4/13/2017 MarketdevelopmentinArgentinaOil&GasFinancialJournal

MarketDevelopmentInArgentina
11/15/2016

ISVACAMUERTACOMPETITIVEINTODAY'SMARKET?
KJETILSOLBRKKEANDBIELENISVILLANUEVATRIANA,RYSTADENERGY

ITHASBEENACKNOWLEDGEDbytheoilindustryforalongtimethatArgentinahasoneofthemost
promisingshaleplaysintheworldtheVacaMuertashaleplayintheNeuquenBasin.Itisalsothemost
developedshaleplayoutsideofNorthAmerica.Theshaleboomthatmanyexpectedinthisplayhasnotyet
happened,eventhoughthereseemsnodoubtthattheArgentinashaleresourcewillcontinuetobe
developedintheyearstocome.

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LookingatwellproductivityoftheVacaMuerta,theinitialratesfromitshorizontalwellsarecomparableto
majorshaleplaysintheUS,asdepictedinFigure1.Theseproductionratesconfirmthecompetitive
deliverabilityoftheVacaMuertahorizontalwells,eventhoughonlyapproximately150ofthemhavebeen
drilledtodate.ThegascontentonVacaMuertawellsissignificantanditvariesdependingonthe
hydrocarbonwindowweretheyaredrilled.Ingeneral,thesewellshaveasignificantcontentofrichgas,
evenintheoilwindow.

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Togetherwithcompetitiveinitialrates,VacaMuertawellshavealsoshownlowerinitialdeclineratesthan
similarwellsintheUS,asshowninFigure2.Thisfigurealsoshowsthechoking(restrictedflow)performed
intheVacaMuertawellsduringthefirst12monthsofproduction.

ThelowerdeclineexperiencedintheVacaMuertawellseventuallyleadstohigherultimaterecovery,as
showninFigure3.After45monthsonproduction,aVacaMuertawellalreadyproducesmorevolumesthan
asimilarwellinthePermianMidlandortheEagleFord.After12monthsonproduction,aVacaMuertawell
producessimilarvolumestoawellintheBakkenorthePermianDelaware.

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EventhoughthefocusintheVacaMuertaiscurrentlyonhorizontaldrilling,82%ofallwellsdrilledtodate
areverticalafteradedicateddrillingprogramperformedbyYPFintheplay.Futureverticaldrillingwillbe
limitedtopilotandexploratoryprojects,whiledevelopmentdrillingisexpectedtobedonewithhorizontal
wells,asshowninFigure4.YPF,asthedominantoperatorintheVacaMuerta,confirmsthiswitha
developmentplanfocusedonhorizontalwells.Futuredevelopmentwillalsobeencouragedbyhighernatural
gaspricesasagreedbythegovernmentforallnaturalgasfrom"newsources"(mainlytightandoffshore
development)to6.57.5USD/kcf,whichissimilartothepricecurrentlypaidforimportedgasfromBolivia.
ThisisanimportantfactorbecausesuchgaspriceinArgentinaismuchhigherthanwhattheAmerican
shalecompaniescanexpectatHenryHub.

Togetherwithexcellentwellresultsandhighgasprices,anotheradvantagetoshaledevelopmentinthe
NeuquenBasinisthetopographyoftheareaandaccessibilitytowater.Theareaconsistsofdrysandy
plainseasytoprepareforPADdrillingandislocatedbetweentolargerivers(Figure5).

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Eventhoughithasseveraladvantages,shaleactivityintheVacaMuertaisstilllimitedbyhighcosts.
Severallocalandforeignoperatorshavetriedtoinvest,butultimatelycloseddownandsoldassetsmainly
toYPF,whichwasthecaseforOxy,Pioneer,EOG,ApacheandMedanito.

Whenlookingattheabovegroundriskandchallenges,oneissandorproppant.Proppantisakeymaterial
thatisnotyetfoundlocally.Itmustbeimportedtogetherwithequipmentsuchasdrillingrigs,pipes,valves,
etc.andtransportedtodrillingsites,someofwhicharelocatedrelativelyfar(23hourdrive)frompopulated
areas.Allthisbringsupthefirstimportantsetbackinthearea:logistics.

Despitewateravailableintheshaleplayarea,itmustbetransportedtothevariousdrillingsites.Todaythere
arenopipelinesorrailwaystotransportwater,whichmeanseverygallonofwatermusttruckedtothesite.It
takesapproximately120truckstotransportsufficientwatertofraconewell.Inaddition,sandorproppant
mustbetransportedtogetherwithequipmentandpersonnel.Thelogisticalchallengeisenormousanda
plan,includingconsiderationsforpipedwaterandrailwaysystems,hastobeputinplace.Withoutthese
investments,activitywillbelimitedbylogisticalbarriersandefficiencywillnotincreasesufficientlybecause
ofalackofeconomiesofscale.

