Just a quick glance at a world map shows you two basic facts about Mother Earth - 1) there is a lot more water than land, and 2) the Northern Hemisphere has a lopsided share of the planet’s terra firma. In fact, two-thirds of earth’s dry land is north of the Equator. Four out of every five square miles in the Southern Hemisphere is seascape.
Even so, Southern Hemisphere countries have been blessed with more than their share of mineral resources – gold and iron ore in Australia, copper in Chile, diamonds in South Africa, just to scratch the surface. Conspicuously absent from the list of abundant natural riches, however, are oil and natural gas. Of the world’s top ten oil-producing countries not one is in the Southern Hemisphere. With very few exceptions, countries there have been (and still are) net importers of fossil fuels. But, that is gradually changing largely due to Northern Hemisphere technology - horizontal drilling and hydraulic fracturing.
World-class potential
In June 2013, the United States Energy Information Administration (EIA) updated its assessment of technically recoverable shale oil and gas reserves outside the United States. One Southern Hemisphere country made the top five with both fuels – Argentina. According to EIA, Argentina ranks fourth in shale oil reserves at 27 billion barrels, and second in shale gas with 802 trillion cubic feet. The report focused on 41 countries, 96 sedimentary basins, and 137 tight shale formations.
Argentina has the potential to become a world-class oil and gas producer. The good news is more than welcomed in a country that has historically been self-sufficient in oil and natural gas, somewhat unique among southern countries. Argentina’s oil industry dates back to 1907 when oil was discovered by accident along the Patagonian coast. Afrikaner immigrants settled there just after the Boer War ended in South Africa. Drilling for water in the semiarid region, they discovered oil. Argentine law forbade private ownership of mineral resources, so the Boers were moved elsewhere and the government took over the oil.
The potential shale oil wealth is entrusted to a country with a long history of conflict between government and private enterprise, historically causing some hesitation for foreign investment. One Argentine regime after another has viewed oil and natural gas as a cash cow for helping fund decades of government largesse and mismanagement. In the late 1920s, the government constructed the town of Comodoro Rivadavia to service the fledgling industry. Comodoro, as it is called, quickly became the Argentine Houston. In 1922, the government established a company called Yacimientos Petroliferos Fiscales, or YBF, as the world’s first state-run oil company, which subsequently served as a model for nationalization in other Latin American countries.
During its first year of operation, YPF produced 2.2 million barrels of oil – comparable to less than two days of current Bakken production – which accounted for one-fourth of the country’s needs. The remainder of Argentine production was controlled by Standard Oil of New Jersey - today’s ExxonMobil - and Royal Dutch Shell. Anti-Standard Oil forces nationalized the country’s oil exploration and production industry in 1927. A coup, some say engineered by Standard Oil, ousted the government in 1929, which preserved private investment for the time-being.
Drilling contracts with foreign companies enabled YPF to increase production from five million barrels in 1934 to 109 million barrels in 1998, roughly three-fourths of total Argentine production. With the Comodoro fields in steady decline, YPF developed newly discovered resources principally in Salta Province in the far northwest and the Neuquen basin in the rain shadow of the Andes. Madrid-based Repsol S.A. purchased YPF in 1999, starting another episode in Argentina’s topsy-turvy oil industry.
Repsol paid $15 billion for YPF and thereby increased its reserves by 40 percent and its production by one-half. (Its new acquisition was called Repsol-YPF.) However, production and profits under Repsol began to fall almost immediately. The company blamed the Argentine government’s price controls and other regulations for the downturn, while the government blamed the company for mismanagement and neglect. By 2011, sentiment within Argentina favored government takeover of Repsol-YPL.
Nationalization rumors fueled a sharp decline in the company’s value. In 2014, following arbitration by the World Bank, Argentina nationalized YPF paying Repsol $5 billion for the share nationalized. The federal government subsequently agreed to share ownership of YPF with the provincial governments. Following nationalization, the government increased investment in YPF, especially in exploration.
Hopes pinned on a dead cow
In 2011, Argentina’s Oil Gas Institute reported that domestic oil production had declined 22 percent in the decade 2001-2010. Natural gas production had dropped 15 percent since 2004 with proven natural gas reserves down by 43 percent. The decline was the first decade since 1907 that domestic production had not increased. The nation faced an annual oil import bill of at least $10 billion.
Things began to turn around in 2010 – or so it appears. After drilling two vertical wells into a tight shale formation called the Vaca Muerta (“Mad Cow” in Spanish), YPF completed its first horizontal well in July 2011. The formation is located in western Argentina just east of the Andes in the Neuquen basin. (It is one of four shale basins in the country.) Current reserve estimates for the Vaca Muerta are 16-22 billion barrels of oil and 308 trillion cubic feet of natural gas. Numbers like those attract lots of attention.
The Vaca Muerta is made up of shales, chalks and other sedimentary rock units. It was laid down about 145 million years ago, so it predates the Bakken by nearly a quarter of a billion years of earth history. At that time the area to the east of the emerging Andes was covered by a shallow sea, which ultimately accumulated the microscopic organisms that became oil and gas. It’s also a time when the super continent Gondwana was breaking up sending South America, Australia, Africa, India, and Antarctica on their separate ways.
The formation covers about 12,000 square miles, about the size of Maryland, with incredible thicknesses that reach 1,000 feet in places. Its depth averages 7,000 to 8,000 feet. Similar to the Bakken and other North American tight shale plays, the Neuquen basin has had a conventional oil and gas industry for decades, which offers a number of advantages for further development. First and foremost is that local officials understand the oil business and are generally amenable to further development. In addition, the region has a skilled workforce, one steeped in all technical aspects of exploration and production.
Other practical advantages abound here as well. Neuquen basin geology is well understood due to more than 100 years of mapping and characterization. The region has one of South America’s most extensive pipeline systems and also boasts good road and power infrastructure and is served by a mature oilfield service industry.
Lots of foreign interest
Development of the Vaca Muerta is where Bakken development was nearly a decade ago. That is, it is in its very early stages. Nonetheless, activity is rapidly ramping up. In July 2013, YPF signed a joint exploration deal with Chevron aimed primarily at developing tight shale oil and gas resources. Chevron agreed to invest $1.6 billion and drill 132 wells. Then the investment floodgates opened.
In September 2013, Dow Chemical Company’s Argentine subsidiary, Dow Argentina, announced it would drill 16 horizontal natural gas wells in 2014 investing $130 million. In December, Shell said it would invest $500 million in 2014 – up from $170 million the year before. YPF also signed a $400 million deal with oilfield service company Archer Ltd. and a memorandum of understanding with PETRONAS, the state-owned oil company of Malaysia (that deal was completed as a three-year, $550 million pilot project in August 2014). In October 2014, YPF announced it had signed a confidential deal with Russia’s Gazprom, the world’s largest natural gas producer.
By the end of March, Chevron and YPF announced 161 wells had been fracked and an additional $1.6 billion would be invested by year’s end with a goal of 170 additional fracked wells. The company’s long-term goal is to frack an additional 1,500 wells. By September 2014, existing wells were producing 31,000 barrels per day, which increased to 45,000 barrels per day in April 2015.
The Argentine government has divided the Vaca Muerta play into exploration and development blocks managed by the consortiums of companies with which the government has deals. YPF is a partner in several blocks. While the Vaca Muerta has gotten the lion’s share of attention, Argentina has three other tight shale formations that harbor significant amounts of oil/and or natural gas and will require fracking to exploit. They include the Chaco basin along the Paraguay-Brazil-Uruguay border, the Golfo San Jorge basin in Patagonia centered on Comodoro, and the Austral- Magallanes basin in the extreme south.