Collaboration leads to higher productivity

Argentina

Teófilo Lacroze, president of Shell Compañía Argentina de Petróleo, talks to TOGY about the gaps in infrastructure that must be addressed to facilitate Vaca Muerta’s full development and the significance of the framework agreement signed in January 2017. Present in Argentina since 1914, Shell participates in six E&P blocks and owns a refinery and several other downstream facilities.

In October 2016, Shell CEO of global operations Ben Van Beurden announced that the company was planning to invest USD 1.2 billion in Argentina for the 2017-2020 period. The investment will be dedicated mostly to Shell’s upstream and downstream activities, particularly its shale projects. The plan calls for an annual investment of USD 300 million per year, not including investment in Bajada de Añelo.

• On the Vaca Muerta framework agreement: “We started 2017 with the framework agreement for the development of Vaca Muerta, which is a great step forward and a very positive sign for investors. With this addendum, it is possible to have clear information about the regulatory framework we will have moving forward, which is very important.”

• On preparing for growth: “If Argentina is to become a light oil-exporting country, it needs to have an adequate infrastructure that will allow exports. Therefore, you also have to consider oil and gas pipelines. We currently have the necessary capacity in the main network, but if Vaca Muerta is as successful as we hope it will be, that capacity will not be enough at some point. We have some time before that moment comes, but we have to start thinking about the alternatives and solutions starting today.”

Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Teófilo Lacroze below.

How has Argentina’s new political landscape impacted Shell’s operations?
The same transformations that were important for the country – free exchange rates, free profit availability and more clear laws, amongst others – were changes that gave the country and our sector more potential and a clearer future. Our sector relies vastly on a very high initial investment, and having a free profit availability scenario is very important when considering the medium- and long-term development of our activities.
Shell is lucky in Argentina, as we combine downstream and upstream activities, where the former creates income and the latter invests it. In a way, we are very well integrated in this aspect.
When we consider the future, we have an exponential growth in upstream activities, mainly in Vaca Muerta, and we have a downstream business that keeps growing and will keep doing so alongside the growth of the country’s GDP. This is the way the petrol and diesel market develops. Today we are upon a very relevant scenario of potential development for these two areas, due to the different structural reforms that were made.

How have Shell’s activities in Vaca Muerta developed?
We have been able to make important advances in Vaca Muerta. We started in 2015 with five areas, three of which we operated. Today, we have six areas; almost seven, if you consider Bajada de Añelo, for which we are waiting for the provincial ordinance to finalise a concession agreement, as negotiations with YPF have already been concluded.
We are investing approximately USD 300 million per year in our blocks, not including Bajada de Añelo. Bajada de Añelo would represent an additional USD 370-million investment. These investments have a significant weight within the sector and especially for the country.
As of June 2017, we have drilled and completed more than 20 wells, and we should be able to do another 10 during the second half of the year, without considering Bajada de Añelo. If we are granted the approval for Bajada de Añelo, that number might double. It all depends on the timing of the provincial decree.
What we are currently doing in our Vaca Muerta fields is de-risking to achieve full development. We have the capacity to do it in different phases. Some of our areas could already go into the development phase and we are discussing when the ideal time will be to take that step. We should see, from this point forward, a high level of activity in our areas and a higher investment.

What activities will Shell be concentrating on in 2017 and 2018?
The most important thing for us is to generate oil barrels and associated gas. This is what Sierras Blancas and Bajada de Añelo will focus on, once we get the province’s approval.
One of our most important objectives for 2017 and 2018 is to analyse what type of investment we need to make in infrastructure. Overall, we need to have the wells that guarantee production and infrastructure that can guarantee the transportation of products, so that we can monetise them. We believe that the most determining factor for the speed at which both oil and gas will develop depends mostly on infrastructure and access to infrastructure, not only to the main network, but also from individual fields.
We will focus mostly on oil, since we are operating mainly in the black oil window. That area also produces some gas, which we need to monetise. Sierras Blancas, Cruz de Lorena, Coirón Amargo and Aguila Mora are located within this window.

Has the company reached any recent milestones?
In Sierras Blancas, we put our oil and gas separation plant in operation in December 2016 and we formally opened it in April 2017. The plant can handle 10,000 boepd. We hope to be working at full capacity in 2018.
In 2017, our main activities are drilling and completing wells. We currently have a constantly operational rig in Sierras Blancas. Our Sierras Blancas, Cruz de Lorena and Coirón Amargo areas are all close to each other. We have different plans for each of the areas, but the main thing is ensuring production that will allow us to have the separation plant running at full capacity throughout 2018.

