DRIVING north-west along a poplar-lined road from the city of Neuquén, orchards and wineries give way to a bone-dry land of stubborn brush, hardy wild horses and a sprinkling of Amerindian villages. Underground lies long unsuspected wealth: Vaca Muerta (“Dead Cow”), a shale formation the size of Belgium, has the potential to transform the country.
Argentina boasts the world’s second-biggest shale-gas reserves, most of them in Vaca Muerta. A survey by the US Energy Information Administration (EIA) suggests that the field holds 16.2 billion barrels of shale oil and 308 trillion cubic feet (TCF) of shale gas. That is more shale oil than Mexico and more shale gas than Brazil. It is enough to satisfy Argentina’s current energy demand for over 150 years, and could make the country an exporter once again.
Neuquén is readying itself for a boom. Shopping centres have sprung up; so have clean new hotels that boast English-speaking staff and American-style food. Horacio Quiroga, the city’s mayor, compares its residents to expectant diners who have tied on their bibs. Argentina’s president, Cristina Fernández de Kirchner, is equally hopeful. “I shall no longer call [it] Vaca Muerta,” she said last year. “I shall call it Vaca Viva (‘Living Cow’).”
But there are several catches. The EIA can be wrong: it has downgraded its estimates for Chaco-Paraná, another Argentine basin, from 164 TCF to 3 TCF. But initial trials at Vaca Muerta have been encouraging. In May Exxon Mobil announced that 770 barrels a day had begun to flow from an exploratory well there. Chevron and YPF, Argentina’s state oil firm, have formed a $1.4 billion joint venture to develop a concession which currently produces 24,000 barrels of oil equivalent a day.
Vaca Muerta’s geology helps. Its shale is thicker than in most formations, which means that companies can produce more from a single site. As firms become familiar with the field, budgets are already dropping: YPF says it has reduced costs from $11m per well in 2011 to $7.5m.
A bigger obstacle is government energy policy. Price controls and export taxes have deterred investment; oil and gas output have declined while demand has grown. Unless policy changes, it will be hard to find the $140 billion to $200 billion that oilmen say is required for large-scale development of Vaca Muerta. Shell, Total and many others have bought stakes in the field, but so far are just exploring. Daniel Gerold, a director at G & G Energy Consultants, estimates that only $3.7 billion has been invested over the past three years.
Argentina’s default on part of its foreign debt on July 31st, the result of a ruling by a New York judge in the government’s dispute with a group of hedge funds, puts a further damper on potential investment. (This week Ms Fernández said she would seek to bypass the judge’s ruling by paying bondholders in Argentina, rather than New York. But this proposal is fraught with legal and practical difficulties.)
Even before the default, many energy companies were wary of Argentina. Operating costs are high, because currency controls push up the price of imported equipment. The nationalisation of Repsol’s shares in YPF in 2012, after the Spanish firm had made big discoveries of shale gas at Vaca Muerta, was a shock. Will Pearson of Eurasia Group, a political-risk consultancy, thinks most companies will wait until Argentina’s presidential election, due in October 2015, before deciding whether or not to move from exploration to production.
Juan José Aranguren, the boss of Shell’s Argentine subsidiary, says his company will decide whether or not to proceed after it has finished exploring Vaca Muerta in 2016. He expects the default to decrease, or at least delay, investment in the field. But his biggest concern is the lack of a clear regulatory framework. “We’re not asking for the world. We just want to see long-term policies grounded in laws that cannot be changed on a whim.”
The government has proposed a new hydrocarbons law, which has sparked an argument between it and YPF and the oil-producing provinces. But the bigger question is whether Ms Fernández is prepared to give the energy companies enough of what they want for the development of Vaca Muerta to get under way, or whether that task will fall to her successor. Even if she takes the plunge, large-scale production at Vaca Muerta is five years away, according to a former energy secretary.
In 2013, Argentina was the largest dry gas producer and the fourth largest petroleum and other liquids producer in South America.
Argentina’s new hydrocarbons reform, published on October 31, 2014, provides investors with offshore exploration opportunities and encourages foreign ventures in unconventional plays. Before the 2014 reform to the 1967 Hydrocarbon Law, Argentina’s energy sector policies prompted an imbalance of energy supply and demand by limiting the industry’s attractiveness to private investors, restraining the profits of domestic producers, and shielding consumers from rising prices. Domestic demand for energy grew rapidly while production of both petroleum and other liquids and natural gas declined — making Argentina a net hydrocarbons importer.
