April 2023

The last barrel

Vaca Muerta poised to boom
Craig Fleming / World Oil

Argentina’s Vaca Muerta shale play is starting to come to life, 130-years 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. After the YPF discovery, Chevron, Total, Royal Dutch Shell and ExxonMobil 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—however, this started to change in 2020 when two companies started to export light oil and LNG from the formation. Although further production increases have been slow, there is a positive buzz around the play, indicating that the investment in capital and time is starting to pay off and could turn Argentina back into a global energy provider. Shell and ExxonMobil have been ramping up activity over the last several years, the first intensive shale drilling outside North America for both companies. 

Building critical infrastructure, finally. After years of setbacks, state-owned Energia Argentina is nearing completion of a 356-mi pipeline—named President Nestor Kirchner after the former leader—that will carry natural gas from the remote northern Patagonia region to Argentina’s cities and industry centers in the east. The project, along with the planned expansion of an oil conduit in the same area, will help relieve bottlenecks that have stifled oil and gas production in a nation that desperately needs to bolster its economy. The progress is a clear indication that one of the world’s biggest shale plays finally has a shot at  living up to its promise.  

While Argentina’s energy industry has experienced its share of boom/bust type cycles in recent years, completion of the pipeline is an irrefutable step toward a much-needed goal of cutting the country's dependency on energy imports—and perhaps regaining the status it held 20 years ago as a key hydrocarbon exporter. 

South American focus. The progress in Vaca Muerta comes as the U.S. shale boom slows, the war in Ukraine roils global energy markets and the world’s centers of oil production growth shift to South America, including Guyana and Brazil. It’s also happening despite government restrictions on crude prices and money flows. “The critical steps are being taken—once completed, there will be no piece of infrastructure missing to sustain Vaca Muerta growth in the near-to-medium term,” said Marcelo de Assis, a Wood Mackenzie analyst based in Rio de Janeiro. “But there are still above-ground risks. Price caps are a policy for election cycles, and drillers need long-term stability and sustained capital investments to be successful.”  

The President Nestor Kirchner gas pipeline is Argentina’s first major gas viaduct in decades. Energia Argentina has stated the pipeline will be ready for start-up in late June, which will be a major victory after years of setbacks, including the Covid pandemic and allegations of corruption, in addition to the near-default of Argentina’s state-run producer, YPF SA. It’s a race against time, since June falls early in Argentina’s winter, when gas demand spikes. The government, betting that the pipeline will be finished on schedule, has ordered just 30 LNG cargoes for the coming months, 11 fewer than last year. Any delay that forces extra imports would erode government funds, which would be an embarrassing misstep after officials used LNG savings for a sovereign bond buyback. 

LNG export potential. Argentina’s natural gas production reached 140 MMcmd last winter, and the new pipeline would provide an additional 21 MMcmd of transport capacity, enabling companies to ramp up operations. If all goes as planned, the country would export to neighboring Brazil by land and to other customers by seaborne LNG cargoes.   

Although Argentina does not have LNG export terminals, Texas-based Excelerate Energy and Transportadora de Gas del Sur will soon decide whether to build a small-scale plant. YPF and Malaysia’s Petronas are studying the feasibility of an even larger facility. As for exports to Brazil, they depend on Argentina luring lenders to finance an extra section of the President Nestor Kirchner pipeline, which is no sure thing. Argentina’s financial problems have kept it locked out of international credit markets, and it’s paying for the first section with tax revenues, including a one-off pandemic wealth tax. The two-section project would cost about $5 billion to complete. 

Crude output. Vaca Muerta’s oil production is poised to increase, with Oldelval SA, which transports most of the region’s supply, and storage company Oiltanking Ebytem planning to double capacity after the government renewed their operating licenses last year. Oldelval has been auctioning off extra space to shale operators, who have resorted to trucking shale oil to the Atlantic coast, a clear sign of a major transportation/infrastructure shortage. 

With U.S. shale production growing more slowly, a window of opportunity has opened for Vaca Muerta, since there are few additional supplies beyond OPEC that can come to market soon. The Neuquén basin produced a record 373,000 bopd at the end of 2022, approximately 67% of Argentina’s total output. But years of efficiency gains in Vaca Muerta mean some operators can break even at $30/bbl, which would put them on a par with U.S. shale oil producers. “With these pipeline plans, we’ll comfortably reach the goal of 1 MMbopd of shale production by 2030,” said Omar Gutierrez, governor of Neuquén. Approximately half of that could be shipped to international buyers, Gutierrez said. 

Historical issues still remain. Argentina’s government has historically kept domestic fuel prices artificially low to protect consumers, often hurting producers’ bottom lines. Currency controls, designed to defend the peso, make it difficult for the country’s operators  to obtain the U.S. dollars they need to buy equipment or send profits to investors. And local refiners have the right of first refusal to buy oil that might otherwise fetch higher prices overseas, a hurdle to long-term export contracts. These issues have been major hurdles to Vaca Muerta’s development. 

The next Permian basin? Miguel Galuccio, CEO of Vista Energy, a leading independent operator in Vaca Muerta and a major shale oil producer says this time could be different. “Progress of pipeline projects is key to attracting more investment and potentially leading Argentina to be a relevant energy exporter once again.” 

Argentina’s Energy Undersecretary, Flavia Royon, is even more optimistic, predicting booming oil production from the shale play will create a significant surplus in energy trade for the country within the next several years. In addition to the massive President Nestor Kirchner project, an abandoned crude pipeline will start to pump oil to Chile in May, Royon said. YPF is also planning to build a pipeline to connect Vaca Muerta supply to the Atlantic coast, where a new port will also be constructed. “In three or four years, we’ll have a positive energy trade balance of approximately $8 billion driven by crude exports,” Royon said at a conference held in Toronto in March. 

About the Authors
Craig Fleming
World Oil
Craig Fleming Craig.Fleming@WorldOil.com
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