What are the main obstacles to the development of Vaca Muerta?
One of the main challenges in the sector has to do with infrastructure. We believe that there should be a public-private co-operation from all parties involved – government, companies, unions, associations – to be able to build the infrastructure that we will need.
You also have to consider the productivity aspect. We started 2017 with the framework agreement for the development of Vaca Muerta, which is a great step forward and a very positive sign for investors. With this addendum, it is possible to have clear information about the regulatory framework we will have moving forward, which is very important.
There are other productivity factors that we also have to improve, for instance reducing non-productive periods. Another challenge we have in Vaca Muerta, which directly relates to non-productive periods, are blockages, when considering long-term competitiveness, in terms of how much it would cost to produce a barrel of oil in Argentina and how much it would cost to produce one in the United States or Canada.
The third key aspect is related to the tax regime for the type of activity we perform. Oil and gas activities require a very high initial investment and you only have a real cashflow after eight to 10 years from that initial investment. You need a tax regime that allows you to execute that development without having to worry about distortive taxes, such as the ones that are currently valid for our industry. This is a medium-term discussion, but it is still a very important subject for the entire sector.
The fourth key aspect has to do with difficulties in importing equipment.

Do companies face logistical and operational challenges when operating in Vaca Muerta?
Regarding infrastructure, there are a lot of things to work on and some are on their way. Consider, for instance, the roads that the provincial government is currently building. You also have the railway project from Bahía Blanca to Añelo.
We also need to consider the development of services companies dedicated to the oil sector. We need a higher number of services companies than we have today.
If Argentina is to become a light oil-exporting country, it needs to have an adequate infrastructure that will allow exports. Therefore, you also have to consider oil and gas pipelines. We currently have the necessary capacity in the main network, but if Vaca Muerta is as successful as we hope it will be, that capacity will not be enough at some point. We have some time before that moment comes, but we have to start thinking about the alternatives and solutions starting today.
One very important aspect is the infrastructure needed to transport the product from the fields to the main network. Regarding the connection from the main network to a specific field, the party that has to do most of the work is probably the businessperson in charge of exploiting the area, who will have to consider the creation of that infrastructure as part of their investment plan.

What is the most efficient way to develop the infrastructure that will be fundamental to Vaca Muerta’s development?
If I have to build a 100-kilometre oil pipeline through three or four different areas, it would be ideal to share the logistics responsibility with the owners of those other areas, to achieve competitiveness and efficiency.
If the sand for hydraulic fracturing is going to be delivered by train, as it is considered a more efficient mode of transportation than trucks, you have to first analyse the different active projects and the different possible solutions, because all involved parties are different. We believe that everyone should be involved in these discussions. The solutions would need to be thought of ad hoc for each aspect you need to resolve.
In the future, we will need to have the adequate infrastructure for water, sand and other relevant materials for our operations. Most certainly, we will need to consider shared infrastructure.
All around the world, the industry has shown that the most efficient solutions are the ones with shared infrastructure, and I believe this should be the approach to solve some of the bottlenecks we currently face. It is important for all parties to be involved, so we can come up with solutions that are beneficial for the individual field developments and for the industry as a whole.

How will the lack of midstream companies in Neuquén impact the development of the play?
For the future of Neuquén, we need to think of the possibility of having midstream companies come into the mix, when considering oil or integrated gas supply chains. No matter what segment of the chain you focus on, there are things to do, which will result in a higher number of companies being able to come into the market to offer their services. This is the main challenge for Vaca Muerta in the future.
It is quite complex, because you need to consider all the pieces of the puzzle, to avoid an unexpected bottleneck that hinders your ability to monetise the molecules you are producing.

What is the significance of the January 2017 framework agreement for Vaca Muerta?
This agreement is a very clear message from Argentina to investors, in which the government states the importance of productivity and having a clear regulatory framework for the future, as well as our objective as a country of having a globally competitive industry.
We will start seeing the benefits of the agreement once it is fully implemented, but this is done gradually and takes some time. The discussions for the agreement are a very clear example of roundtables where government, companies and unions came together. We see a joint participation of the main parties of the industry.
The agreement has a very meaningful impact, if you think that Vaca Muerta can go from drilling 150 wells to drilling 1,000. If we reach the growth we want to achieve, our industry could contribute 3 or 4 percentage points to overall GDP growth and create more than 160,000 direct and indirect jobs.
The unconventionals market in Argentina is only five years old, at most. There are some things we need to adjust to the industry reality, and the agreement is a good starting point and very strong basis to work upon in the future. This is a change that will bring several transformations.
There are several investors nowadays that are at least interested in getting to know the opportunities Argentina has to offer. Vaca Muerta will bring in new players and new investors. We are already starting to see the results in the various investment announcements that have been made by different E&P companies in the past five months.