To incentivize foreign investment in the hydrocarbons sector and boost domestic energy supplies, the recent policy will reform the national bidding process, increase the frequency of offshore licensing rounds, allow for longer exploitation periods, and offer tax exemptions to companies that invest more than $250 million over a three-year period. The reform will also reinforce national oil company (NOC) Yacimientos Petrolíferos Fiscales’s (YPF) position while reducing the impact of provincial oil companies.
To limit the influence of the current low oil prices on production, the Ministry of Economy recently announced a reduction to oil exports tariffs.
The Argentine government has also provided tax incentives to companies that form partnerships with state-owned energy company, Energía Argentina Sociedad Anónima’s (ENARSA), for offshore exploration and offered higher gas prices for new gas production sold in the domestic market under the Gas Plus Plan.
In Argentina, the energy sector is regulated by the Ministerio de Planificación Federal, Inversión Pública y Servicios (Ministry of Federal Planning, Public Investment, and Services). The Ministry includes the Ente Nacional Regulador de Gas (ENARGAS), which regulates natural gas transportation, and distribution activities; and the Secretaría de Energía (Energy Secretariat), which oversees upstream oil and natural gas production. The 2014 reform also transfers all of the offshore permits and concessions of state-owned energy company ENARSA’s to the Energy Secretariat.
According to the 2013 Energy Balance published by the Argentina’s Energy Secretariat, total primary energy production in Argentina was 3.02 quadrillion Btu. Natural gas production accounted for approximately 51%, and production of crude oil represented 38% of the total energy production portfolio. Hydroelectricity is the third largest primary energy source.
Natural gas, which is used widely in the electricity, industrial, and residential sectors, represented 53% of total primary energy consumption in 2013 (3.22 quadrillion Btu). Oil is the primary fuel used in the transportation sector and represented 33% of total primary energy consumption. A smaller share of the country’s total energy consumption can be attributed to nuclear, coal, and hydropower, which are used for electricity generation, while other renewable resources are used to produce biofuels for transportation.
As of January 2015, Argentina held 2.4 billion barrels of proved crude oil reserves, a decrease of almost 0.5 billion barrels from the prior year, according to Oil and Gas Journal (OGJ). In 2014, total oil production was 711,000 barrels per day (bbl/d), of which 519,000 bbl/d was from crude oil and 104,000 bbl/d was from natural gas plant liquids.
YPF is the largest oil producer in the country and extracts oil from about 59 fields. The second-leading oil producer, with 18% for total production in 2013, is Pan American Energy (PAE), which is owned by BP and the Bridas Corporation (a 50-50 joint venture between the China National Offshore Oil Corporation and Bridas Energy Holdings). PAE currently operates one of Argentina’s largest oil fields, the Cerro Dragón field. Chevron (U.S.), Petrobras (Brazil), and Sinopec Group (China) also have had a significant presence in Argentina’s upstream oil production.
Argentina has ten refineries with a combined 611,175 bbl/d of crude refining capacity, more than half of which is controlled by YPF, according to the OGJ. Total crude refining capacity decreased from 630,575 bbl/d in 2013 because of lower capacity at Refinor SA’s Campo Duran refinery and Shell’s refinery in Buenos Aires.
Argentinian refined products do not satisfy all domestic fuel demand. As a result, Argentina imported 86,863 bbl/d of total oil products, including 43,494 bbl/d from the United States, in 2014.
In 2014, Argentina’s soybean-based biodiesel production was expected to reach 48,251 bbl/d and production capacity grew drastically to 88,746 bbl/d. However, following the most recent anti-dumping tariffs on biodiesel imports implemented by the European Union (EU), Argentina has been unable to find an alternative market for their biodiesel exports, according to the Cámara Argentina de Biocombustibles (CARBIO).
Argentina had proved natural gas reserves of approximately 11.1 Trillion cubic feet (Tcf) in January 2015, according to latest estimates from OGJ, a decrease from 13.4 Tcf in 2014. Argentina holds the world’s second-largest shale gas reserves and Vaca Muerta, located in the Neuquen Basin, is Argentina’s largest shale gas play with an estimated 308 Tcf of dry, wet, and associated shale gas resources.
