'Vaca Muerta investment commitments speak to increased confidence'

Monday, January 15, 2018

It has now been one year since Argentina's government negotiated more flexible oil workers' contracts to raise the appeal of investing in the Vaca Muerta shale fields to overcome the country's energy deficit.

Vaca Muerta, in the south of Argentina, is one of the world's largest shale reserves at some 30,000km2. It has attracted a lot of interest, but still remains largely unexplored.

With new drilling technologies and a more business-friendly regulatory environment, the area is shaping up to have a lot of potential for 2018 and beyond. 

BNamericas spoke to Amanda Kupchella, a Wood Mackenzie research analyst, to test the waters on current conditions at the play that may boost production and investment moving forward.

BNamericas: Are well prices in the Vaca Muerta play coming down?

Kupchella: Yes they are, especially for YPF. At Loma Campana horizontal well costs have come down from over US$16mn in 2013 and today they're between US$8mn and US$​9mn. Other operators are also seeing cost reductions and, in general, are able to drill longer laterals while still decreasing costs. They have come down quite a bit.

BNamericas: Is water, sand and road infrastructure improving?

Kupchella: As there is more development, pilot projects that are starting and developments ramping up, the water and sand is getting tighter. The most advanced players have good water and sand infrastructure and so they can source sand domestically and are either close to water sources or have good infrastructure but then some of the newer, smaller players have more challenges. As far as the roads, those need a little bit more investment. Especially as things are ramping up, all three of these things will become more challenging.

BNamericas: What is happening to production?

Kupchella: Production is increasing. Vaca Muerta production has tripled since 2014 and it is currently producing about 75,000boe/d and that will continue to increase. Last year over US$5.8bn was committed to Vaca Muerta so that will drive and increase production going forward.

BNamericas: What do companies see as the main challenge to E&P?

Kupchella: The main challenges for E&P in Argentina, especially for Vaca Muerta, are growing pains including infrastructure capacity mainly, gas pipelines especially will need to be expanded as production grows and then the local supply chain will also need to grow to accommodate the ramp ups across the play.

BNamericas: Argentina is now again exporting natural gas to Chile, is this a sign of new confidence?

Kupchella: This agreement is really just an agreement to swap gas with Chile, so it's for the seasonal peaks and demands. The ability to export to Chile is beneficial for operators as it provides them with more flexibility but a completely deregulated market would be even more beneficial and create more flexibility as production grows, but right now the gas swap is just for seasonal changes.

BNamericas: So any level of confidence between the two countries hasn't quite returned yet?

Kupchella: Right, unconventional production is ramping up and will drive an increase in gas production but it not necessarily is there a flow of export out of Argentina because they are still importing gas from other sources.

BNamericas: Is there any new regulation that is helping the industry?

Kupchella: The Argentine government reduced tariffs on imports of used E&P equipment so that benefits unconventional development and then there are still gas price benefits in place so operators can receive prices that are significantly above market level.

BNamericas: How has the agreement between the oil companies and the Neuquen provincial government benefited Vaca Muerta?

Kupchella: That agreement really demonstrated strong collaboration between the provincial government, the federal government, the unions and then the E&P companies and it is a sign that all the players are willing to work together to develop Vaca Muerta. That's a positive indicator, and then the string of investment commitments that we saw last year speak to the increased confidence that investors have for the play.

BNamericas: Can Argentina replicate the shale boom in the US?

Kupchella: The geology of the Vaca Muerta play is comparable to some of the best US shale plays, but Argentina is not the US so it is going to have its own boom but it is not going to be like it was in the US because it is a fundamentally different environment, a different business environment.

About Amanda Kupchella

Amanda Kupchella is research analyst at UK-based consultancy Wood Mackenzie.

About the company

Wood Mackenzie, a subsidiary of US data analytics and risk assessment firm Verisk Analytics, is a global energy, metals and mining research and consultancy group that provides data, written analysis and advice. The company has offices worldwide, including in London, Houston, Moscow and Sydney. In Latin America, it is present in Argentina, Brazil, Mexico and Peru.