Driving northwest 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 U.S. Energy Information Administration (EIA) suggests that the field holds 16.2 billion barrels of shale oil and 308 trillion cubic feet 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 centers 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 trillion cubic feet to 3 trillion cubic feet. 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 said it has reduced costs from $11 million per well in 2011 to $7.5 million.
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 31, 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 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 nationalization 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, said 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 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.
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