Planning and costs in Argentina

What is the state of Argentina’s energy industry?
It’s unfortunate that Argentina, a country with such a great quantity of hydrocarbon resources under its subsoil, is not energy self-sufficient. Through a great deal of effort, this autonomy was achieved and maintained for many years, but it was lost about a decade ago. Since then, we started to use our currency reserves to import increasing amounts of energy, mainly natural gas. Unfortunately, this cost the country a fortune. When the price of energy was high, Argentina spent about USD 15 billion per year in energy imports. Today this figure is lower, since the gas price has dropped and local gas production is slowly increasing, but it remains a significant portion of our import expenditures.There’s a tipping point in the production of natural gas. We went through a minimum, and now it’s on the rise again. Consumption is also increasing. Production should increase at a much quicker pace than now, if we want to reach self-sufficiency in a reasonable period of time. Argentina depends a great deal on natural gas. Gas accounts for more than 50% of the energy matrix.

What are the main obstacles to achieving energy self-sufficiency?
Argentina’s greatest challenge is cost-effectiveness in exploration and development. Our land has outstanding potential in unconventional hydrocarbons. Vaca Muerta shale, for example, exceeds in quality similar basins in the USA. But we have not yet achieved the conditions to produce these resources in a cost-efficient way. The problem isn’t the existence of the resources, but the development of a technical/economical system that could facilitate a growing investment environment to produce those resources for the benefit of everybody. Our duty as Argentines is to overcome that disadvantage. Labour cost is a major problem; not just labour costs associated with each worker, but also the quantity of personnel that the industry is forced to employ for each operation. During the period when the oil barrel price was high, the industry and government tolerated inefficiencies that should not have continuity today at much lower prices, if we want to develop unconventional resources. We have access to all the same technology that is used in the USA, but we don’t necessarily put it in practice as we should. Of course, scale has something to do with it. Carrying out major operations, with well after well being drilled in a factory model, is not the same as engaging in appraisal drilling, when you’re trying to determine how many wells you’ll drill as you keep learning about your field. Lastly, there are also logistics problems, which make operations more expensive in Argentina.

How has the learning curve evolved regarding new technology and techniques?
It’s a dynamic process that evolves from day to day. In the USA, they’re always trying to find new ways to make wells more productive and economical. When the barrel price dropped from USD 100 to less than USD 50, a lot of the unconventional projects were stopped. They had to find cheaper and more efficient ways to drill, complete and produce from those wells. Several of those projects are now being reactivated, with an oil price below USD 60 per barrel. In Argentina, we have access to that new technology as well. The same services companies working in the USA are working here, and sometimes, the same operators as well. With organisations such as the SPE, know-how spreads quickly, even to those operators and services providers that are not the cutting-edge experts in the subject. The main factor is making it competitive; otherwise, our natural resources won’t become reserves. We may have a lot of resources, but they are not useful as long as they remain underground. The challenge is to turn those resources into reserves, produce them and put them on the market. We’re making strides in that direction. Companies such as YPF and a few others are working on it. YPF is drilling for much cheaper than it did in previous years, and drilling more efficient wells, such as horizontal, multi-fractured wells instead of vertical ones.

Are YPF’s improved drilling costs a result of overcoming some aspects of the learning curve?
There are several factors. The learning curve is one. Another is the fact that in a market in crisis, as we’re in now, players realise that they need to adapt to new circumstances. They can’t just wait for the price of the barrel to rise, because it’s not likely to happen any time soon. The USA is developing unconventional oil for less than USD 60 per barrel. When the price of oil rises, drilling and production increases as a consequence, and the market adapts again. It is unlikely that oil will return to a high price any time soon. We need to adapt our industry to these new circumstances.

How much more costly and difficult would it be to exploit Argentina’s unconventional resources, compared to its conventional ones?
Conventional or unconventional, we’re still talking about the same hydrocarbons. It’s the same gas and oil, they just differ in how porous and permeable the reservoir rock is. If the rock has very low permeability, the process is more expensive, because fracturing is required on a massive scale. Development of a conventional field is obviously much cheaper. However, Argentina’s main productive onshore basins are mature and they’ve been thoroughly explored. The chance of finding a large conventional productive field in those basins is low. Further development of the large existing mature fields is quite expensive because most of them have been extensively waterflooded. Most of Argentina’s large oilfields are already producing 95% water with very high lifting and reinjection costs. There is still a great volume of oil beneath the subsoil of those fields, since the oil recovery factor is below 50%. There is more oil left in the reservoir than the cumulative historical production, but the use of more sophisticated technologies is required to recover additional volumes. Therefore, in many fields, conventional oil is not necessarily cheaper or easier to produce than that in unconventional fields. Another complexity factor is that the majority of oilfields in Argentina are multilayered. Within a single well, you have several layers producing at the same time. When most of those layers are flooded, there is a technological challenge to identify and produce oil from those layers that haven’t been adequately swept. Areal and vertical sweep efficiencies can be improved, but at significantly higher costs. It would be a mistake to generalise and say that unconventional oil is always more expensive to produce than conventionals. It all depends on the circumstances and the stage of life of each field. They both have their challenges.

