By Gerardo Jimenez
It might be tempting to conclude that YPF’s shale gas find will fix this problem. A closer look at the Argentinean natural gas industry shows that the operators with experience producing from shale gas do not exist. Additionally, the unconventional gas industry is in its infancy, and the natural gas pricing structure is not very favorable for capital-intensive shale gas developments. However, YPF’s discovery is in the Neuquina basin where existing gas producing infrastructure is already in place. The geology aspects of the two different shale formations are world class and analogous with the Marcellus and Haynesville shale plays in the United States. With Argentina deriving over 50% of internal energy consumption from natural gas, bringing shale gas to market will not be a quick or easy task, but it might be the key to overcome the 2020 natural gas crunch.The discovery made by YPF is located at the conventional gas field Loma de la Lata in the Neuquina basin. As of 2008, the Neuquina basin contained the majority, 44 percent, of Argentina’s gas reserves. As the plot below shows, reserves have been declining in this mature basin from close to 7 to 5.5 Tcf from 2005 to 2008.
Los Molles and Vaca Muerta are the shale formations that offer promise to reverse these declining trends. According to research from Texas A&M University, the key ingredients for delectable shale gas accumulation include: high total organic content, mineralogy that is high in sand content, high thickness, depositional environment that minimizes clay content, favorable pressure, and high gas in place. The table below has ranges for some of the key ingredients for Los Molles and Vaca Muerta. Based on those parameters, the corresponding analogs are also listed. Data for Los Molles and Vaca Muerta are obtained from the US Energy Information Administration (EIA) study released in 2011, while the analog data is compiled from research done by Texas A&M University in 2009. The corresponding American analogs are included in the table because they could foreshadow the future of the Argentinean counterparts. The phenomenal success of the Haynesville and Marcellus shale gas developments started with sub-surface characterization, and comparable ingredients are also present in the Argentinean gas shale formations.
Los Molles and Vaca Muerta shales are the source rocks for most of the oil and gas production in the basin. The table above shows that current understanding to date is very encouraging, however, significant reservoir characterization remains to be done to find the “sweet spots” in both plays. For instance, quantifying the contributions of natural fractures to productivity is an important step. The success of the Barnett shale in the Fort Worth basin was partly due to natural fracture mapping which led to better understanding of well productivity. Another issue is thermal maturity. If shale is not thermally mature, the kerogen has not been cracked to hydrocarbons. Research from Felipe Rodrigues et al. of YPF indicates that the Vaca Muerta shale is largely immature to marginally thermally mature except in areas that have tertiary sills. Sills are essentially underground lava flows that lift sedimentary bedding surfaces. The lava is liquid and extremely hot which heats the surrounding sediments and cracks kerogen into hydrocarbons. Rodrigues et al. have found that when the Vaca Muerta formation is penetrated by sills, a full spectrum thermal maturity range is found permitting the generation of hydrocarbons. Although the major ingredients are present for Los Molles and Vaca Muerta to indicate good productivity, long term reservoir characterization remains to be done.The gas distribution infrastructure, pipelines, pump stations, liquid handling plants, etc, is already in place in the Nuequina basin. Information from the Global Gas Transport website shows that 3,900 miles of pipeline with a capacity of 2.2 billion cubic feet already export gas from the Neuquina basin. Production data from March 2011 indicate that these pipelines might be operating near capacity. For the most part, the infrastructure needed to produce gas shales in the Neuquina basin is already in place. After possible expansion, it will be ready to transport gas out of the Neuquina to the rest of Argentina and possibly to Chile, Brazil, Uruguay, and Bolivia because exporting pipelines are already in place.
For a successful gas shale there is a need for an experienced operator. The first place to look for one is in-house. Four companies produce 75% of the natural gas in Argentina: Total Austral (parent company Total), Petrobras Argentina (parent company Petrobras), Pan American (majority stakeholder is BP), and YPF. Totals’ unconventional portfolio consisted exclusively of tight gas assets until 2010 when interest from American independent Chesapeake was acquired for the Barnett shale in Texas. Petrobras, YPF, and Pan American have no unconventional gas production experience in Argentina. It is necessary to note that the majority stakeholder in Pan American is BP, who does have experience in shale gas production from operations outside Argentina. The Journal of Petroleum Technology reports that BP agreed to sell its 60% stake in Pan-American to the minority holder, Bridas, for a total of $7.1 billion. The impact to Argentina’s shale gas kitchen is that there is no chef in the kitchen, no experienced operator to bring to the table technology, capital, lessons learned, experienced engineers, geologist, and project managers.
The lack of an operator with significant experience in shale gas underscores the infancy of unconventional gas industry in Argentina. Given the potential shale gas reserves, the industry has just begun to look at unconventional resources. Apache Corporation is leading the way by drilling the first ever horizontal, multi-staged hydraulically fractured well. The target reservoir is tight gas sand in the Neuquina basin. Apache reports that the well was drilled to a vertical depth of 12,800 feet, a horizontal section of 2,800 feet, and tested at 7 million cubic feet per day. This goes to show it is not impossible to bring this technology to a new basin and new country. Companies with the technology and the know-how need one last ingredient: a favorable and stable pricing environment.The government’s regulation of natural gas prices led to the reduced investment in natural gas. With a crippling economic collapse in 2001 and reserves at a peak volume of 27.5 Tcf in 2002, the government established natural price caps to keep prices affordable for consumers, industrial use, and electricity generators. After all, over 50% of the Argentinean economy is fueled by natural gas. Price caps did not make investing in the natural gas business appealing, and the precipitous drop in reserves and production begun. To spur interest in new gas deposits, in particular the more expensive unconventional resources like shale gas, the Argentinean government has adopted the Gas Plus policy in 2008. Rigzone reports that under the plan, companies must provide the Energy Secretary details of development plans including a reserves estimate and a timeline for estimated daily production. Companies must also agree to sell produced gas in the domestic market only, and the program is open to producers enrolled in current government accords for gas supply levels. In exchange, the development company gets a price “that must contemplate costs and a reasonable profit”. This seems like the profits of the development company are left at the discretion of the Energy Secretary. Apache was one of the first companies to apply for the program. The average realized price is $4.93 per thousand cubic feet which is significantly better than the gas capped price of $1.4 per thousand cubic feet.
Despite the uncertain economic conditions, there are a few companies that might dip their hand in the pot. ExxonMobil is looking to invest in international shale gas plays and Argentina might be a place that attracts attention from them. A small Canadian independent, American Petrogas, already produces conventional gas in the Neuquina, and the company is enthusiastically consulting with experts about unconventional prospects in their existing leasehold. Total is also looking to expand its portfolio into shale gas, and Argentina is the obvious place for the company to start given its existing presence in the country.
The sub-surface ingredients are in place for Los Molles and Vaca Muerta formations. The infrastructure is existing but might need expansion. There is currently no operator, with experience in gas shales. However, Gas Plus might be the needed gas pricing structure to garnish shale gas development and entice an operator to come into the country. Once these things are in place world-class shale gas development might be in place in a nation desperately needing increased gas reserves and production to fuel a growing economy already predominantly powered by natural gas.
NUTSHELL:
What is your take on this? A great investment destination choice; or maybe just not yet? A hope for industry I think.
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