In which areas can the industry further improve productivity?
One of the biggest items was the non-productive time related to wind speed regulations. The addendum addressed this issue and it is a problem that has been overcome.
Another very important productivity aspect are the blockades by protesters, because they limit your ability to effectively access your operations and meet your objectives. In 2016, Shell lost a series of operating days because we were unable to access our areas. In 2017, we keep fighting this problem.
This is an issue that not only affects the oil industry, but rather the country as a whole. This is the biggest unresolved issue related to non-productive periods. This is something we have to resolve through the joint forces of all parties involved.
The solution has to be a result of a co-ordinated vision of Vaca Muerta’s growth. Through Vaca Muerta, we are trying to achieve higher activity, more jobs and increased wealth for Argentina. In some way, we have to favour a scenario where [all parties] come together for the future of the industry.

Were the fiscal regulations established by the 2014 Hydrocarbons Law adequate for regulating the industry moving forward?
We believe that there is still room to adjust the legislation to the reality of our sector. I am referring specifically to distortive taxes, such as those related to debit and credit, cheques, gross income and VAT.
We are not asking for the industry to pay lower taxes, but rather for the government to adjust taxes to the timing of the industry’s development. You need to make a difference between what you have today and what you will have in the future. At the end of the day, you will end up paying the same amount of taxes, but in this way, you can be sure you will pay proportionately and according to the development of the industry.

Has there been a change in the ease of importing equipment to Argentina?
President Mauricio Macri made an announcement about simplifying the existing procedures that need to be followed when importing used equipment, specifically that used in the unconventionals sector.
We are discussing a decree draft, which, at least initially, seems to be reasonable and would allow companies to take advantage of the fact that there has been a global equipment surplus since 2014, when the decrease in activity in the global industry started. I believe this is something that we will be able to resolve, considering not only our needs, but also the needs of the local industry, which needs to be developed in parallel.

What E&P knowledge and experience can Shell bring from its operations in Canada and the USA to Argentina?
We can bring everything from well design to de-risking and landing zone experience. We bring the way in which we analyse and understand the information provided by our pilot wells. This allows us to shorten the learning curve.
Of the 20 wells we currently have, four or five are within the top 10 performing wells in Vaca Muerta. This demonstrates that the know-how transfer is going very well. We have to keep in mind that the pilot phase and the development phase are two very different things. We firmly believe that Vaca Muerta is great. We can back this up with the results we have seen so far in our wells. We have to keep moving along this path.
Our next challenge is to be consistent and able, even throughout the development phases, to incorporate large wells into the company’s development. We think this is something we can do.
We monitor our drilling and completion from Calgary, where the monitoring headquarters are located for the unconventionals sector. This control is done in real-time, which makes the process even more agile.

How does Shell view its role in Argentina’s downstream sector?
In August 2016, Shell announced and began a strategic review. This does not mean we wanted to sell our assets, but rather that we wanted to take a look into our business. We are currently undergoing that process.
The certain growth of the presence of our brand in Argentina is clear to us. The model we will follow is secondary to our growth strategy. Our vision for the future is to grow in the downstream sector. We have the infrastructure to do so. We have a refinery that, looking into the future and considering that this market will start producing more light oil, perfectly meets the configuration demanded by the market.
This gives us several opportunities in the future for our downstream business. We are investing in the development of innovative products and services to support the growth of our downstream business in the next few years.

Are Shell’s downstream assets capable of meeting higher demand?
The Dock Sud refinery has a higher capacity than current throughput. If we keep moving towards a free market, we will naturally achieve full capacity.
This market is short in terms of finalised product. We have a local market that relies on diesel imports because there is not enough local production capacity to meet demand. Whether we produce it locally or import it, we need to make sure to always have the necessary molecules to supply local demand. We do not see any problems regarding this aspect in the future.
We believe that if the country keeps growing at an average rate of 3% annually, fuel demand should be growing at a higher rate, and we hope to grow beyond the market’s average rate. We have the infrastructure to do so, which is the most important aspect in the downstream market. We have refineries, storage sites, lubricating plants and LPG facilities. All of them are ready and prepared to withstand the growth rates we hope to achieve.

Where would you like Shell to be positioned in Argentina by 2022?
In five years’ time, we have to be in a place where we produce more gas and oil than we currently produce. In 2017, we produce around 7,000 boepd. We expect to see a significant growth in the upstream, as well as in the downstream. We hope to have growth that is higher than Argentina’s GDP and to increase our market share.
We started operations in Argentina almost 103 years ago, and to this day, we keep on growing. Our objective is to continue to provide very high-quality and innovative products to our clients, and keep expanding our market share. This is our objective and will continue to be our objective for the next few years.

For more information on Shell in Argentina, including the progress being made at the company’s Vaca Muerta concessions, see our business intelligence platform, TOGYiN.
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