What potential do you see for the Northwest and Austral basins?
Progress is slow, not for a lack of potential, but because Vaca Muerta and the Neuquén Basin are so important that they are attracting most of the attention and investment, slowing down progress in other basins. It’s natural for a company that wants to invest to look first at basins with higher chances of success. Larger companies are better positioned to explore areas with more risk, such as deep gas in the Northwest, or offshore in the Austral Basin. I can’t say when the potential of those basins will be fully exploited, but their time will come. Total Austral is already developing a big gasfield offshore Tierra del Fuego. There is also potential in the onshore Austral Basin, if labour unions provide a more reasonable environment to attract capital.

What progress is being made in other basins?
I think Argentina has a lot of offshore potential and steps are being taken to explore that. Seismic is being recorded and an offshore bidding round is expected in 2018. Human resources is not a big problem because it can be acquired quickly. Companies can train personnel or bring in experienced personnel from around the world in the early stages. Argentina has experience with offshore developments off the coast of Tierra del Fuego. I think the main challenge is assuming the risk. In any case, most probably deepwater will require some time to take off because of the costs involved. There are also other onshore basins that haven’t been explored much, but chances of success look low. They entail a much higher risk. You need big money and very little aversion to risk.

What lessons can Argentina learn from the way that infrastructure and logistics developed in the USA?
The IAPG [Argentine Institute of Oil and Gas] has conducted workshops with people from the USA that have been useful, as they have shared their experiences about how they’ve dealt with challenges there. People from the federal and provincial governments were invited to the workshops, as well as company representatives. The goal was to learn about what solutions were successful there and could be applied here. In Argentina, one challenge we face is that the areas we want to develop don’t have much infrastructure, such as railways, roads, lodging, homes or hospitals. On the other hand, they’re not in the middle of nowhere, and some are not that far away from existing fields. An advantage we have is that water isn’t scarce, unlike in other places. You can either get water from rivers or lakes, or you can get salt water from underground that is useless for human or agricultural use. A railway would be an expensive development, but it would be quite useful to transport frack sand and equipment to the Neuquén Basin by train. At the moment, most transportation is done by truck, which damages the roads and represents a bottleneck for Vaca Muerta’s development. If we want to reach the desired level of development in Vaca Muerta, we also need to improve roads and construct new ones.

What short-term federal or provincial regulations could aid in the development of Argentina’s different resource types?
Some legislation is being created with the aim of streamlining imports. At the moment, importing machinery can be quite difficult for bureaucratic and cost reasons, and there is a lot that we can’t build here. If Vaca Muerta develops the way we expect it to, we will need to import a great deal of equipment. Also, legal and financial stability would give investors more faith in the country. Long-term investors want to know that rules and regulations won’t change down the road. Subsidies aimed at replacing imports are criticized, but, in my opinion, are more than justified. At the moment, we are importing LNG for about USD 5.50 per million Btu. That is currency that is leaving Argentina. The total cost is even higher if you account for transportation and regasification costs. Paying just a little bit more to a local producer, the currency stays in Argentina and a large part of the total cost comes back to you, not only in taxes and royalties, but also as a source for local labour. It has a multiplier effect in other industries and the local economy. The money turns in a cycle and most of it comes back to state coffers. As such, that money is being well invested, compared to giving it away to a foreign producer.

What is the outlook for Argentina’s oil and gas development in the foreseeable future?
Argentina will attract investment for hydrocarbons exploration if there’s stability, from the political point of view. We also need to become more cost-effective. We’re working on that right now, and I hope it will bear fruit sooner than later. On another note, some agreements have been reached with unions in Neuquén and in the south, but in practice, they are having trouble implementing them. Hopefully, these agreements will be implemented and, at some point, extended beyond unconventional hydrocarbons.  As I explained earlier, costs and inefficiency are a problem for conventional hydrocarbons just as much as they are for unconventional ones. A lot of conventional fields are beginning to reach their economic limit. Now is the time to decide either if there is something that can be done to maintain existing wells in production, or to shut them down when they become unprofitable.  If we are able to improve production and cost efficiency, and political and legal stability, Argentina can become a great place in which to invest exploration and development capital. A huge amount of money will be required to develop our resources and recover our energy self-sufficiency. This will obviously not happen overnight, but if the right measures are taken, many more investors will start coming to Argentina, and the ones that are already here will dedicate larger amounts of their global capital budget locally.

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