If you can’t make money at current prices, then you won’t have investment. We understand that, our contractors understand that and the unions, at the end of the day, understand that.

Richard J. SPIES CEO PAN AMERICAN ENERGY

Positive prospects on the horizon

September 22, 2017

Richard J. Spies, CEO of Pan American Energy (PAE), talks to TOGY about the developments at the company’s blocks throughout Argentina and Bolivia, what to keep in mind as more progress is made in Vaca Muerta and how interested parties must work together to ensure that the country’s oil and gas resources remain globally competitive.

Established in 1997 as a joint venture between Bridas and BP, the company now accounts for 17% of the country’s production. In September 2017, PAE entered into a joint venture with Axion Energy to combine assets, establishing the largest private energy company in the country. The company expects to drill eight to 10 new wells in the Vaca Muerta oil window before the end of the year.

• On the Vaca Muerta framework agreement: “If we can be efficient, the investment will come and we will have this great increase in activity with a lot of jobs for qualified people. That was the incentive for everybody to sit down and figure out how we could make this work. The implementation of the agreement has been a process and we are still working through it in good faith on all sides. I am confident that it will be implemented as we agreed.”

• On the division of Aguada Pichana: “Aguada Pichana was a very large block and now it’s two large blocks. Having one operator potentially limited the ability and the speed at which it could be developed. With two operators, the idea is that there will be more activity and more rapidly.”

• On midstream infrastructure in Vaca Muerta: “The big picture question is, in a few years, as particularly gas production increases, will there be sufficient transport capacity to move additional volumes to the markets? For the next year or two, it appears there will be sufficient capacity because there have been declines in some of the larger, older, producing gasfields in Neuquén. Beyond that, if things develop as people believe they could, and if the industry is successful, then we’re going to have issues with the need to expand that capacity.”

• On competition: “In the oil business everywhere, everyone is investing or competing against each other effectively, and if you can’t make money at current prices, then you won’t have investment. We understand that, our contractors understand that and the unions, at the end of the day, understand that. We are working together trying to make sure we have the efficiency to continue to work.”
Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find an abridged version of the interview with Richard J. Spies below.

What was the impact of the Vaca Muerta framework agreement signed in January 2017?
The agreement in Neuquén with the unions was aimed at improving efficiency and productivity and through that, increasing the availability of jobs and activity at the same time, all based on the fact that there is a lot of work to be done in Vaca Muerta, as well as with tight gas in the province. Lots of activity is already taking place and a lot more activity has been announced, largely in pilot projects.
Because of the way the licences are structured, there’s a need to do pilot projects, and then a decision to commit to developments or not. If that development is committed to, it represents a step change in activity in Neuquén. It’s based on what we know to be able to increase efficiency such that we can compete with other basins in the world.
If we can be efficient, the investment will come and we will have this great increase in activity with a lot of jobs for qualified people. That was the incentive for everybody to sit down and figure out how we could make this work. The implementation of the agreement has been a process and we are still working through it in good faith on all sides. I am confident that it will be implemented as we agreed.

What are the main challenges that remain to optimising operations?
The government signed a decree that is a great step for bringing in used drilling and oilfield equipment. I applaud that step because there is an inventory of idle equipment in the US that services companies in Argentina can take advantage of.
The government has to pass regulations on how we will implement the decree. That’s still in process, but I am confident it will be done and we will get the equipment down here fairly quickly. It will then take time for services companies to actually make the commitment, decide what equipment to bring, and then bring it to Argentina. It will be a while before all that happens.
The other parts of the agreement are taking place on an individual company basis. Operators are working with their services providers and the unions involved. It’s not something that’s necessarily homogeneous. It’s more heterogeneous, depending on the operator and their needs.

 

What have been the latest developments in PAE’s Vaca Muerta pilot projects?
In late 2016, we drilled two horizontal wells in the oil window of Vaca Muerta in Bandurria Centro. We fracked them and put them on test. In 2017, we have drilled two additional horizontal wells and are finishing the completion of those wells. They’ll go on test very soon. Meanwhile, we have begun drilling the next two wells. We don’t have much to report in terms of results because we haven’t put those other two wells on test yet, but we will end up having eight to 10 wells drilled in the Vaca Muerta oil window in Bandurria Centro by the end of 2017.
We have drilled one horizontal side track in Coirón Amargo Sur Este, and we are talking to our partners about potentially doing another in 2017, depending on our agreement with them. There was a change of plans, as we had previously talked about drilling a deepening test to check the presence of tight gas in another well. We will still do that, but we thought because of the fairly interesting results we had from the first horizontal side track, that we would try another instead of the tight gas well right away. We are trying to decide what should take priority in that block.
We also signed an agreement with YPF, Total, Wintershall and the province of Neuquén regarding Aguada Pichana. We divided that block. PAE is the operator of the western part of the block and we expect to have a rig drilling horizontal wells in the gas window of the shale area before the end of this year.

