Pipeline to Neuquén’s oil prosperity

Argentina

Jorge Vugdelija, CEO of Oleoductos del Valle (Oldelval), talks to TOGY about plans to expand the company’s transportation capacity in line with projected production growth at Vaca Muerta and the importance of implementing high operational and efficiency standards. Oldelval maintains and operates one of Argentina’s crude oil pipeline systems.

Originally established in 1955 as a department within state oil company YPF, Oldelval was privatised in 1993. The company is now owned by YPF (30%) and a consortium of Neuquén Basin operators (70%). In 2017, Oldelval transports nearly 30% of Argentina’s total oil production and 100% of oil produced in the Neuquén Basin.

On the importance of firm contracts: “The development of firm contracts will enable us to know the real dimensions of projected production in Vaca Muerta. When companies have to make commitments, sign contracts and make payments, we can get more accurate projections.”

On working with others: “We need to work with players such as Shell and ExxonMobil, among others. These players were not active in 1993, but in 2017, they are moving forward very strongly, regardless of current international oil prices and the fact that the industry is focusing more on gas. These companies are still betting on oil production.”

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

How is Oldelval working to adapt to the dynamics of Argentina’s oil industry in 2017?
We are working on a strategic business plan focussed on the evacuation of all foreseen production in the Neuquén Basin. A new horizon is now appearing, giving a second life to our transport system. We are talking about a new basin, which, even though it is in the same location, necessitates a new approach to development and requires producers to use different types of technologies.
At 24,000 cubic metres [150,955 barrels] of oil per day, Oldelval is currently working at a capacity that is almost half of its historic capacity. At full capacity, we would be able to work with 42,000 cubic metres [264,172 barrels] of oil per day, although we would also need some investment to reach this capacity. These investments would be aimed at reactivating infrastructure that has not been used lately due to the diminished flow coming from the basin. Once we reach that historic maximum capacity, we will still have the possibility to go beyond that value interconnecting existing loops. Oldelval will be the most economic transport expansion option for a long time.

How can Oldelval reach its objective of working at full capacity?
We need to expand our current workload. To achieve this, it is necessary to have accurate projections, which is why we work very closely with producers and do not limit ourselves to the company’s shareholders.
We need to work with players such as Shell and ExxonMobil, among others. These players were not active in 1993, but in 2017, they are moving forward very strongly, regardless of current international oil prices and the fact that the industry is focusing more on gas. These companies are still betting on oil production.
Additionally, gas development includes condensate gas, which also runs through our system. Clearly, the volumes involved in the latter product will not change the Argentinian energy reality, but for Oldelval, they represent much appreciated flow volumes.

Does Oldelval have a clear investment plan or strategy to recover capacity?
We are only in the preliminary stages of the business analysis. However, we can already tell that the necessary investment is very low when compared to the investment levels needed for the full development of the Vaca Muerta play. We would need a very little percentage of the investment that Vaca Muerta is currently expecting for development operations. Even if this investment is quite a challenge for Oldelval, it is not an issue for the industry at all.
Around mid-2016, we started to meet with oil producers, letting them know that we are here, open to working together and willing to do what needs to be done. As concessionaires of a national transportation system, it is very important for us to let oil producers know that we are working hard to be in the condition to evacuate the foreseen basin production. We believe that is also very important for them, since they are investing high amounts of money in exploration and production and the absence of evacuation capacity represents a risk.

How can the company take advantage of new infrastructure in the Neuquén Basin?
Different producing companies are working in a collaborative way. There are some new projects for short-distance transportation that are being put forward by producers. Oldelval aims to handle the terminal operations for the companies that will eventually connect to our system.
The transportation aspect of the process is our core business. Our value proposal for loaders and producers focuses on our transportation abilities: We take care of the “annoying” part of the process for the producers, while they can focus on what they know how to do best. We are very good at what we do and we have high-quality know-how. We have been working in the basin for 24 years as a private company and for more than 60 years as an active company.
Under these concepts we are already working on the development of offering operations and maintenance services for third-party transport facilities operating in the basin.

How will Oldelval set its fee framework?
We are developing it. We know that the Ministry of Energy and Mining is working on a regulation revision. Although current regulations allow firm contracts, we expect that new regulations will provide detailed directives and enable the industry to have firm contracts for all activities linked to the midstream sector, especially transportation and storage. We are already working on a contract scheme considering all of this.
In 2017, oil transportation deals with variable fees. The loaders pay a regulated fee depending on the volume they load, with no obligations whatsoever. This new phase calls for other types of regulation: a long-term vision together with firm contracts.
Only with firm contracts will we be able to deal with the necessary investments. Although these investments are not large for the industry’s standards, it is necessary for Oldelval to have the security of a contract to be able to cover its costs.
In March 2017, we were able to get approval for a fee framework. This framework is based on a series of projects that we are currently working on, more tactical than strategic.