Giventheselimitations,thecostsperwellinNeuquenareintherangeof23timesthecostofasimilarwell
intheUS.Forinstance,thecostofthepilothorizontalwellscurrentlydrilledbyoperatorslessexperienced
thanYPFareobviouslymorecostlybecauseoftheambitionsofgatheringdata,coringandincreasingthe
knowledgeofthestratigraphyinthearea.However,thecostbreakdownshowshighercostsinall
sequencesoftheoperationthanwhatisseenfromwellsdrilledintheUS.Thelowestcostforhorizontal
wellsinNeuquenwasindicateddowntoapproximatelyUS$6millionforthedrillingandaboutUS$4million
forthecompletion.Thiscostbreakdownbetweendrillingandcompletionisinterestingbecause,forwellsin
theUS,60%oftotalcostislinkedtocompletion,and40%islinkedtodrilling.Thehigherdrillingcosts
experiencedinArgentinacomparedtotheUSarerelatedbutnotlimitedto:

Costofaccessingequipmentandmaterials,whichmustbeimported
Highernumberofcrewmembersneededperrig(asrequiredbylocalunions)
Regulationsrequiringdrylocations(nofluidshouldtouchtheground,somudpoolsarenotallowed,all
fluidsneedtobetanked),andotherregulationsregardingHSEandpsirequirementsontheequipment
Someoperatorsusingoilbasemudinsteadofwaterbase
Collapsingofcasing
PresenceofsomehighpressureformationssuchasQuintucowhichstillneedtobedrilledupbefore
reachingtheVacaMuerta,henceincreasingthedrillingtimeperwell.

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TheaboveobservationslimitthenumberofhorizontalwellsdrilledperrigyeartoonlynineinArgentina,
comparedtoupto30wellsperrigyearintheEagleFordintheUS,asshowninFigure6.Theacceleration
ofpaddrillingusecanalsoincreasethedrillingtimeinArgentina.Currently,wellsaredrilled,completed,and
connectedonebyoneinsteadofusingthepadmethod,mainlybecauseoperatorsprefertobringeachwell
toproductionassoonaspossibleinsteadofwaitingforseveralwellstobedrilled,completed,andbrought
onlinetogether.

AnimportantfactortoshaledevelopmentinArgentinaispolitics.Thisincludesfederalimporttaxes,local
authorities,laborunionsandgeneralrelationshipsbetweenservicesuppliersandthecommunity.Sincea
specialimporttaxiscurrentlyapplied,equipmentimportedfromtheUSwillbeatleast2030%more
expensiveinArgentinathanintheUS.Withoutanychangesinthepolicyregardingimportation,thebest
wellsinNeuquencouldstillendup50%moreexpensivethanthoseintheUS.Regardinglocalauthorities
andlaborunions,theseregulatetheactivityquiterigorously.Laborunionsrequiremoreworkersperrigthan
intheUS,soinspiteofsalariesbeinglowerinArgentina,manpowercostsarehigherthanintheUS.
Regardinglocalservicesuppliers,theyrepresentasignificantforcebehindtheactivityaccordingtotheir
capabilityandcapacitytosupplytheoperatingcompanies.Aftermeetingpersonallywithsomeofthekey
localsuppliers,thegeneralimpressionisthatthereisalotoflocalknowledgeandcapability,butthecapacity
needstoincreasesubstantiallyinordertodeliveronanactivityincrease.Manyofthelocalsupplierslack
longtermdevelopmentcommitmentsfromtheoperatorsandperhapscertaintyforpoliticalstability.Ifthe
operatorsandsupplierscandemonstratethatprojectswithlargerscalewilltakeplace,itisassumedthatthe
unionswillbecomemoreflexiblebecausemanymorejobswillbecreatedandastrongertrustsentimentwill
becreatedamongworkers,suppliers,andthecommunity.

Summarizing,theimpressionontheNeuquenisthatthereissomecapacityinplacereadytostarttheshale
revolutioninArgentina.RystadEnergybelievesthatVacaMuertahasexcellentopportunitiestobecomea
significantshaleplayinfuture.Withatotalacreageof30,000squarekilometers,asmanyas50,000wells
couldbedrilledinthearea.AportionoftheoilandgasproducedcouldpotentiallybepipedtoChile,offering
relativelyeasyaccesstoexportmarkets.Thepotentialforoptimizationishuge,butsoistheneedfor
investments.Morerigsareneeded,moreroadsareneeded,railwaylogisticsareneeded,localpipelinesfor
transportationofwaterareneeded.Mostofall,aroadmapofagrandplanforthedevelopmentofthe
resourcesinVacaMuertaisneeded.

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