Argentina’s Vaca Muerta shale play has big expectations, high interest

Compared to US shale plays, Eagle Ford geology in south Texas comes closest to Vaca Muerta

Despite volatile oil prices that have drastically reduced oil and gas drilling activity worldwide, operators that have weathered the oil price decline are positioning themselves to tap the potential of the next “big unconventional play.”

American Energy News reported that this play would double production by 2018 (read that here).

Many operators, particularly those with experience in the U.S. shale plays, have set their sights outside the US on the Vaca Muerta shale formation, Argentina’s highly prospective, but largely unproven, unconventional play in the Neuquén Basin, according to a new analysis from IHS.

“Many geologists will tell you it’s all about the rocks, and certainly these Vaca Muerta shales have the potential to provide prolific production,” said Graham Bliss, Ph.D., senior director of research at IHS Energy, and one of the authors of the analysis.

According to the IHS Energy research entitled The Vaca Muerta Insight Series, the Neuquén Basin is similar to other “super basins” around the world such as the Permian Basin in the United States in that it possesses numerous desirable geologic traits. Those traits include very thick, high quality, organic-rich shales, multiple unconventional targets, and the potential to deliver billions of barrels of oil equivalent.

“The geologic characteristics of the Vaca Muerta are promising, but they vary significantly depending on depth and location. In addition, the ‘sweet spots’ of the play have not yet been determined, and there has been relatively little drilling to clarify the play’s potential,” said Bliss.

Exploitation of the Vaca Muerta is comparatively new, IHS said, and so far has taken place over a relatively small area of the more than 115,000 square kilometers of the Neuquén Basin.

Development has focused primarily on the YPF-operated (Chevron joint venture) Loma Campana project, and few wells have been drilled outside that project. In fact, even the Loma Campana drilling has been minor compared to its North American analogues.

The IHS analysis said slightly more than 400 wells have been drilled in the play, as compared to the Eagle Ford shale play in the U.S., which has recorded more than 14,000 wells drilled since 2008. Fewer than 10 per cent of the existing wells in the Vaca Muerta are horizontal, and recent positive results suggest that horizontal wells will play an increasingly important role going forward, the IHS report said.

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In terms of comparison to US shale plays, there is no simple US analogue, but the Eagle Ford in south Texas comes closest when several key geologic parameters are considered, IHS said. The principal belowground difference between the Vaca Muerta and the Eagle Ford is the former’s greater thickness—which ranges from between 100 meters and 200 meters in the most prospective areas—an important consideration for operators when considering economics and well type.

Average Eagle Ford wells produced at a higher rate than the first horizontal wells from the Loma Campana block (see attached figure). Initial production (IP) rates for the Eagle Ford are approximately 600 barrels per day, while for the Loma Campana IP rates are about 520 barrels per day.

Bliss said the Vaca Muerta play is still in its “proof of concept” phase as YPF, Argentina’s state-controlled oil company, and other operators, search for the right conditions to establish economic production. “We are very early in the development of this play, so there is likely to be a steep learning curve for operators, particularly as they move away from the Loma Campana area,” Bliss said.

“However, with production approaching 50,000 barrels of oil equivalent per day, it is one of the most successful unconventional domains outside of North America, so all eyes are on the Vaca Muerta to understand its potential,” he said.

To be successful, says the IHS report, the Vaca Muerta play will have to attract many more operators, service companies and investors. Currently YPF, several international majors (including ExxonMobil, Chevron and Shell) and a handful of small independent and Argentine operators dominate the play.

But that may quickly be changing, since just last week, US shale veteran Aubrey McClendon, co-founder and former CEO of Chesapeake Energy and now CEO of American Energy Partners, announced his company had signed a preliminary, three-year, $500 million agreement with YPF for the exploration and development of the Vaca Muerta.

Despite their importance, the rocks (geology) represent just one piece of the puzzle operators must consider when operating in regulatory environments outside the U.S. To that end, IHS has prepared three scenarios to help operators better assess both the belowground and aboveground risks. These drive three supply outlooks based on rig and well schedules and the capital investments required to carry out these schedules.

The recent election of Mauricio Macri as Argentina’s new president and his proposed economic policy reforms increase the likelihood of a more favorable business environment in Argentina, noted the IHS report. Macri’s administration aims to reverse many of the policies that have kept investors at bay.

“The most immediate concern relative to investment in the Argentine energy sector right now is the economy,” said Paula Diosquez-Rice, principal economist at IHS.

Among the main items remaining on the administration’s agenda include addressing the country’s capital controls, as well as settling the country’s outstanding debt dispute. However, the wide range of economic challenges will require a skillful balance between adhering to the Macri administration’s policy goals and working with a split legislature and other major players, including the labor unions, and provincial governors.

“Argentina continues to battle high inflation, a depreciating currency, low commodity prices and low demand. The new exchange rate floatation system will imply more market-driven changes in the exchange rate and thus more volatility, so controlling inflation and gaining access to external financing are essential to bringing the Argentine economy to order and providing a framework for regaining investor confidence. If the government can stabilize the economy and restore investor confidence, it will be open season on the Vaca Muerta,” said Diosquez-Rice.