Energy, News

Vaca Muerta: The Road to Energy Autonomy

Everybody is talking about it, but what is the real attraction of Vaca Muerta? Why is it so important to foster the development of this resource?

To begin with, Vaca Marta is not a single field, but a sedimentary formation from the Jurassic Age with a surface of 30.000km2, located in the Neuquén Basin (provinces of Neuquén, Río Negro, Mendoza and La Pampa). It was discovered in 1930 by the North American geologist, Charles Weaver, and has great geological potential, combining high density, good permeability and high pressure.

According to a report issued by the U.S. Energy Information Administration (EIA) in 2013, Vaca Muerta is the second largest shale gas reserve and the fourth shale oil reserve in the world.

Nevertheless, access to these reserves requires a lot of investment in new technologies for extraction (fracking, drilling of horizontal wells).

YPF is leading important advances in the learning processes of these technologies.. The characteristics of the resource are now much better known, and its potential has been confirmed. Production costs have been substantially reduced and other operators have carried out some pilot tests.

A “second wave” of investments

The government has been encouraging and promoting the exploitation of non-conventional hydrocarbons for several years (link). Today, Vaca Muerta is attracting new interest.

In general terms, the regulatory framework is suited for the development of these projects, and the government has established incentives according to the risks and the dimension they present.

In January 2017, President Macri announced an agreement between the Government, the Province of Neuquén, oil companies and unions, to improve the conditions of non-conventional production and to lower costs.

The key points of the agreement are:

  • An objective of private sector investments for USD 5000 million for the first year.
  • The commitment of the province of Neuquén not to apply new taxes and to improve the logistics of the sector through joint investments with the national government in infrastructure and railways.
  • The elimination of export withholdings for oil and gas, and a new program of preferential prices for non-conventional gas since 2018 (at the end of Plan Gas). This new program will start with a minimum of USD 7.50 per million BTU and will drop 50 cents every year until it reaches USD 6 per million BTU in 2021.
  • Important reforms to labor regulations in the sector (link)

We can already see the first results of the agreement: in March, Grupo Techint announced an investment of USD 2300 million in Vaca Muerta for the production of gas until 2019. And the second phase of the program foresees a larger investment related to manufacturing industrial production.

Moreover, the European company Schlumberger, a leading company in global oil services, recently announced an investment of USD 390 million together with YPF. This is a clear sign that the role of utility companies is changing.

Impact in the medium and long term

In the current scenario, Vaca Muerta may be seen as a first step towards achieving  the widely-proclaimed energy autonomy, and eventually, to reposition Argentina as a supplier of energy resources. In the long run, it may contribute even to the reduction of energy costs.

For the time being and in the immediate future, the scenario set out by the agreement is encouraging: there is a concrete commitment of the national and the provincial governments to create attractive conditions for non-conventional production and a real interest from the private sector in this new scenario.

In upcoming months, it is likely that more companies will announce investment projects for the exploitation of non-conventional resources in Vaca Muerta. This will have a knock-on effect for drilling companies, hydraulic fracturing companies and suppliers of industrial components and equipment.

Francisco A. Macias

Partner

C.V.

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