According to OGJ, Total Austral, a subsidiary of Total S.A., is Argentina’s largest natural gas producer, accounting for about 30% of the country’s total domestic supply. YPF, Argentina’s second-largest natural gas producer, accounts for over 23% of the country’s natural gas output. Other significant players in the natural gas sector include Pan American Energy, Petrobras (Brazil), Pluspetrol (Argentina), Tecpetrol (Argentina), and Apache Energy (U.S.).
Argentina produces more natural gas than total petroleum liquids. However, the country’s natural gas output decreased for a seventh—consecutive year to 1.3 Tcf of dry natural gas in 2013. The largest—gas producing basins include Neuquén, Austral, and Noroeste. Together, these three basins account for roughly 85% of the country’s natural gas production.
Argentina has 17,958 miles of natural gas pipelines. Predominant pipelines include Neuba I, Neuba II, and San Martin, which connect producing provinces in the Neuquén, San Jorge, and Austral basins (located in the central and southern parts of the country) with Buenos Aires and other demand centers.
Bolivia is the source of virtually all of Argentina’s natural gas imports via pipeline. In 2013, Argentina imported 184 Billion cubic feet (Bcf) from Bolivia via pipeline. Located on the Paraná River, the Escobar terminal is Argentina’s sole LNG terminal. Argentina imported 244 Bcf of liquefied natural gas in 2013 via the terminal, of which the largest share of LNG came from Trinidad and Tobago.
Although Argentina is a net importer of natural gas, it continues to export natural gas to its neighbors — largelyChile and, to a lesser extent, Uruguay.
Argentina consumed 117.1 billion kilowatthours in 2012 and remains the second-largest consumer of electricity in South America, after Brazil.
Through electrical transmission interconnections with Brazil, Chile, Paraguay, and Uruguay, Argentina imported 18.4 billion kilowatthours in 2014, a 79% increase from electrical energy imports in 2013 (8.0 billion kilowatthours), to meet increasing domestic electricity demand.
The Loma Campana camp where YPF and Chevron produce shale oil in the southwest Argentine province of Neuquén. So far, the plunging of oil prices has not modified the costely development of this unconventional fuel. Credit: Fabiana Frayssinet/IPS
BUENOS AIRES, Apr 10 2015 (IPS) - Despite the precipitous fall in global oil prices, Argentina has continued to follow its strategy of producing unconventional shale oil, although in the short term there could be problems attracting the foreign investment needed to exploit the Vaca Muerta shale deposit.
The uncertainty has come on the heels of the initial euphoria over the exploitation of shale oil and gas, of which Argentina has some of the world’s largest reserves.
Is the Vaca Muerta shale oil and gas field in intensive care, now that the price of a barrel of oil has plummeted from 110 dollars to under 50 in just seven months? That is the question repeated by financial and oil industry experts.
Argentina’s energy trade deficit climbed to almost seven billion dollars in 2014, partly due to the decline in the country’s conventional oil reserves.
Eliminating that deficit depends on the development of Vaca Muerta, a major shale oil and gas deposit in the Neuquén basin in southwest Argentina. At least 10 billion dollars a year in investment are needed over the next few years to tap into this source of energy.
“Conventional oil production has peaked, so to meet the rise in demand it will be necessary to develop unconventional sources. And Argentina is one of the best-placed countries to do so.” -- Víctor Bronstein
“But taking a more strategic view, investment in and development of these resources must be kept up, since oil prices are going to start climbing again in the near future and we have to have the capacity to produce our own resources when that happens,” he added.
That is how President Cristina Fernández saw things, he said, when she set a domestic price of 72 dollars a barrel – “40 percent above its international value” – among other production incentives that were adopted to shore up Vaca Muerta.
According to the state oil company Yacimientos Petrolíferos Fiscales (YPF), Vaca Muerta multiplied Argentina’s oil reserves by a factor of 10 and its gas reserves by a factor of 40, which will enable this country not only to be self-sufficient in energy but also to become a net exporter of oil and gas.
YPF has been assigned 12,000 of the 30,000 sq km of the shale oil and gas deposit in the province of Neuquén.
The company admits that to exploit the deposit, it will need to partner with transnational corporations capable of providing capital. It has already done so with the U.S.-based Chevron in the Loma Campana deposit, where it had projected a price of 80 dollars a barrel this year.
