Unconventional projects have become the best that YPF has, economically speaking.

Pablo BIZZOTTO Executive Vice-President of Upstream YPF

YPF: Working in better ways

May 21, 2018

Pablo Bizzotto, YPF’s executive vice-president of upstream operations, talks to TOGY about the company’s E&P objectives and how it plans to meet targets, the importance of partnerships and sound policy, and midstream considerations for Vaca Muerta’s development. YPF is moving towards a production matrix in which unconventionals will make up at least half of overall output by 2022.

• On productivity: “The current agenda is productivity and this is no small thing for Argentina. It is clear that the intention of the federal government is to impose the issue of productivity in every industry. If we are competitive, Argentina offers investment opportunities of every kind. We are clearly focused on competitiveness.”

• On the unconventionals future: “We are essentially promoting and trying to accelerate our pilots, adding value to Vaca Muerta more rapidly, because today we are able to do it from both a financial structure and technical capability standpoint. Unconventional projects have become the best that YPF has, economically speaking. We did things so well that now we have the pressure of having to do things much more rapidly.”

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

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What are the upstream goals set out in YPF’s five-year investment plan, which was announced in late 2017?
The plan contemplates a 25% growth in production throughout five years. In 2022, more than 50% of total production has to be associated with unconventional resources, both tight and shale, which means an average annual growth of 5% in those areas. The first year is the most difficult, so this does not mean that in 2018 we will already be growing at a rate of 5%.
2017 was a transition year in which activity decreased due to the drop in international prices. 2018 will be a transition year between the decrease of activity due to declining international prices and our strategic plan to attain aggressive growth. There are two main vectors involved, the first of which is that, in our basic production, conventional resources still have a huge importance for YPF’s structure. Our first goal is to get conventional production to stop declining, or at least reduce this decline as much as possible through enhanced recovery and optimisation techniques in mature fields. The other vector is unconventionals, which has to provide growth.
Our message is that every cubic metre of production is worth the same. We need to motivate the rest of the organisation, especially at a time in which there is so much marketing involving Vaca Muerta and unconventionals. The way to do this is by stressing the fact that all production is important.

What is the role of mature fields within this programme?
We have launched a new development organisation oriented towards the growth of specific treatment drivers. We have the development department, and below that we have departments for tight studies, shale studies, water flooding studies for secondary recovery in conventional fields, tertiary or EOR – because one of our goals is to accelerate tertiary recovery – and another, which I believe to be crucial for technical specialties. This last department contains all the geoscience subject areas within its team and is in charge of carrying out the technical reviews of the project to guarantee the quality of the studies.
The other main goal is to decide how we are going to do things. Each of these lines of study is devoted to one type of development, one type of rock. The technical specialties department determines all the workflow and work methodologies. It standardises everything. YPF was previously lacking the definition of work methods.
Secondary recovery still has a great opportunity in our fields, which have a recovery factor of about 17-18%. By implementing all the enhanced recovery techniques, one can reach 40% or more. We have the same amount of resources in Vaca Muerta that we have in tertiary recovery potential distributed in all the different basins. This is the sum of all the different resource opportunities associated with the application of EOR by means of polymers or surfactants. We haven’t developed these resources as fast as we should have.

What is YPF doing to meet these tertiary recovery goals?
We want to become leaders in Argentina and Latin America in tertiary recovery. To accomplish this, we have devised an aggressive development plan with pilots. We will work with the concept of factory production, as in unconventionals, doing everything in modules and reducing the fields’ risk in a piecemeal fashion. We will incorporate about 10 tertiary recovery plants per year. Over the next 10 years, we should install 100 modular tertiary recovery plants, in most cases using polymers. Half of those resources are in the San Jorge Gulf Basin.
Our guiding objective is to prioritise technical and operational aspects. I think it is crucial to raise the company’s technical bar and operational standards, and we are working to accomplish this. For example, YPF has placed the more experienced people in Vaca Muerta. We have a very solid team there, but we must also continue to dedicate resources to it, because activity levels will grow substantially.
Other places, from where we have taken people with seniority for Vaca Muerta, need to be strengthened once again. In some cases, they need to be developed. For instance, in terms of tertiary recovery, we almost have no experience in Argentina. We have a pilot that is doing very well in Chubut called Grimbeek. This is one of the best pilots worldwide in terms of its response to tertiary recovery.

How will you reach a lifting cost of USD 10 per barrel in Vaca Muerta?