What characterises the projects that this approved fee framework is based on?
The projects have four pillars. The first is the integrity of infrastructure. The current infrastructure should allow us to work for some more years. Since we started in 1955, we have a lot of knowledge, but we also have equipment that needs to be revamped and replaced. The projects we are working on are mostly based on this pillar.
The second pillar is the technology we want to implement in the transport system to minimise illicit actions such as oil siphoning. We are moving forward with several projects that have this in mind. We started implementing a service called Zero Wall, which is mainly an intelligent tool that rapidly notifies you if there is an illegal connection in your system. We started implementing this in August 2016.
We have also been installing a series of flow measurement tools, which enable us to have a better balance closure, also aimed at attacking illegal connections. All of this is directly related with our transparency policy. This is important not only for clients for whom we transport oil, but also for the provinces.
The third pillar has to do with shrinkages that are not related to illicit connections, but are rather operative results of the system, such as evaporation. We also have some projects in line that aim to reduce this shrinkage. The projects in this pillar are mainly related with some improvements in our operational storage tanks.
The last pillar is energy efficiency, which is also a very important point for the ministry. We are implementing a new standard called ISO 50001, which we will certify in August 2017. We will be the first oil company holding a certification for this standard that regulates energy efficiency. Conceptually, it has to do with “using less energy to transport energy.”
With this in mind, we again see the need to work with regulated fees. We believe that adopting this regulation and implementing this energy management system is necessary to move a management solution forward that targets efficiency and optimisation.

How important are standards when looking for new clients and approaching international companies?
With this ISO 50001 regulation, we would be able to draw a baseline that ensures a huge profit, because with this solution, you are able to know where you are consuming energy and what type of consumption you have. From that baseline, you can set improvement objectives. There are a series of early improvements that will arise when the model is first implemented.
When you start to work with international companies and they see that you have international certificates for your management work, they feel you speak their same language.

Why does Oldelval have to seek new clients, given that it has a natural monopoly in the basin?
We could stay put and wait for clients to come knocking on our door, but it is not the type of service we like to offer. For us, a planned activity is an activity that will always be more efficient and more profitable. We know that by approaching new clients that are settling in or clients that have new projects in the basin, we are able to offer them a higher-quality service.
There are foreign companies that are interested in working in the midstream sector. We work under a natural monopoly model, which implies there is a public benefit from there being only one company supplying a service. This definition has a limit, because when you reach a given situation, you see that everyone is in the same condition. From a philosophical point of view, it is a good thing that external parties are coming into the sector. Competition makes everyone better and strengthens the market.
Nevertheless, it is important to note that for many more cubic metres, the marginal cost of any expansion will be covered by ourselves because we have an established base, which implies lower costs for expansion when compared to the construction of brand new infrastructure. But of course, this has a limit, too.

Will Oldelval be able to meet transport demand once oil production in the basin begins to rise?
Everything points to us being able to handle the production volumes that will come, at least for the next 10 years, and especially with the projects with which we are currently moving forward.
The development of firm contracts will enable us to know the real dimensions of projected production in Vaca Muerta. When companies have to make commitments, sign contracts and make payments, we can get more accurate projections.

What is the current situation of illegal oil siphoning in Argentina?
Unfortunately, this is something that still happens quite often in our country. That’s why one of our pillars of work is implementing technology to minimise illicit actions.
Currently, Oldelval is not one of the most attacked companies, although it was for a while. Some pipelines for refined products around the country are the most vulnerable ones because they handle products that are easier to sell to third parties.

What is the importance of maintaining positive relationships with provincial governments?
We have to report to the Ministry of Energy and Mining of the nation. The provinces are only concerned parties. Although they do not have controlling power, following our philosophy of transparent management, we are interested in showing them what we are working on.
Our activity has an indirect impact on the provinces’ royalties through the transportation fees. It is fundamental to keep them informed about our investment plans and the evacuation capacity benefits for the province.

What are the main environmental challenges Oldelval has faced?
One aspect has to do with the integrity of the infrastructure itself, which has a direct relationship with the environment, such as an oil spill. Besides being a financial loss, those represent an impact on the environment. You also have to consider pipeline expansions, as they all require environmental certification, which will become more and more strict with time.
We are finishing a new section of the oil pipeline, not aimed at increasing capacity, but rather to reverse the flow in a specific area from Señal Cerro Bayo to Puesto Hernández. By mid-2016, we had started building a new pipeline, parallel to the existing one, that runs in the opposite direction. The aim of this pipeline is to supply the refinery in Luján de Cuyo.
We are building a new section, and the design we had to do was very complex, specifically due to the environmental demands. It was necessary to reconsider the route of the pipelines, as well as their depth. We hope to have it working by the end of August or early September 2017.

Where would you like Oldelval to be positioned within five years?
We want to see ourselves as a determinant player in Vaca Muerta’s exploitation and be an industry reference. We want to be a strategic partner for producing companies and come up with solutions for their problems. We want clients to feel they are in good hands and think that, regardless of our monopoly position, we are efficient.

For more information on Oldelval’s operations in Argentina, see our business intelligence platform, TOGYiN.
TOGYiN features profiles on companies and institutions active in Argentina’s oil and gas industry, and provides access to all our coverage and content, including our interviews with key players and industry leaders.
TOGY’s teams enjoy unparalleled boardroom access in 35 markets worldwide. TOGYiN members benefit from full access to that network, where they can directly connect with thousands of their peers.

Business intelligence and networking for executives: TOGYiN

Read our latest insights on:

• Argentina