“Who is going to invest in unconventional oil and gas at the current prices?” the vice president of the Grupo Moreno, Gustavo Calleja, commented to IPS.
“We have to hold on to Vaca Muerta and continue studying its deposits in just a few pilot wells, to see how deep they are and what kind of drilling is necessary to keep down costs and curb the environmental impacts,” said Calleja, who was the government’s undersecretary of fuel in the 1980s.
YPF technicians working on one of the shale oil drilling rigs in the Loma Campana shale gas field in Vaca Muerta in southwest Argentina. Credit: Fabiana Frayssinet/IPS
Hydraulic fracturing or “fracking”, the technique used to extract shale oil and gas, involves the high-pressure injection of a mix of water, sand and chemical additives into the parent-rock formations at a depth of over 2,000 metres, in order to release the trapped oil and gas which flows up to the surface through pipes.
Besides being very costly, fracking poses environmental risks, as it requires huge volumes of water, pollutes aquifers, and can cause earthquakes.
The shale boom that began in the United States in 2008 was driven, among other factors, by high oil prices, which provided a profit margin.
“At the current prices only those who have cutting-edge technology can develop their shale reserves,” said Calleja.
The cost of producing a barrel of shale oil is based on variables such as extraction, exploration, investment amortization and the payment of taxes and royalties. In the United States, the cost is calculated at between 40 and 70 dollars.
That fact, explained Bronstein, led to an over 30 percent reduction in drilling activity since prices fell, “which will bring down production over the next few months.”
In Argentina, shale development is just starting, which means costs are high “due to a question of scale and problems of logistics and infrastructure,” said the expert.
In the United States, “developing a shale well, including fracking, costs around three million dollars,” while in Argentina “it costs more than twice that,” he said.
“The cost of extracting conventional oil in Argentina ranges between 20 and 30 dollars a barrel, while it costs around 90 dollars to extract a barrel of shale oil, although that will gradually go down as Vaca Muerta is developed,” he said.
Argentina does not yet produce shale gas on a commercial scale, as it still has large reserves of conventional gas. YPF’s shale oil production represents 10 percent of the company’s total output, and between three and four percent of the oil extracted by all operating companies in the country.
Canada and China produce unconventional oil on a commercial scale. But due to their geologic and operative characteristics, the United States and Argentina are seen as having the greatest potential in terms of future production of shale oil and gas.
YPF argues that with the gradual reduction in production costs, a rise in output, and higher domestic oil prices, Vaca Muerta is still profitable.
The industry is waiting for the collapse in prices to bring down the costs of international inputs and services, thus reducing the high domestic industrial costs.
YPF has also signed agreements for the joint exploitation of shale deposits with Malaysia’s Petronas and Dow Chemical of the United States, while other transnational corporations have announced their intention to invest in Vaca Muerta.
Bronstein believes the investments will continue to flow in because they were planned with an eye to “significant production in five years.”
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“This means investors don’t take the current price of crude oil into account as much as the future price. And virtually all analysts agree that oil prices will rally within a few years,” he said.
“Conventional oil production has peaked, so to meet the rise in demand it will be necessary to develop unconventional sources. And Argentina is one of the best-placed countries to do so,” Bronstein added.
Cristian Folgar, who was undersecretary of fuels last decade, said “any snapshot of the market today would be distorted because the costs of different oil industry services have not yet settled.”
“YPF will continue to forge ahead and will not slow down investments that depend on its decision because the company currently channels its entire flow of investment into Argentina,” he told IPS.
In his view, international corporations will reduce their investments at a global level, which means “YPF is not at all likely to reach new joint venture agreements with other oil companies until the situation stabilises.”
But “those who have already started to invest are not going to back out,” he added.
“Argentina continues to pay for crude and gas at the same prices as before the start of this downward price trend,” Folgar said. “Since a change of government lies just ahead, new developments will probably wait for the next government to send signals indicating what its plans are in the energy sector.”
Calleja is worried that Saudi Arabia, the world’s leading oil exporter, and the country that according to experts is pulling the strings of the current price collapse in order to – among other goals – push shale out of the market, “may drive prices even further down.”
In the face of what he describes as a global “war of interests”, he believes it is a good time to start looking to energy sources other than fossil fuels.
Calleja argues in favour of hydroelectricity and nuclear energy, which currently represent just 14 percent of Argentina’s energy mix, but have “lower economic and environmental costs.”