When you work with unconventionals, your benchmark is the United States, which is always improving. Therefore, what seemed impossible – a cost of USD 10 per barrel – needs to be reduced even further. I think we are close to reaching the USD 10 goal with very tangible measures that are already being implemented. The development cost is the division of two variables: capex for drilling the well, divided by the accumulated production the well will have throughout its entire life. Reducing costs, for instance, using a low-quality sand, can in turn affect the well’s productivity.
Our strategy focuses on two or three aspects, one of which is drilling increasingly longer wells. We are taking our entire slim design, which is a reduced-diameter design that lowers costs, to the technical limit of the equipment we have, which is 2,500-2,700 metres horizontal. To this, you need to add the 3,000 metres of depth in Vaca Muerta.
Without any kind of inconvenience, we have taken all our wells to the greatest length we can achieve and that the area limitation allows. We are doing geosteering and I am convinced that this will lead to the next step in Vaca Muerta. Making the wells longer has a marginal cost because you have already drilled the vertical well. This should lead to a reduction in development costs.
Another factor for reducing costs is having an adequate contractual framework. As we advance, we learn more and we develop our contractual architecture in a different way. Our goal is that our contractors improve their efficiency just as we do. I think that the addendum for unconventionals signed in January 2017 has been crucial for this.

What has been the importance of the framework agreement signed for Vaca Muerta?
It has enabled us to discuss productivity with the unions and we have stopped discussing conflicts. I have met with union leaders to explain the problems we had in carrying out more fractures per day. We reached an agreement and went from performing two fractures to six fractures per day. If I don’t fracture 24 hours a day, it makes no sense to drill four wells in one location. I have four wells so, while I am lowering the plugs in one, I am fracturing in another, and drilling wellbores in another. This is what factory-type production is all about.
When one explains to the union leaders and the people in general why a new labour agreement is needed to contemplate unconventional operations, everything is much simpler. I think this is also a matter of communication. We have achieved a certain level of understanding, and even though we continue to argue, we argue about different topics.
The current agenda is productivity and this is no small thing for Argentina. It is clear that the intention of the federal government is to impose the issue of productivity in every industry. If we are competitive, Argentina offers investment opportunities of every kind. We are clearly focused on competitiveness.

 

How does YPF benefit from partnering with international companies?
We have partners that can invest anywhere in the world, so to capture that capex and have them invest in YPF, we need to be reliable and competitive. We have partners that trust us and we have very important teamwork. We work with them in the United States with their specialists in workshops, and then an action plan is devised and we follow it systematically. This is what we want to do in secondary and tertiary recovery.
We also need to know how to profit as much as possible from these partners, which have very solid processes in other segments such as conventionals, for example, where we can incorporate their methodologies, expertise and approaches. In all our projects, we have secondees from our partners, and they are generally people with distinctive knowledge and seniority. This also provides cultural growth for our people. It is a very interesting synergy.

What does geosteering entail and how is YPF making improvements to this method?
Geosteering requires two components, one of which is an azimuthal gamma ray, which is a 3D gamma ray that identifies rock quality in all three dimensions and allows you to know if you need to move upwards or downwards while drilling, which is a feature not present in the traditional gamma ray.
The other component is drilling with an RSS [rotary steerable system], which is the next generation of what is known as a mud motor. Mud motors have a fixed drilling angle, while the rotary steerable system can change the drilling angle metre by metre in any of the three dimensions without withdrawing the tool. We have a navigation window of plus or minus 5 metres vertically.
At a depth of 3,000 metres, in a well thousands of metres long, the uncertainty cone increases. As the length of the well increases, it is harder to maintain the drilling trajectory. For every metre, we have an indicator of drilling quality. We don’t just measure the time, we also measure the quality of the well that is delivered. At this point, we place the drilling room geologists that work 24 hours with the driller following the well’s trajectory.
We are developing a mobile platform to monitor geosteering for 24 hours from one’s smartphone. A geologist that is at his home could see the well’s trajectory on his phone. This has great significance both for costs and productivity.

Why do you believe that geosteering is the future of Vaca Muerta?
If I manage to drill a homogeneous rock, things will be faster because I will not encounter an intercalated layer of a different hardnesses that will slow the drilling speed. On the other hand, if I can look for the best rock quality, which is related to organic matter and measured using gamma rays, and I follow it, then a large part of the lateral branch will go through the best rock quality. If the rock is completely homogeneous, stimulation treatment is ideal, due to a phenomenon known as divergence, which consists in how the flow is divided throughout all the holes made in the rock.
There was a very important study in the United States that said that half of clusters are not productive. This has to do with the fact that when you perform stimulation, there is a lot of fluid going through some of the holes and very little through others. If the rock is homogeneous, then divergence is ideal and the fluid intake of every hole is essentially the same.
This is why I think that one can improve stimulation efficiency with geosteering. Statistics show that nearly 50% of these holes have not sufficiently responded to treatment and are thus not productive, so there is a lot of room for improvement.
Also, in Vaca Muerta, it is known in the industry that casing deformation takes place when the well goes through one of these intercalations and then treatment with its pressure generates a movement of the casing, creating some problems in performing the plug and perf. If I could avoid these intercalations, then I would not have any operational inconvenience. We are implementing this now.

