Vaca Muerta finally produces oil, a century after its discovery

Jonathan Gilbert June 25, 2019

BUENOS AIRES (Bloomberg) -- Along the western edge of Argentina’s Patagonia, on an arid steppe nestled against the Andes mountains, lies a shale formation known as Vaca Muerta. And ever since engineers confirmed what an American geologist suspected a century ago -- that the Vaca Muerta, or dead cow, contains massive amounts of oil and gas -- the rush to replicate the U.S. shale production boom was on.

First came YPF SA, the local oil giant, and Chevron. Then the likes of Total and Royal Dutch Shell. Between them, they poured some $13 billion into exploration over the past eight years. None of them ever had much to show for it, though. 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 way too early to declare victory -- any number of logistical and economic hurdles remain. But it’s the first sign that all the money and time invested might actually pay off and turn Argentina back into the global energy provider it used to be well over a decade ago.

“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, Exxon Mobil this month made a similar commitment. Argentina’s light oil shipments are now forecast to reach 70,000 bpd next year.

What Bloomberg Intelligence says

"Further growth in Argentina’s oil and gas production and, just as importantly, export capability has the potential to markedly constrain trade deficits."--Jaimin Patel, senior credit analyst.

There’s a long way to go to match -- or even come close to matching -- the benchmark of shale production, the Permian basin in Texas and New Mexico, where output is driving Gulf Coast shipments to about 2.5 MMbpd. Infrastructure developments, including roads and gathering pipelines, lag drilling progress. 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 the dead cow 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 market-oriented President Mauricio Macri win re-election in October, especially since he faces an opposition ticket featuring former leader Cristina Fernandez de Kirchner, whose capital controls spooked foreign investors.

LNG cargo

In addition to the Vista shipment, YPF recently exported Argentina’s first liquefied natural gas from a barge it has anchored off the Atlantic coast. Next quarter, it’s planning more shipments from the barge, which can liquefy as many as eight cargoes a 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 much 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,” Marcos Bulgheroni, CEO of Pan American Energy, said at a shale conference in oil city Neuquen this month.

Ideally, Bulgheroni said, the dead cow needs both coastal outlets. (No one, it should be noted, really knows why it’s called the dead cow. The most commonly told story in industry circles is that it’s because the formation looks like a cow lying down when viewed from the sky.)

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, according to a report by energy research firm Wood Mackenzie.

But if Argentina fails to gain a slice of the global LNG market in the next few years, producers would likely pull back drilling plans. To be sure, the nation is still an importer of the fuel.

When it comes to supplying energy, time really is of the essence. At the conference in Neuquen, Macri warned a room of oil executives 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."

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