Edited by Estrella Gutiérrez/Translated by Stephanie Wildes
European supermajors Total and Shell increased their investments in Argentina’s highly prospective Vaca Muerta shale formation last month.
Authorities in the western province of Neuquén said in late November that Shell and Total would invest $550 million with Gas and Oil Neuquén (GyP), an oil and gas company owned by the province, to develop two pilot shale projects.
Although it was initially unclear if the cash represented new or increased investment, a spokesman for the province’s government confirmed to Interfax on Tuesday the cash was “new investment in the Neuquén Basin”.
Total, Shell and GyP will invest $300 million in the Rincón La Ceniza and La Escalonada concessions, which will include the acquisition of 3D seismic, the drilling of horizontal wells and the installation of gas processing facilities. Total operates both concessions with a 42.5% stake. Shell’s Argentine affiliates control 42.5% of the blocks, with GyP holding 15%.
Four horizontal wells and one vertical well have been drilled to date in Rincón La Ceniza. One horizontal and one vertical well have been drilled in La Escalonada. No oil or gas output has been registered from La Escalonada, but Rincón La Ceniza produced 1 thousand cubic metres per day (Mcm/d) of gas in September, according to data from IAPG, a Buenos Aires-based producers’ association.
Shell’s Argentine affiliates and GyP will also invest $250 million in the Sierras Blancas and Cruz de Lorena concessions. The investments include an oil and gas treatment plant with a processing capacity of up to 10,000 barrels of oil equivalent per day. The concessions produced a combined 10 Mcm/d in August and September, according to IAPG data.
“We are pleased to enter the next phase of our operations in Vaca Muerta,” a London-based spokeswoman for Shell told Interfax on Tuesday. “The activities in this next phase – which include additional drilling and the construction of a pilot production facility – will enable us to optimise drilling costs and gather important information about the resource potential in our blocks,” she added.
Shell has been cautiously optimistic about Vaca Muerta, where it owns 20,200 net hectares and has drilled six horizontal wells since October 2012.
Up with the best
“We need more time to establish if this will be [a] commercial play. But the Vaca Muerta is up there with the best of the best,” Laurens Gaarenstroom, an unconventional exploration manager for Shell’s Latin American business, told conference delegates in Buenos Aires in September (see Shell is a convert to Latin American shale, 26 September 2014).
The supermajor is employing knowledge gained from its North American operations to explore Vaca Muerta, limiting its portfolio to what it believes to be the formation’s sweet spots in an attempt to make drilling more economic. Shell also owns 22.5% in the Acambuco joint venture in Argentina’s northern province of Salta, and its share of production is around 5,200 barrels of oil per day.
However, tensions have simmered this year between the supermajor and Argentine authorities. Buenos Aires clashed with the company over the reform of the country’s hydrocarbon laws in October.
Total – which is Argentina’s second-largest gas producer – has seen its average daily output slip by more than 4%, to 32.4 million cubic metres per day (MMcm/d) in 2014 from 33.78 MMcm/d in 2013 (see Argentina’s two-speed production industry, 10 November 2014).
Aug. 15 (Bloomberg) -- George Soros’s $28 billion family office more than doubled its stake in YPF SA, making the state-controlled oil producer its biggest U.S.-traded stock holding two years after Argentina seized control of the company.
Soros Fund Management LLC added 8.47 million shares of YPF in the second quarter, according to a filing yesterday, bringing its position to 3.5 percent of the American depositary receipts. That was worth $450 million at the end of June, making Soros the fourth-biggest holder. The stock rallied today.
YPF, control of which was seized by Argentine President Cristina Fernandez de Kirchner in 2012, is steering its efforts into some of the world’s largest shale deposits in the Vaca Muerta formation along with Chevron Corp. to reverse a widening energy deficit. The Buenos Aires-based company said yesterday that it made a shale discovery in Mendoza province, its third non-conventional find in the country.
Argentina defaulted for a second time since 2001 on July 30 after a U.S. court blocked its $539 million interest payment for not complying with a ruling to also pay a group of defaulted bondholders. Those so-called holdout creditors, led by hedge-fund Elliott Management Corp., refused to accept new bonds worth about 30 cents on the dollar in restructurings in 2005 and 2010 and instead sued for better terms. Until Argentina pays them about $1.5 billion or reaches a settlement, the nation can’t pay interest on any of its overseas debt.
