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Why The Argentinian Shale Boom Isn’t Taking Off

Irina Slav

The Vaca Muerta shale play in Argentina has been a hot spot in global oil and gas for the past few years after exploration suggested it could yield oil and gas at competitive production costs, offering Argentina the chance to emulate the U.S. shale boom. But now obstacles are beginning to emerge, slowing down the potential boom.

A recent report by S&P Global Platts quoted industry insiders from the South American country as saying the play needed more independent E&Ps in addition to the supermajors to make the hoped for boom happen.

"For Vaca Muerta to be truly transcendent, there have to be 10, 15, 20 companies like us," the head of one such independent, Vista Oil & Gas, told S&P Global Platts. "If there were 10 projects like this, we could be producing 500,000 b/d for export," Gaston Remy said, referring to Vista’s project in the play that aims to produce 65,000 to 70,000 bpd of crude some day.

Among the Big Oil players who have declared interest in taking part in the development of Vaca Muerta are Chevron and Exxon. They have already invested in exploration there: Exxon has ponied up $250 million and plans to add another $10 billion to this over the next 20-30 years. Chevron invested $1.5 billion when it struck a joint venture deal with YPF four years ago.

This commitment has paid off in that Big Oil tech and expertise has helped reduce the production costs for wells in the Vaca Muerta play, which has been a major problem on the path of the play’s development. Yet it has not been solved fully.

Earlier this year, Oilprice reported that production costs at Vaca Muerta may need to go as low as US$40 per barrel of crude to make it internationally competitive. Yet such low production costs involve reducing the costs of things like frac sand, fracking itself, logistics, and related services. This would not be an easy job to do across the play, given the lack of frac sand deposits near the play or extensive logistics infrastructure.

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On top of this all, Argentina is having yet another financial crisis and it is affecting the energy industry. As a result of the crisis, S&P Global Platts notes, a number of companies active in the Vaca Muerta play last year suffered losses or could not afford to boost exploration activities. Some, like independent Medanito, had to sell assets to reduce its debt pile in the face of a worsening economy.

Unfortunately, it seems the Argentine government is not making things easier for the energy players. Earlier this year the government changed the way it interpreted a subsidy program targeting the development of unconventional oil and gas resources. As a result, two of the largest companies operating in the play suffered several million dollars in losses and another eight delayed their investment plans for the area.

According to Argentine government estimates, the Vaca Muerta play could double the country’s oil production to 1 million bpd by 2023, with natural gas production rising to 260 million cubic meters daily. Yet to do this, the government and the industry must join forces to smooth the often sizeable bumps along the road.

By Irina Slav for Oilprice.com

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