There is no doubt that Vaca Muerta and other unconventional areas are great news for our country, but to transform those massive resources and proven reserves will require tremendous efforts.

Daniel KOKOGIAN President NEW MILESTONE OIL & GAS

Realistic approaches

June 21, 2017

TOGY talks to Daniel Kokogian, president of New Milestone Oil & Gas, about new agreements with labour unions and how the industry has adapted to a low oil price environment. In January 2017, President Mauricio Macri announced a new framework agreement aimed at increasing investment in the country’s unconventional plays in January 2017. The deal was the result of negotiations between labour unions, oil and gas companies, and Argentina’s provincial and national governments.

• On relations between labour unions and industry: “Problems arise when a union’s decisions start to impact the way business is done. The unions should not be telling companies how to operate their businesses.”

• On positive outcomes in a time of low prices: “The economic distress led to reduced equipment use and a decrease in drilling, but an increase in the time available for the technical groups to better understand the fields they were working on.”

Kokogian also discussed tempering expectations for Vaca Muerta’s development and the importance of establishing small and medium-sized oil companies to boost Argentina’s overall hydrocarbons production. Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Daniel Kokogian below.

What is the outlook for the development of gas resources in Argentina?
You need to take into account macroeconomic and political perspectives that include the dependency of our energy matrix on natural gas. It is important to understand that it can take decades to have a real, consistent change involving the massive deployment of renewable capacity. In the meantime, natural gas plays the primary role as our energy source, representing almost 60% of the total energy matrix, which is why priority has been placed on the natural gas industry, especially unconventional gas resources.

What is the relationship like between oil and gas players and the labour unions in Argentina?
For many years, there was constant chaos regarding the unions’ decision making for the industry, which I say as a former union leader. Problems arise when a union’s decisions start to impact the way business is done. The unions should not be telling companies how to operate their businesses.
We have had some awkward situations. For instance, one company that imported very modern equipment needed only three employees to operate. The union stated that if the number of workers needed to operate that equipment was not higher, they would not work at all. What is the point of bringing in new technology, then? This example shows some of the excess leeway the unions had.
I believe that the enactment of the framework announced by President Mauricio Macri in January 2017 was necessary, and the best decision was to start implementing it in the unconventional sector, which had specific characteristics that made it important to start work there.
The government and industry players were able to come to an agreement with the union in Chubut and, as of May 2017, they are negotiating with the one in Santa Cruz. This will eventually lead to some type of agreement, and the unions seem quite receptive to change. I believe that we have all reached a point where we agree that we cannot move forward in the way we had been working.

What challenges does the industry face in meeting development expectations for Vaca Muerta?
A paradigm needs to be changed at a societal level, because we are being very optimistic in the message we send to society. When we try to convince the Argentinian people that Vaca Muerta will make us almost like a Middle Eastern oil country, we are sending a misleading and confusing message, and these messages create expectations that are quite unnecessary.
There is no doubt that Vaca Muerta and other unconventional areas are great news for our country, but to transform those massive resources and proven reserves will require tremendous efforts, both technical and financial.
Having resources is very good, but you must transform them into reserves if you want to profit, otherwise they will just sit there. It is easier to transform resources into reserves at selling prices of USD 100 per barrel, but at USD 50 you are at the limit, so you have to either reduce production costs or stop drilling.

 

What advances in Argentina’s E&P sector were spurred by low oil prices?
The decrease in oil prices has led to major improvements in two areas. First, production costs were reduced, to a large degree.
Second, we stepped out of the paradigm of vertical wells. Almost every company now works with horizontal wells, which has led to a considerable increase in productivity. Operators who oversaw the wells were happy with the downturn, because they finally had the time to analyse the work they had to do. If operators had to drill five wells in a month, they could not even begin to analyse the first, knowing they had four other wells to do.
The economic distress led to reduced equipment use and a decrease in drilling, but an increase in the time available for the technical groups to better understand the fields they were working on. As a result, in just one year, well drilling performance significantly improved, not only with the change from vertical to horizontal wells, but also in the exploitation of horizontal wells, where technical groups were able to develop tailor-made solutions.