Soros, 84, is the world’s 23rd wealthiest person with a net worth of $26.3 billion, according to data compiled by Bloomberg. The Hungarian-born investor increased his fortune 14 percent this year.
Perry, Third Point
Perry Capital, the $10.9 billion hedge-fund firm run by Richard Perry, and Dan Loeb’s Third Point LLC also added significantly to their YPF holdings in the second quarter. Lazard Ltd., the second-biggest holder of the ADRs, sold 2.3 million shares to reduce its stake to 4.38 percent, data compiled by Bloomberg show.
Michael Vachon, a spokesman for Soros’s New York-based fund, didn’t immediately reply to an e-mail seeking comment on the increased stake in YPF. The YPF press office didn’t immediately reply for comment on the Soros investment.
Argentina’s Fernandez seized a 51 percent stake in YPF from Repsol SA in April 2012, handing control of the company to former Schlumberger Ltd. executive Miguel Galuccio. The company’s ADRs have more than doubled since the takeover to $31.64. Down 6 percent this year, they rose 4.9 percent in the second quarter and gained 4.8 percent to $32.46 at 1:57 p.m. in New York today.
Repsol Compensation
YPF returned to the international debt markets last year and sold $1 billion of bonds due 2024 in May to finance its exploration and production program.
The Argentine government agreed to compensate Repsol with $5 billion of bonds earlier this year, and the Spanish energy producer sold the majority of its remaining shares in the company afterward.
YPF said yesterday it discovered oil at a well in the Agrio formation in southwestern Patagonia, the third shale find in the country in four years. Agrio is in the Neuquen basin, the site of Vaca Muerta, the world’s second-biggest shale gas deposit and fourth-biggest shale oil deposit.
Energy Investments
Speaking from the presidential house last night, President Fernandez said Argentina is seeking to rewrite oil legislation as the country needs clear rules to attract investment. Plans to establish national taxes are being opposed by some provinces. Currently, royalties vary form province to province.
“We want to have an equal regulatory framework with the same legal contract in Jujuy as in Tierra del Fuego,” Fernandez said, referring to the northern and southern provinces. “We need a lot of transparency because that will allow us to attract investors to Vaca Muerta and other fields.”
Apparently when sentiment changes in investing it changes rapidly. Argentina has had its share of financial issues, but now we have seen a serious sentiment change for Argentina out of the team at Bank of America Merrill Lynch. The firm raised its ratings on Petrobras Argentina S.A. (NYSE: PZE) and YPF S.A. (NYSE: YPF).
The first thing that Merrill Lynch spelled out in its report was that this was not the Petrobras most investors think of, the one in Brazil. Still, one has to wonder what could happen if sentiment were to ever change there as well. Here is what the Merrill Lynch team sees for Argentina.
On the broad scope, it is likely that volatility will remain high over the next year due to a tumultuous period in advance of and following the presidential election in October 2015. With persistently high inflation, an overvalued currency and softening economy, the near-term outlook for prices and costs in dollar terms is considered difficult to predict.
The general expectation from the coming election is that any new president is likely to face a very difficult economic environment. This could lead to a long-term adjustment in key factors that affect Petrobras Argentina’s profitability, including:
A possible foreign exchange (FX) devaluation
An adjustment to energy tariffs, which could hurt consumer disposable income
Anti-inflation program
An elimination of FX controls to make it easier to attract capital into Argentina
Petrobras Argentina was raised to Buy from Underperform at Merrill Lynch, and analysts raised the price target to $9 from $5. The company’s growth in coming years is expected to be mostly focused on tight gas projects, with important upside over the next several years in the Punta Rosada development in the Rio Neuquén area. These are expected to contribute to a 20% increase in gas output at the company over the next five to 10 years.
At this point, the stock is at a relatively low value, but with the upcoming elections and political change, the Argentine country risk could be positive for Petrobras Argentina over the next 12 months.
Shares of Petrobras Argentina were up 4.2% at $6.62 at midday in Monday’s trading session. The stock has a consensus analyst price target of $5.00 and a 52-week trading range of $4.32 to $7.40.
Merrill Lynch also upgraded YPF to a Buy rating from Underperform and raised the price target to $39 from $26 per American depositary share. The potential changes in Argentina’s economic policy would help to lower the level of Argentine risk embedded in the equity and potentially contribute to an important rise in the share price. YPF is currently Merrill Lynch’s top pick in Latin American oil and gas.
