Make or break year for Vaca Muerta

An oil drill in Neuquen province, Argentina, where the Vaca Muerta field is situated. (PA)

Will 2014 see the Vaca Muerta field come to life? It is hard to say. Political risk and operational opacity mean Vaca Muerta may remain a metaphor for unfulfilled potential, rather than an emerging shale phenomenon.

Here is what we know of the story so far: Vaca Muerta is the size of Armenia, covering 3 million hectares in the Neuquén Basin. It has the shape of a tilted isosceles triangle. Its oil and gas is probably as old as the dinosaurs, with its hydrocarbon-rich rock formed from marine deposits around 150 million years ago.

It is not an easy drilling prospect, but it is not the toughest play out there. The thickness of its black shale ranges between just over the length of an Olympic-sized swimming pool and New York’s One World Trade Centre (60 to 520 metres), with the widest parts in the north and west. Some of its oil and gas can be recovered with vertical drilling alone, which is much cheaper than extra horizontal boreholes that sniff out oil-rich pockets.

Early drilling results have been good, with vertical shale wells producing up to 600 barrels of oil equivalent per day (boe/d) after a five-stage frack job. Just over 40% of Vaca Muerta’s area is in the oil-prone window, with around 30% each for wet gas and dry gas.

Vaca Muerta sits beneath the Los Molles formation, its thicker, older brother. Technically recoverable resources from Los Molles are estimated at 7.8 trillion cubic metres of shale gas and 3.7 billion barrels of shale oil. Vaca Muerta’s oil resources are more than four times larger than Los Molles, with its gas resources only slightly larger than its neighbour.

However, Vaca Muerta is a much better source rock, according to the few well-tests available. Its rock holds a higher percentage of organic carbon; in its northernmost section, rates are as high as 14% – bear in mind that 2% is usually enough to excite a petroleum geologist. Los Molles has some decent sweet spots, but it is patchier.

This results in Vaca Muerta’s superior resource concentration of up to 33 million cubic metres (MMcm) per hectare, compared with a maximum of 21 MMcm per hectare for Los Molles, according to the United States’ Energy Information Administration.

Oilmen’s early drilling experiences have backed up the play’s strong fundamentals. Nicolás Gutierrez Schmidt, the head of the department of reservoirs at the hydrocarbons arm for Neuquén Province, said earlier this year that average yield rates from Vaca Muerta wells were as good as the Eagle Ford formation in Texas, and better than those of the Barnett formation in the same state.
The comparison with Eagle Ford, a play that has made millionaires of Texan farmers and is the standard-bearer of the North American shale revolution, is not far-fetched. Vaca Muerta is almost the same size as the Lone Star State phenomenon, and both prospects have a fairly neat mix of dry gas, wet gas and light oil.

Mauro Soares, the unconventional resources manager at Tecpetrol, an Argentine explorer that is part of the giant Techint Group, believes that, like Eagle Ford, around 20-30% of Vaca Muerta will eventually be economic.

A learning game

That is the opportunity, in a nutshell. But will Vaca Muerta exploration ever reach the critical mass needed to turn Argentina into a shale production giant?

It is early days, and Vaca Muerta is still tender. The pilot project between state-run YPF and Chevron, the only sustained drilling campaign in Vaca Muerta, are wormholes compared with Eagle Ford’s Byzantine rabbit warren.

A modus operandi for drillers is still elusive. Ali Moshiri, the colourful president of Chevron’s African and Latin American business, enjoys characterising Vaca Muerta as “a long column”, which could involve anything between “three frack jobs or 18”. He thinks that shale sweet spots should be identified before drilling expensive holes.

The huge investments needed for unconventional exploration are not peculiar to Vaca Muerta, but finding the search for the perfect cookie-cutter for Moshiri’s column will be expensive. “The minute you stop investment – boom!” warned Moshiri earlier this year.

The expensive drilling-and-learning game is even more costly in Argentina, where industry is smaller and less dynamic. Land leases do not expire every six months, so companies have to keep drilling.
Appetite for the play is also hard to gauge. YPF, whose 1.2 million hectare position covers about 40% of the formation, is still the only company with production in Vaca Muerta. Its output reached 13,000 boe/d in Q3 2013.

YPF and Chevron agreed in July 2013 to invest $1.24 billion in the first phase of a project, which calls for at least 100 wells to be drilled in the Loma La Lata Norte and Loma Campana areas. Those wells have already been drilled, and YPF expects to complete the pilot programme in March.

If Chevron likes what it sees, exploration and production will then hit an inflection point. YPF plans to launch a second phase which it says will require investment of $16 billion – split evenly between both companies – to drill more than 1,500 wells.

Chevron is not the only guinea pig. YPF also has an agreement with Dow Argentina, the local subsidiary of the US petrochemical giant Dow Chemical, for the development of a $188 million pilot project in the El Orejano block. YPF will be the operator in a first phase of work that includes 16 wells to be drilled in a period of 12 to 18 months in an area of 4,500 hectares.

Neuquén’s oil and gas company, Gas y Petroleo de Neuquén (GyP), which is planning an IPO on the Buenos Aires stock exchange next year to develop the Aguada del Chañar area of Vaca Muerta, has also signed a preliminary deal with German giant Wintershall to invest $108 million in exploration over the next two years. It also reached a $54 million agreement with Petrobras Argentina to explore the Parva Negra area.

The chasing pack

Private companies are also cautiously optimistic. “The companies are six to nine months behind YPF but they are heading towards a similar trend,” YPF Chief Financial Officer Daniel Gonzalez said in November 2013. The growing list of companies – including ExxonMobil, Apache and EOG Resources – that have quietly taken a position in Vaca Muerta tells a story that is more than a stealthy land-grab. Most of them are there because they are optimistic that Buenos Aires will soon wake up to its bounty. “This year could be make-or-break for Vaca Muerta,” an oil executive from one of the country’s largest companies told Interfax in December. “There’s a pot of gold down there, at the right price.”