[NGW Magazine] Argentina 'unprepared' for shale boom

Argentina’s massive shale gas formation is progressing but the industry still has concerns over labour contracts as well as services provision and infrastructure at Vaca Muerta.

Despite significant progress made this year at Argentina’s Vaca Muerta shale formation, the energy industry can still see a number of obstacles that will have to be overcome before it can relax and get on with the job of exploration and production.

“We’re at a very early stage of exploration but it is not clear what happens when these projects develop,” the head of Americas politics research at the consultancy Verisk Maplecroft Jimena Blanco told NGW. 

“It will need much more people on the ground, there’s very limited infrastructure around the area, the road network is still very limited for what it will need to be, airport capacity is small,” she added, noting that concerns were raised about such infrastructure deficiencies at a Chatham House conference held in Buenos Aires in November.

The Vaca Muerta unconventional play, which is around the size of Belgium and is Argentina’s largest shale play, is in Neuquen province in the central part of the Patagonia region. 

One of the largest shale deposits in the world, Vaca Muerta contains around 308 trillion ft³ of shale gas and 16.2bn barrels of shale oil, according to the US Energy Information Administration.

The administration of the pro-business president Mauricio Macri has made some headway in fixing infrastructure problems. The country is expected to hold a tender in December for the construction of a railway, which will run from the port of Bahia Blanca in the very south of Buenos Aires province, on the Atlantic coast, to Anelo in Neuquen province.  

However the project, which is estimated to be cost between $500mn and $600mn, is expected to take three years to build and is just one project among many that industry members believe are necessary. There are concerns that high labour costs and the need to import equipment could also stand in the way of planned production increases.

“The country has relatively high labour and imported equipment costs, shortages of specialized shale rigs, and limited proppant capacity – there are factors likely to hinder efforts to quickly increase production,” the US Energy Information Administration said in a report published earlier this year.

There are also issues remaining with service providers, Blanco said, though this is complicated because it is a ‘chicken or egg’ question. “Service providers are not going to be transferring equipment and personnel from other operations, namely in the US, to Argentina – unless they see the demand and the demand can’t be there until they explore,” she said.

Industry members are concerned about the difficulties they are facing in finding the right suppliers and having to operate in what they describe as ‘subpar conditions’ – either because the equipment isn’t what it should be or because the right equipment isn’t receiving the maintenance that it should – she added.

Part of the reason for this is that service providers are running behind schedule – which is not problematic now but would be if production continues to increase and service providers can’t meet demand – she said. It could result in avoidable accidents because service providers simply cannot keep up with the maintenance.

In January, the government inked a landmark investment deal with foreign majors including US Chevron, French Total, Anglo-Dutch Shell and local BP unit Pan American Energy aimed at lowering production costs at Vaca Muerta. The companies agreed to collectively invest $5bn in the formation this year. ramping up sharply to $15bn/yr from 2018. 

In addition, the country’s trade unions said they would accept clauses in their collective bargaining agreements, in an effort to make contracts more flexible and improve productivity.

Nonetheless, there is “still a lot of concern around labour unions and the demands that they place on the sector,” said Blanco, adding that there are some grey areas that need some attention. 

In addition, the potential risks associated with accessing water at the site – which sits in a dry, desert-like region – are causing some concern among industry members, she said, and there is the risk of protests and social opposition over efforts to extract water in the area, which is in limited supply. 

However, since the January deal, some improvements have been made, for instance most of the sand needed for fracking at the site no longer needs to be imported because nearly all of it is now produced locally by YPF, she said.

Oil companies operating at Vaca Muerta like US majors Chevron and ExxonMobil are keen to lower operating costs at the formation, in order to make it profitable despite the prolonged downturn in global oil prices. Although it is known to have similar geological properties to the Eagle Ford play in the US, the economic competitiveness of Vaca Muerta is still questionable.

High operating costs are not just due to conditions at Vaca Muerta specifically but down to business conditions in Argentina more generally, said Blanco. It is “becoming more efficient but the main bottleneck is still labour costs which the government labour reform to some degree is trying to address that but it is not an easy battle. 

Furthermore, operating costs are in fact dropping very quickly, she noted. According to YPF’s latest estimates, the cost of recovery in 2015 was $25/barrel whereas this year it is $13.4/barrel, representing a 47% drop in two years. The goal is to reach $10/barrel by 2022.

Also on a positive note, the sector “thinks it is being listened to now” and believes that the government is trying to improve things, she emphasised.  

“Anyone operating in the country expects strikes and expects labour conflict,” she said, adding that the absence of prolonged national strikes this year is a positive sign for the industry and for the future of Vaca Muerta.

 Sophie Davies