YPF is similar to Petrobras Argentina in terms of having a strong upside potential from conventional and tight gas projects. YPF sees more upside potential from full development of Argentina’s shale resources, but in the analyst’s opinion, this would require improvement in oil prices and a reduction in unit costs.
YPF shares were up 0.7% at $26.91, in a 52-week trading range of $20.83 to $41.74. The consensus price target is $36.18.
PUNTA DEL ESTE, Uruguay, April 9 (Reuters) - Argentina's shale oil output from the vast but barely tapped Vaca Muerta formation has increased, but low world oil prices and high drilling costs threaten profitability, the chief executive of state-run YPF said on Thursday.
YPF has said the slump in international oil prices over the last year has had no impact on the company's exploration plans, defying the industry trend of multinational giants announcing multibillion-dollar spending cuts.
The South American country wants to ramp up its exploitation of Vaca Muerta, which lies beneath the windswept plains of Patagonia, to reverse an energy deficit.
Government controls on the economy and high costs, however, have deterred foreign investors.
As the fall in world oil prices has forced energy companies to recalculate their plans, uncertainty has been heightened in Vaca Muerta, where production is in its infancy and engineers are still deciding at what angles to drill in order to optimize output.
"It is still early to talk about the profitability of non- conventional energy. It depends on a lot of factors," YPF Chief Executive Officer Miguel Galuccio told an industry conference in Uruguay.
"It is not profitable with an $11 million well and prices at $50 per barrel. We drilled our vertical wells with the expectation that they would be profitable at $84 per barrel and with wells that cost between $6.5 or $7 million," he added.
Brent crude futures settled at $56.57 per barrel on Thursday, having plummeted from more than $115 per barrel in June.
"The horizontal wells are demonstrating a much more positive range in terms of productivity, but we are talking about wells that have been producing for less than one year," Galuccio said.
YPF has said reversing the country's energy deficit will require $200 billion in investment over the next decade to exploit Vaca Muerta.
Argentina nationalized YPF in 2012 after accusing its former parent, Spain's Repsol SA, of under-investing.
"Today the Loma Campana field is producing 44,000-45,000 barrels per day equivalent," Galuccio said.
Galuccio was referring to the field YPF is exploiting with Chevron Corp and which accounts for nearly all of Argentina's shale production.
"This is the highest level of production from a non-conventional resource anywhere outside of the United States," Galuccio said.
The figure compares with production of 41,000 bpd reported by YPF in late February.
(Writing by Richard Lough; Editing by Richard Chang and Jonathan Oatis)
Oil price within Argentina is almost 40% higher at $76
YPF has ramped up production really fast, two years ago they were producing only 8000 Boe/d
Drilling cost are coming down
On the latter, According to a Macquarie note on YPF, the cost of horizontal wells is only $13-14M, while Macquarie estimated them to be $20-25M. They can come down 10% more by using locally sourced sand.
MOSCOW -- Alexey Miller, chairman of the Gazprom Management Committee, and Miguel Galuccio, CEO of Argentine national petroleum company YPF, signed a memorandum of cooperation on Thursday.
The document stipulates the main areas of future bilateral cooperation, including exploration, production and the transmission of hydrocarbons in Argentina and third-party countries.
The ceremony was held in Moscow in the presence of Vladimir Putin, president of the Russian Federation, and Cristina Fernandez de Kirchner, president of the Republic of Argentina.
In 2013, Gazprom won an international tender for the supply of 15 LNG cargoes, with a total volume of one million tons, from Gazprom’s portfolio to Argentina between 2014 and 2015.
Chief executives of Mexico’s Petroleos Mexicanos (Pemex) and Argentina’s YPF SAare both seeing energy reforms within their respective countries, and both emphasize the need for investment from international oil and gas companies to achieve their new goals.
“Pemex is transforming itself from a government organization to an enterprise” and is tasked with the new challenge and luxury of financial autonomy, explained Emilio Lozoya Austin, the company’s chief executive officer, at IHS CERAWeek on Apr. 21 in Houston.
Four new agencies and five new spinoff companies have been created in Mexico over the past year, including transportation and services companies that will serve international participants following their entrance into the country (OGJ Online, Aug. 21, 2014).