How do Vaca Muerta’s resources compare with the shale plays in North America?
The industry is capital-intensive, but analysis- and intelligence-intensive above all. You need to go through an analytical phase before getting to the capital part of the equation, but in Argentina, we started the other way around.
Vaca Muerta is not better or worse than the Permian or Eagle Ford formations in Texas; you can find wells that are better and others that are worse. The difference does not rely on the subsoil, but on what is above the surface.
I do not intend to underestimate Argentina, but if I talk about the United States I take into account the vast economic power and the completely different political, economic, financial and legal characteristics. The businesses there and here are completely different.
In the United States, you have 50 companies offering to drill for you every time you need them. On top of that, the owner of the drilling equipment comes to the well with a drilling truck and prices are discussed directly on site.
We cannot compare ourselves with the United States or take them as a reference point unless we aim to become a second United States in 10 or 20 years.
We hear about the shale revival in the United States. Of course, they reduced costs, but they had to lay off 400,000 employees, several companies went broke, and so on. Those that survived are back to drilling, as the barrel price is up to USD 50, but they are still indebting themselves at low interest rates to do so.
They will keep doing this until OPEC decides to drop prices again, or the increase in US shale production impacts the prices. It seems the latter alternative has more chances of happening. Then these companies will let other employees go and stop production for a time, living off their reserves. This is not what happens in Argentina and we are never going to be able to be like that.

What is the status of the domestic oil industry in 2017?
We could say that we are almost self-sufficient. We import some crude grades, but we export others. Production is decreasing a bit, but this is a direct result of the conditions I mentioned earlier: companies stopped drilling because the activity led to losses, not profits, in many areas.
With this in mind, we will need to modify the industry’s structure. We might need to do what Canada did and scale the transformation according to our industry’s size.
When a country has a portfolio of 500 fields and 10% are contributing 90% of total production, while the others are almost completely forgotten when the time for annual capital allocation comes, the fields need to be reallocated and assigned to smaller business structures. This is especially true when most fields belong to a few companies. I’m convinced that the portfolio optimisation of the major operators is mandatory.

What are your expectations for Argentina’s offshore campaign, which will kick off at the end of 2017?
I think the Austral Basin will become a major gas source in the next decade. When I mention the basin, I am also talking about onshore fields – I believe that there is still a lot of work to be done in the onshore business.
On the other hand, we have the offshore business, which also entails a very high risk, the risk of the unknown. We need to head out and explore. I know that we will not find what Brazil found in the pre-salt following the trends in macrogeology. From the Brazil-Uruguay border to the south, the geological history is completely different.
I believe that we are doing everything we need to be doing right now. We need to minimise costs, as this is a very costly practice due to the large areas that need to be covered.
The Ministry of Energy and Mining created an agreement for the seismic procedures and YPF made an agreement with Statoil to study the potential of the area. I think that in the not-so-distant future we may have useful findings. These areas deserve at least an exploration campaign.

Are Argentina’s subsidised barrel prices sustainable at current levels?
I believe that this will become essential, otherwise production will steadily decrease, we will have to increasingly rely on imports and the transition to an international market price will have to be closely managed. If the price for the next five years will be between USD 45 and USD 60, I can assure you that half of the fields in Argentina will close.
Either we implement the solutions I mentioned before and support the creation of small and medium-sized oil companies, or we face difficulties in the future. If we have 100 oil SMEs working alongside large oil companies, we might be able to match the production volume of the large companies, with lower production costs.
Canada did exactly this. The average production of a well in Canada is very low, but when you combine the small outputs of hundreds of single operators, you obtain a considerable overall production.

What are your expectations for production in Argentina?
If there is no incentive for the San Jorge Gulf, which produces 30% of the oil in Argentina, production will decrease, without a doubt. We need to come up with a viable solution.
The production of natural gas will increase, as I believe it will receive across-the-board incentives. These will affect tight and shale gas, for example, in Vaca Muerta and other fields. We still have a lot of gas in Argentina. I am not sure how much we will be able to produce, because production is not the only factor in the equation.
The oil structure is present in many fields in Argentina. There are two or three major fields, but many smaller ones contribute to overall production.
Regarding natural gas, five areas were responsible for 90% of the country’s total production, including Loma de la Lata, Ramos, Aguada Pichana, the Austral Basin and the Northwest Basin. Production in all is currently declining, except offshore in Tierra del Fuego, where it is increasing.
Loma de la Lata used to produce 45 mcm [1.59 bcf] per day, but we expect it to decrease to around 5 mcm [177 mcf] per day. Wells performing well in Vaca Muerta are producing around 3 mcm [106 mcf] per day. The tight gas reserves in Rincón del Mangrullo produce 5 million mcm [177 mcf] per day.
Considering the whole picture, I believe that reaching self-sufficiency is already a difficult objective that will take a few years.

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