Tecpetrol raises the Dead Cow bar [NGW Magazine]

Buenos Aires-based Tecpetrol’s fast-tracked $2.3bn unconventional shale gas project at Fortín de Piedra in the Neuquen basin has changed the make up of the company in just under two years in terms of its production profile and financial statements.

The transformation began in July 2016 when Tecpetrol obtained a licence for unconventional gas exploration in Fortin de Piedra in the giant Vaca Muerta formation. By March 2017, amid favorable announcements by Argentine president Mauricio Macri related to the country’s energy sector, the company had inked a deal, which included incentives to invest in gas developments in unconventional reservoirs. 

“Vaca Muerta is a key project for the country,” Tecpetrol business development director Ricardo Markous said in a video released through the company’s social media channels. “In 2018, thanks to the shale gas, Argentina generated savings of more than $400mn and we estimate it will be about $1.1bn in 2019. In addition, the import substitution added to the possibility of exporting gas and electric power, brings great benefits to the trade balance.”

The first phase of the Fortin de Piedra project requires investments of $2.3bn up to the end of 2019 and entails drilling 150 wells and building two processing plants as well as other installations to treat and transport gas. Most of the money, $1.6bn, will be spent on the wells and the remaining $700mn will go on the processing and transport infrastructure, including 245 km of pipelines.

Tecpetrol has spent $1.6bn since early 2017, with the effect of boosting gas production to 15mn m3/day in November 2018, more than ten times the 1.4mn m3/day in 13 months. It sells all the gas to the domestic market

“Tecpetrol’s unique capabilities along with access to a high gas price contributed to the project’s success, while its sister company Technit E&C constructed facilities for Fortin de Piedra, helping to fast-track the project,” Wood Mackenzie told NGW in an email.

Argentina sits atop the world’s second largest accumulation of recoverable shale gas and most of the estimated 802 trillion ft³ is to be found in the Vaca Muerta formation. Yet Argentina continues to rely on costly imports to meet domestic energy demand.

The continued development of Vaca Muerta holds the potential to generate productive activity all along Argentina’s hydrocarbon value chain and provide the energy to drive economic and industrial development that contributes to energy self-sufficiency, according to Argentina’s energy ministry. 

The scope and scale of the Fortín de Piedra project was revealed in Houston in February 2018 by the then-energy minister Juan Jose Aranguren: “At some point this year production from this deposit will represent 10% of Argentina’s gas consumption.”

In terms of employment, Tecpetrol’s work at Fortin de Piedra will have generated close to 4,500 jobs at the project’s peak, the company says. 

“The ability to ramp up production this much, this fast and with this type of investment shows there are opportunities. However, the restraints, as we have seen related to shale developments in the US and Qatar, relate to infrastructure,” Carl Larry, market specialist with financial risk consultancy Refinitiv, told NGW. “Production isn’t the issue any more, so companies have to start thinking ahead of that.”

Financial transformation

The Vaca Muerta formation covers 30,000 km2, or an area the size of Belgium, and extends over four Argentine provinces: Neuquen, La Pampa, Rio Negro and Mendoza. 

Tecpetrol’s investment push into the formation was not driven solely by geology but also by ongoing efforts by Macri’s government to attract national and international investors. He needed them to develop the country’s massive unconventional resources and jump-start the economy. It had long been suffering from inflationary concerns.

“Tecpetrol also had access to a special gas price of US$7.50/mcf as part of a government program,” Wood MacKenzie told NGW. “The high price helped the project get a running start, enabling the operator to reach the economies of scale necessary to bring costs down.”

From a financial standpoint, rising gas production, coupled with favorable gas prices, have helped Tecpetrol firm up its income statement and balance sheet, significantly changing its DNA compared to 2016 and 2017, when earnings from continuing operations were firmly in the red.

Tecpetrol’s net sales in Argentine pesos rose 35% in 2017 compared with 2016. In the first nine months of 2018, the company’s net sales were up 112% compared with 2017, largely owing to increased Fortin de Piedra production and higher average sales prices. Net sales for the year were expected to increase by 182% compared with 2017.