Over the next year, the biggest steps forward will come through partnerships created with international companies in the Round One bid round and ensuring contracts are up to international standards, including the ability to execute farmouts in a timely manner, he said.
“World-class partners” will mitigate the risks that come with venturing into economic and operational territory not seen since Pemex was nationalized in 1938, Lozoya stated. Pemex also is assigning more of its budget to exploration, so solid partnerships and advanced technology are critical.
Lozoya said his company will stop its declining oil production by next year. Mexico’s total oil production fell 22% from its peak in 2004 to 2009, but the decline has since remained at less than 1%/year, according to data from the US Energy Information Administration. Crude production in 2013 was at its lowest since 1995.
Earnings from the oil industry in 2013 accounted for 32% of Mexico’s total government revenues, EIA says.
Mexico advancing
Pemex’s launch as a company focused on profits came in last year’s Round Zero noncompetitive bid round in which Pemex was granted 90% of the country’s proved and probable reserves, totaling 21 billion boe; and 83% of its prospective resources, totaling 23 billion boe—including 4 billion boe in unconventional reserves (OGJ Online, Sept. 23, 2014).
At the time, the company said it had identified 50 fields that it would like to develop with partners and was tentatively seeking to form 10 joint ventures.
In December, Mexico opened Round One bidding on production-sharing contracts for exploration of 14 shallow-water areas to domestic and international companies (OGJ Online, Dec. 19, 2014). Blocks will be awarded on July 15.
Lozoya explained that unconventionals will be up for bid toward the end of the bid rounds because they’re not as cost competitive as offshore development. “We will enter unconventionals at a slower pace” when the economic environment improves, he said.
He added that Mexico has underinvested for decades on midstream and downstream. “Our issue is cash flow,” he said.
Lozoya sees North America as one energy market, as Mexico exports 900,000 b/d of heavy crude to the US, which in 2010 received 71% of Mexico’s overall oil exports. Pemex in January sought approval from the US Department of Commerce to allow the company to swap heavy crude it produces in exchange for as much as 100,000 b/d of US-produced light crude.
Federal approval by the US for crude swaps with Canada and Mexico may be easier to obtain because they are immediately adjacent countries (OGJ Online, Apr. 6, 2015).
Argentina looks on
Miguel Galuccio, chief executive officer of YPF, has observed the monumental changes undertaken through energy reform in Mexico, which he describes as the “most important thing to happen in oil and gas over the last 50 years,” and “the biggest oil and gas opportunity today.”
YPF, meanwhile, once a top-20 international oil company, is attempting under Galuccio to get back to that level. He emphasized that lots of recent government policy changes have been made to encourage investment from international companies.
Published last October, Argentina’s reforms “provides investors with offshore exploration opportunities and encourages foreign ventures in unconventional plays,” according to EIA’s country brief.
The new policy incentivizes foreign investment by reforming the national bidding process, increasing the frequency of offshore licensing rounds, allowing for longer exploitation periods, and offering tax exemptions to companies that invest more than $250 million over a 3-year period.
“The reform will also reinforce national oil company [YPF’s] position while reducing the impact of provincial oil companies,” EIA says.
Argentina’s unconventional resources are perhaps its most attractive asset to dangle before outside investors. The country boasts the world’s second-largest shale gas reserves, much of which lies in its largest play, Vaca Muerta, EIA indicates. Residing in the Neuquen basin, Vaca Muerta holds an estimated 308 tcf of recoverable natural gas and 16.2 billion bbl of recoverable oil.
Galuccio this week was expected to sign a memorandum of cooperation with Russia’s OAO Gazprom stipulating “future bilateral cooperation, including exploration, production, and transmission of hydrocarbons in Argentina.” Vaca Muerta is the primary focus of the deal.
YPF also last August signed a $550 million agreement with Malaysia’s Petronas detailing terms and conditions for development of the shale play (OGJ Online, Aug. 28, 2014). Companies already present in Vaca Muerta include Chevron Corp., ExxonMobil Corp., Petroleo Brasileiro SA (Petrobras), Royal Dutch Shell PLC, Total SA, and Wintershall Holding GMBH.
Just 3% of Vaca Muerta resources have been recovered thus far, Galuccio noted, but Argentina is “ahead of the learning curve” compared with the early stages of the shale revolution in the US because Argentina has that template from which to learn. “There are no limits to what we can recover,” he stated.
