By John Kemp
LONDON, Dec 20 (Reuters) - Chevron's partnership agreement with YPF to drill 100 unconventional oil wells in Argentina's Vaca Muerta ("dead cow") shale formation confirms that exploration and production activity is accelerating in the country, despite the standoff with Repsol after Argentina nationalised YPF earlier this year.
Most analysts predicted the nationalisation would deter further foreign investment in Argentina's oil and gas industry, leaving the country's vast unconventional hydrocarbon resources stuck in the ground.
But the scale of the prize has continued to attract strong interest, even though Repsol has sought to organise an investment boycott and threatened legal action against any other company benefiting from what it considers are unfairly expropriated assets.
Total, Apache, Exxon Mobil and EOG Resources have all continued quietly exploring in parts of the Vaca Muerta.
Like North Dakota's Bakken, the Vaca Muerta formation contains three members: two bituminous shales separated by a layer of limestone. It is part of the giant Neuquen sedimentary basin covering almost 67,000 square miles underneath Argentina's Neuquen province and extending under the neighbouring province of Rio Negro.
Vaca Muerta is more famous for its enormous shale gas resources. The formation contains 240 trillion cubic feet of technically recoverable gas, making it one of the largest shale gas formations outside the United States, according to a 2011 assessment conducted by Advanced Resources International (ARI) on behalf of the U.S. Energy Information Administration (EIA).
Deposited on the floor of an ancient sea, the Vaca Muerta shales have a total organic content (TOC) ranging from 3 percent in the south to as much as 14 percent in the north of the basin, with an average of around 4 percent. The organically rich shale layers have an average thickness of about 500 feet.
Much of the formation is not thermally mature: it has not been buried deep enough and become hot enough to convert all the organic matter into oil and gas. However, the prospective area still covers some 8,500 square miles, according to ARI ("World Shale Gas Resources" April 2011, pages 110-117).
Vaca Muerta also contains significant oil resources. In May 2011, YPF announced its Loma La Lata field in Neuquen contained 150 million barrels of shale oil ("Special Section: Shale", Journal of Petroleum Technology, July 2011).
An independent assessment of Loma La Lata conducted by consultants Ryder Scott concluded 77 percent of the area contains oil with the rest containing dry and wet gas ("Reservoir Solutions" March-May 2012).
Total recoverable oil resources across the prospective are of the Vaca Muerta are likely to amount to billions of barrels.
Vaca Muerta, and an even deeper shale formation, Los Molles, are thought to be the original source rocks for many of the conventional oil reservoirs and conventional oil fields in the region. With the advent of horizontal drilling and hydraulic fracturing, oil and gas producers can now target production from Vaca Muerta and Los Molles directly.
In 2011, Apache produced around 9,500 barrels per day of oil, 3,000 barrels per day of natural gas liquids, and 209 million cubic feet per day of natural gas in Argentina. The country accounted for around 6 percent of Apache's worldwide oil production. The company drilled more than 70 unconventional wells in four Neuquen fields between 2008 and 2011.
Argentina has a large domestic gas market -- some 1.9 million vehicles (15 percent of the total fleet) run on natural gas. But natural gas prices are controlled by the government.
The government's "Gas Plus" programme allows companies extracted unconventional gas to charge a higher price, and has incentivised new drilling by companies like Apache.
The government announced last month that gas producers would be allowed to charge $7.50 per million British thermal units for new production, more than double the current benchmark price in the United States, in a bid to attract more foreign investment into new fields.
"We've decided to give incentives for gas production," President Cristina Fernandez said. The current price ceiling is about $5, although prices at the wellhead average just $2.50 in the Neuquen basin.
Even so, drilling for oil rather than gas is more attractive for foreign investors. Prices are higher and there are stronger linkages to international markets, enabling oil producers to maximise value from their wells. It is notable that Chevron's letter of intent with YPF will target oil production from YPF's liquids-rich Loma La Lata and neighbouring Loma Campana fields .
Argentina's enormous shale gas and oil resources are too attractive to be left undeveloped, notwithstanding the country's fraught relationship with bond investors and Repsol. Exploration and production activity will continue to accelerate.
But international companies will control their political risk by keeping investments small (Chevron is investing just $1 billion at this point) and phasing them so each new investment depends on the country meeting its obligations under previous tranches.
Chevron's plan for 100 unconventional oil wells is the boldest indication yet that the fracking revolution which started in the United States has started to be exported overseas.