Houston Chronicle Sunday

‘Dead Cow’ oil play is, well, dead now

Ar­gentina’s shale re­gion was once com­pared to the Per­mian Basin in po­ten­tial pro­duc­tion.

- By Jonathan Gil­bert

Just a bit more than three weeks ago, the head of Ar­gentina’s state-run driller out­lined an ag­gres­sive $1.8 bil­lion spend­ing plan for 2020 in the coun­try’s Vaca Muerta shale re­gion, based on $60-a-bar­rel crude. With global prices start­ing the year above $68, it wasn’t un­re­al­is­tic.

Now, all bets are off.

The toxic mash-up of an oil-price war be­tween Saudi Ara­bia and Rus­sia, two of the world’s largest pro­duc­ers, and the COVID-19 pan­demic have driven global crude to below $25 a bar­rel. That’s cre­ated a new re­al­ity for Ar­gentina’s plans to de­velop a for­ma­tion known as the Vaca Muerta, or “dead cow” in English. The re­gion of­ten is com­pared to the Per­mian Basin, with the prom­ise to push out a mil­lion bar­rels of oil a day and turn around an econ­omy on course for a third straight con­trac­tion this year.

“They were in a place where they were draw­ing sig­nif­i­cant in­ter­est in the re­gion be­cause it was one of the bet­ter re­sources glob­ally, but that’s fall­ing apart,” ac­cord­ing to Fer­nando Valle, an an­a­lyst with Bloomberg In­tel­li­gence.

At to­day’s low prices, even state-run YPF SA’s three flag­ship shale projects — where costs are low­est, with breakevens in U.S. dol­lars in the mid-to-high thir­ties — would lose money. Mean­while, the com­pany’s New York-traded shares are down by al­most 60 per­cent since oil be­gan its plunge in Fe­bru­ary, and Bank of Amer­ica Se­cu­ri­ties is pre­dict­ing they can fall a lot more.

YPF de­clined to com­ment.

New bot­tom line

For years, ex­plo­ration com­pa­nies have been ex­cited about Vaca Muerta in Patag­o­nia, with the qual­ity of its so-called mother rock ri­val­ing shale ar­eas in the U.S. The com­pa­nies, in­clud­ing global oil ma­jors Chevron and Royal Dutch Shell have be­gun drilling in the re­gion, though mostly as an ini­tial step de­signed to get a bet­ter han­dle on how to bring the oil to mar­ket, even as sig­nif­i­cant lo­gis­ti­cal and eco­nomic hur­dles re­main.

But the bot­tom line has sud­denly changed. Any plans for test drilling, early-phase pro­duc­tion and in­fra­struc­ture in­vest­ments are go­ing to be post­poned, said Ig­na­cio Rooney, an up­stream oil an­a­lyst in Buenos Aires for con­sul­tancy Wood Macken­zie. The only chance for progress, he said, would come if Brent can sta­bi­lize above $30 a bar­rel, mean­ing in­vest­ments in Vaca Muerta’s most de­vel­oped fields would con­tinue to make sense.

The price crash “puts all Ar­gen­tine oil pro­duc­tion in doubt,” YPF Chair­man Guillermo Nielsen told the Te­lam news agency dur­ing a re­cent event in Salta province.

There’s an­other fac­tor for con­sid­er­a­tion, as well. Coron­avirus and the price rout have ar­rived at a time when drillers were al­ready pulling back in the Vaca Muerta af­ter the govern­ment put in place price con­trols to tame high in­fla­tion. The num­ber of rigs op­er­at­ing in Ar­gentina slumped to fewer than 50 in Fe­bru­ary, com­pared with more than 70 be­fore the con­trols went into ef­fect seven months ago, ac­cord­ing to Baker Hughes. At the same time, oil ma­jors world­wide are rac­ing to cut spend­ing in response to the dual global chal­lenges.

Still, those who’d started com­mit­ting to Vaca Muerta — Shell, Exxon Mo­bil Corp. and Cono­coPhillips — were putting up with price med­dling be­cause of Ar­gentina’s long-term shale po­ten­tial and be­cause new Pres­i­dent Alberto Fernandez was promis­ing to safe­guard their in­vest­ments with spe­cial leg­is­la­tion.

Big im­pli­ca­tions

Mean­while, in a bid to save drilling, oil-pro­duc­ing prov­inces and pow­er­ful trade unions have been lob­by­ing the fed­eral govern­ment for a do­mes­tic crude price of about $50 a bar­rel, likely funded by fuel con­sumers at the pump. Such a move would mir­ror a sim­i­lar strat­egy by pre­vi­ous Pres­i­dent Cristina Fernandez de Kirch­ner.

But a prob­lem — al­beit, per­haps, a tem­po­rary one — has emerged with that idea. A na­tion­wide lock­down in Ar­gentina to stop the spread of coron­avirus has dra­mat­i­cally sup­pressed de­mand for fuel. That means drillers wouldn’t ben­e­fit from high lo­cal crude prices any­way be­cause they’ll need global buy­ers for the pro­duc­tion glut.

With the likes of Shell and Exxon an­a­lyz­ing the new price sce­nario, how things play out in the near fu­ture in Vaca Muerta will surely im­pact chances in the long term of oil flow­ing freely from the re­gion.

“Vaca Muerta is the pri­mary call­ing card for in­vest­ment in Ar­gentina,” Bloomberg In­tel­li­gence’s Valle wrote in a March 20 report. “And its de­vel­op­ment is crit­i­cal to the coun­try’s re­cov­ery.”

 ?? Leonardo Petri­cio / As­so­ci­ated Press ?? Vaca Muerta in Ar­gentina has huge shale oil de­posits, but a price col­lapse has halted plans.
Leonardo Petri­cio / As­so­ci­ated Press Vaca Muerta in Ar­gentina has huge shale oil de­posits, but a price col­lapse has halted plans.

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