In terms of property, plant and equipment, the company’s figures in Argentine pesos rose 62% in 2017 compared with 2016, and were already 332% higher in the first nine of months of 2018, again mainly on the strength of Fortin de Piedra. 

Other players in Argentina and abroad are surely taking notes and wondering how they might enjoy similar success.

“Others won’t have these same advantages and the price program is no longer available, but Vaca Muerta’s productivity is high enough to encourage further development,” Kupchella said. “Dry gas wells could ultimately recover over 13bn ft3 and break even under US$4/mn ft3, below current market prices. Early wells on a new project have higher costs and breakevens, so it will take longer to recoup upfront investment without the incentivised price.”

Beyond production

Tecpetrol, controlled by its Madrid-based parent company Tecpetrol Internacional, which holds a 95.99% equity interest in the company, ranks second among production companies in terms of its own acreage in the Vaca Muerta wet gas window, and fourth in terms of total acreage.

The Vaca Muerta formation contains 40% of Argentina’s unconventional gas and 60% of its unconventional oil. That’s more shale gas than in Russia and more shale oil than in Venezuela, according to Argentina’s ministry of production and labour.

“Beyond the extraction of shale, [the Fortin de Piedra project] also involves considering projects such as [gas] storage, the provision of sand (for fracking operations) and work to reduce investment costs,” Tecpetrol said in a recent filing. “It might also lead to an endless number of other possibilities for the country’s economy if progress is made in an energy matrix based on gas.” 

Despite the positives achieved by Tecpetrol in such a short investment window, the future of Argentina’s oil and gas sector still faces issues.

Some headwinds remain in Argentina, consultancy Deloitte outlined in a recent report, and include building infrastructure to handle growing production, adopting the latest technology, ensuring the continued availability of a skilled workforce and greater participation of oilfield services companies to support growing demand for services from producers. 

“Fortin de Piedra had several advantages that enabled its quick ramp up, but its success is not impossible to replicate. Gas market dynamics will be the most important factor in whether others can follow suit,” Kupchella said. “Additionally, more export and storage capacity will be needed before other projects of Fortin de Piedra’s scale can come online.”

Still, Argentina’s rising shale gas production, primarily from the Vaca Muerta, has started to reap rewards. Gas exports to Chile – the first in more than decade – resumed in 2018, while Belgium’s Exmar and Argentina’s YPF signed a 10-year deal late in 2018 to deploy a barge-based floating LNG unit that will liquefy and export Vaca Muerta gas. Additionally, Shell Argentina recently announced plans to develop three unconventional developments in the Neuquen Vaca Muerta basin. 

But while interest in Argentina’s shale potential appears to not be waning, at least not for now, the politics of Argentina may tell a different story. In 2018 alone, the country went through three energy ministers, a sign of instability that many oil and gas executives in Argentina view with weary – and wary – eyes, considering what has happened in Venezuela and Brazil in recent years and what may transpire in Mexico under the leadership of the country’s newly-elected president, Andres Manuel Lopez Obrador.

From Colombia and Brazil to Venezuela, the Latin American petroleum sector has seen its fair share of petroleum stories that never really took off as planned. 

Whether it was the hype of the Cupiagua fields in Colombia’s Llanos basin, or the as-yet unrealised pre-salt prospects offshore Brazil, or the unfulfilled potential of the Orinoco heavy oil belt in Venezuela, home to the world’s largest accumulation of heavy and extra-heavy oil, the region has had a number of disappointments, most of them driven by corruption, rebel attacks and financial, economic or political issues. 

But for the moment it appears Argentina’s saving grace has been that it has yet to get to a worst-case scenario, at least on the political front, Refinitiv says. 

In terms of political issues, “when you look at Venezuela, that’s a worst-case scenario,” a spokesman told NGW. “So, there is opportunity to work around the politics. Obviously things will always fluctuate from year-to-year. I don’t think it’s terrible, I don’t think it’s great, but I definitely think there is opportunity.”