What was the logic behind the partition of Aguada Pichana?
It depends on the viewpoint of the different players. Aguada Pichana was a very large block and now it’s two large blocks. Having one operator potentially limited the ability and the speed at which it could be developed. With two operators, the idea is that there will be more activity and more rapidly.
It offers an interesting chance for competition between the two operators. It’s not bad blood, but it’s human nature. Who can get better results and what can we learn from each other? That dynamic is attractive to the investors in the block and attractive to the province. The more activity there is, the sooner it will be more attractive to the unions as well. I think it’s a win-win all around.

What obstacles does existing infrastructure pose for the development of Vaca Muerta?
For the people developing blocks where there wasn’t much existing infrastructure, the challenge for the next couple of years will be to put in some infrastructure for what they’re working on. We have to do it at Bandurria Centro, for example. We will have to do something at Aguada Pichana Oeste, but then there is also an issue about where we can tie into existing infrastructure and facilities. We are looking at that and we think there are possibilities.
The big picture question is, in a few years, as particularly gas production increases, will there be sufficient transport capacity to move additional volumes to the markets? For the next year or two, it appears there will be sufficient capacity because there have been declines in some of the larger, older, producing gasfields in Neuquén. Beyond that, if things develop as people believe they could, and if the industry is successful, then we’re going to have issues with the need to expand that capacity.

Is the participation of mid-sized E&P players growing, particularly US and Canadian ones?
The composition of the industry in shale plays in the US is very different than what we have in Argentina. I don’t know how that will change in the future and I don’t know if we’ll be successful in bringing some of those players in. There have been expressions of interest from some and some have already tried it and decided they couldn’t make a go of it and left. Some new players are raising money and have expressed an interest, but those players are not active in the US.
I’ve had conversations with some of those companies and expressed an interest in having them come and work with us in Argentina. The perspective on investing in Argentina of a company that has been investing here or whose parent companies have been investing here for 60 years would be very different from one that has never invested in Argentina before. I think it’s still an open question and will remain that way for a while.

How has development of the San Jorge Gulf Basin evolved, given competition with Vaca Muerta for investment?
It’s a matter of efficiency. The investments in the San Jorge Gulf Basin have to make sense economically compared to other investments elsewhere. If we have good efficiency, what we have seen so far is that they can compete. To have investments in Neuquén, you have to have the efficiency to compete against investments elsewhere.
In the oil business everywhere, everyone is investing or competing against each other effectively, and if you can’t make money at current prices, then you won’t have investment. We understand that, our contractors understand that and the unions, at the end of the day, understand that. We are working together trying to make sure we have the efficiency to continue to work.
Each field is probably a little bit different, even in the San Jorge Gulf Basin. Each operator is a little bit different. Some operators publicly say that they won’t continue their activity there and conversations are going on to perhaps change some operators, but I think that can be positive too. If a new operator approaches it differently and has different ideas, perhaps they’ll find more opportunity in those areas.
It’s difficult right now with some of the processes going on around us, but I think at the end of the day it will be healthier for the whole basin.

What have been the latest developments at the Acambuco field in the Northwest Basin?
The Northwest Basin is, in a sense, an old basin. It has been in production for 100 years. In one way, it’s pretty mature.
There was another round of deep gas development that went on in the 1990s and 2000s, and that is what our Acumbuco operation essentially is. That operation has historically been the most efficient operation we have had, as well as the safest. Our people up there do a great job.
I would love to do more there. The question is finding the way to do more there. There are a few unproven geological ideas that we think could perhaps lead to something, but nothing that I could commit to now. It would be a shame if we can’t find a way to do more.

How do you expect opportunities in Argentina’s different basins to evolve in the midterm?
I expect we’ll see a lot of development going on in Neuquén. I expect we’ll see a significant increase in gas production coming out of that basin, both from the Vaca Muerta shale gas, as well as the tight gas opportunities there.
I expect that shale oil will stabilise overall oil production, at a minimum. It continues to decline, so I expect the shale will at least stabilise it and prices will increase a little bit in the next two to three years, and then shale will drive it to actually increase.
The San Jorge Gulf Basin will continue to be a basin with activity. It is a basin that is simple in some respects and very complex in others, and that geological complexity is such that the companies that operate there will continue to be driven to find opportunities that they will want to take advantage of. I think you’ll see activity in the San Jorge Gulf Basin for a long time. Some of the operation may change, but I think that activity will continue to be interesting.
In Tierra del Fuego, it’s a question of having markets, particularly if it’s gas that’s found. The activity will at least keep the production up.
In the Northwest Basin, it’s a question of finding geological opportunities. Otherwise, it may continue to decline.

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