What role has YPF played in developing Vaca Muerta’s midstream infrastructure?
During the first years in Vaca Muerta, YPF took care of everything in terms of infrastructure. The company built a USD 200-million crude oil treatment plant with the latest technology. It is at the heart of the core oil area, which includes Loma Campana, La Amarga Chica, Bajada de Añelo and Bandurria. Even though this plant is owned by the Loma Campana joint venture, it will also receive production from other fields, and it provides an initial capacity to enable further development and de-risk the other blocks.
We are also building the Loma Campana-Lago Pellegrini oil pipeline, which is the expansion needed to evacuate all this oil. We have already finished the tender, and construction will begin soon. It will require a substantial investment of about USD 80 million. That pipeline will enable the evacuation of a significant part of the oil in that area. Surely others will pay a fee and make use of it.
We developed the Rincón del Mangrullo tight gas project in record time. We built a gas pipeline that connected Rincón del Mangrullo with Loma de la Lata, and through this gas pipeline, we will evacuate the production of the Rincón del Mangrullo project, whose first wells have been a great success. Production from Fortín de Piedra is also being evacuated through this pipeline, thus helping Tecpetrol.
The expansion of the Pacific gas pipeline has also been planned, and YPF played a crucial role in promoting it. This will allow for the increased evacuation of gas from YPF and other operators. El Orejano, which was the first shale gas project in Vaca Muerta, was an initiator and helped promote this. Today, El Orejano produces approximately 4.7 mcm [166 mcf] per day from just 40 square kilometres.
What YPF did was foundational. It paved the way and brought technology into the country. In terms of infrastructure, YPF is working closely with the government as a facilitator and as one of the main parties interested in the railway from Bahía Blanca to Añelo. I think that the train is an absolutely necessary means of transportation to reduce costs.

How does YPF manage logistics for the sand and water needed for unconventional projects?
Within our own operation, we have a strategic last-mile plan for mainly water and sand. With AESA, we are working with a sandbox company on containers that transport sand in boxes. In this way, when you begin fracturing, you already have the stock of all the containers filled with sand that you need in the pad. If there is a surplus, you can move it. Of course, there is also water distribution with hoses.
In terms of logistics, we are working on general infrastructure, always checking our sand productivity, our mine and our sand sources, and also working on our future resources. We will grow in the unconventionals segment and require a lot of drilling equipment and coiled tubing. We continue to work with the services companies so that each one has the available capacity when it is needed.

How do you expect the pilot projects evolve in 2018?
We are essentially promoting and trying to accelerate our pilots, adding value to Vaca Muerta more rapidly, because today we are able to do it from both a financial structure and technical capability standpoint. Unconventional projects have become the best that YPF has, economically speaking. We did things so well that now we have the pressure of having to do things much more rapidly.
We are also working very hard on promoting other shale formations such as Los Molles. We have very auspicious results there in both the areas we operate and the ones we do not operate. We are pushing our operating partners, providing our experience and knowledge to move forward more rapidly. For example, we had a workshop with the team from Total to show them all that we had learned so that they could do things in the best possible way in Aguada Pichana from day one.
In this respect, YPF has shown great solidarity, sharing everything that it has learned, publishing everything and putting our best people at the disposal of our operating partners. This is a significant part of our agenda. We have to be competitive and the technical hierarchy, with discipline in the use of capital, has to be a beacon for upstream.

What are your goals for YPF’s upstream operations?
My goal is to make the organisation develop this medium-term vision and plan. I think that this should lead to better results for the company, but more importantly, to a disciplined use of the all the company’s resources and capital.
This might be a bit ambitious, but I want YPF’s upstream to be admired. When we present what we are doing in unconventionals, we feel proud. People abroad are impressed by the speed at which YPF has overcome the learning curve. We need to transfer this to the rest of the company. The idea is a new DNA to make our upstream a sector admired by the rest of the companies, and not only in Argentina.
We have partnerships with many big companies such as Chevron, Shell, ExxonMobil, Total, Statoil, Petronas and Schlumberger. I have always maintained that having partners such as Chevron is one of the secrets for being competitive in the unconventionals business. Having partners that are constantly challenging you to earn the budget’s capex is completely different than when you are 100% alone. Having these world-class partners has been extremely helpful.
Since late 2017, we have made all these organisational changes and are devising a different organisational architecture which we are still working on, but that we think will be key to carrying out this strategic plan.

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