light oil shipments are now forecast to reach 70,000 bpd next year.

Potential to lower trade deficit. “Further growth in Argentina’s hydrocarbon production and export capability has the potential to markedly constrain trade deficits,” says Jaimin Patel, Bloomberg senior credit analyst. Although Vaca Muerta has vast potential, it remains to be seen whether the shale formation can mimic the Permian basin.

Challenges in the region include improving infrastructure, including roads and gathering/transportation pipelines. Producers also want the government, which has been shifting Argentina away from protectionism, to finally let exports off the leash. That means ending a right-of-first-refusal for domestic refiners and coming good on a promise to ditch export taxes at the end of 2020. “If industry players and the government embrace this, and support energy policies to facilitate exports, we have an exciting opportunity ahead,” said Miguel Galuccio, who led YPF’s first incursions into Vaca Muerta and now runs Vista Oil & Gas, which sent the recent light oil cargo.

Drillers must also take into account politics. Most would like to see President Mauricio Macri win re-election in October, especially since he faces an opposition ticket featuring former leader Cristina Kirchner, whose capital controls spooked foreign investors.

Growth leads to LNG exports. Argentina’s natural gas production has been rising steadily in the past three years, largely because of increasing production from the Vaca Muerta shale. Production from the tight formation surpassed 1.0 Bcfd in December 2018 (EIA). And, in addition to the Vista light oil shipment, YPF recently exported Argentina’s first LNG from a barge it has anchored off the Atlantic coast. The process starts with transportation of natural gas from Vaca Muerta by an existing pipeline network to the port of Bahía Blanca, where it is liquefied at the Tango floating LNG production vessel (FLNG). The offshore facility has an LNG production capacity of 500,000 metric tons (0.07 Bcfd). Next quarter, YPF is planning more shipments from the barge, which can produce up to eight LNG-export cargoes per year. There’s also room to grow sales by pipeline to neighbors Chile, Brazil and Uruguay.

These gas exports are short-term solutions. With consumption in Argentina tailing off severely in warmer months, domestic drillers need access to bigger markets, to make shale gas investments worthwhile. That’s why they’re already mulling construction of an LNG terminal that could cost $5 billion, either on Chile’s Pacific coast or at an Argentine Atlantic port. “The key to tapping our potential is the LNG terminal,” said Marcos Bulgheroni, CEO of Pan American Energy, during a shale conference in Neuquen. Ideally, Bulgheroni said, the shale play needs both coastal outlets.

If export plans move ahead swiftly, LNG production will soar, and by 2024, Argentina could steal market share in Asia from the U.S., especially because tankers sailing from its shores can avoid congestion in the Panama Canal. But, if Argentina fails to gain a slice of the global LNG market in the next few years, producers will likely scale back drilling plans.

When it comes to supplying energy, time is of the essence. At the conference in Neuquen, Macri warned that the world’s slow move away from fossil fuels imperils Argentina’s shale prize. “Oil folks are laid back about the fact there’s still time,” he said. “But you never know where ingenuity will take us. So, we need to make the most of the moment.”

The prize. So, 126 years after the discovery of oil-bearing shales in the Salado River valley, the region’s enormous potential is finally being tapped. Geographically, the Vaca Muerta is three times the size of the Permian, and could yield enormous returns, if the right conditions are established. The U.S. EIA estimates total recoverable hydrocarbons from the Vaca Muerta to be 16.2 Bbo and 308 Tcfg. So, once again our industry has persevered, and responded with multiple technological solutions that enable operators to economically exploit Argentina’s untapped shale prize. WO

About the Authors
Craig Fleming
World Oil
Craig Fleming
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