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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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Argentina's Oil Revolution: Vaca Muerta Shale Fuels Economic Hope

  • Argentina's Vaca Muerta shale formation is driving a significant increase in oil and natural gas production, positioning the country as a major energy producer in South America.
  • Investment in the Vaca Muerta by national and foreign companies, including YPF, Exxon, Chevron, and Shell, is contributing to the growing output and economic potential of the region.
  • Despite Argentina's current financial crisis, the booming hydrocarbon sector, particularly shale oil and gas, is contributing substantially to the country's GDP and is expected to play a major role in its economic recovery.
Vaca Muerta

For a decade, Argentina’s governments have viewed the 7.5-million-acre Vaca Muerta, or Dead Cow, shale formation as an economic silver bullet. Since President Cristina de Kirchner nationalized YPF in 2012, Peronist administrations have viewed exploiting the Vaca Muerta as a means of funding excess fiscal spending while restoring the economy to growth. Regardless of rising hydrocarbon output, Argentina has slipped into its worst financial crisis since the 2001 economic collapse. Last year, inflation roared into triple-digits, hitting a multidecade high of 160.9% in November 2023 with it fueling a cost-of-living crisis that sees 40% of Argentineans living in poverty. Despite this chaos, Argentina’s unconventional oil and natural gas boom is gaining momentum, with production hitting new highs.

The key driver of Argentina’s once-in-a-lifetime oil boom is the Vaca Muerta shale formation situated in the Neuquén Basin, which lies in Patagonia. The geological body, which analysts believe to be superior to most U.S. shale plays, is thought to contain 16 billion barrels of oil and 308 trillion cubic feet of natural gas, making it one of the largest unconventional hydrocarbon resources in the world. The Vaca Muerta is frequently compared to the prolific Eagle Ford shale in Texas, with the U.S. unconventional hydrocarbon play pumping around 1.2 million barrels of oil and seven billion cubic feet of natural gas daily. The U.S. Energy Information Administration (EIA) previously claimed that the Vaca Muerta and Eagle Ford share similar depths, thicknesses, pressures, and mineral compositions. 

Importantly, oil industry consultancy Rystad Energy claims that Vaca Muerta’s oil yield per foot is superior to any major U.S. shale play. Those numbers underscore the Vaca Muerta’s considerable hydrocarbon potential and the tremendous economic benefit it will deliver for a cash-strapped Buenos Aires. By successfully tapping the geological body, Argentina will emerge as a major South American energy producer. Rystad is tipping that the Neuquén region will become a net oil exporter with the Vaca Muerta expected to be pumping one million barrels daily and generating $20 billion in revenue by 2030. The development of the shale play will allow Argentina to become a major natural gas exporter at a time when there is a worsening regional shortage because of Bolivia’s rapidly declining production.

The successful ongoing exploitation of the Vaca Muerta is the reason for Argentina’s hydrocarbon production regularly hitting new all-time highs over the last decade. For November October 2023, data from the Ministry of Economy shows that Latin America’s third-largest economy pumped a record average of 666,494 barrels per day. This represents an impressive 9.5% increase compared to the same month a year earlier, although the total monthly output was 1.3% lower than October 2023. Natural gas output also grew, rising 3% year over year to 4.6 billion cubic feet per day, although it was flat month over month and substantially lower than the all-time high of 5.1 billion cubic feet daily recorded for August 2023.

The Vaca Muerta’s rising unconventional hydrocarbon production is driving that notable leap in output. Government data for November 2023 shows shale oil output grew by a stunning 29% year over year to 344,749 barrels per day, comprising 52% of Argentina’s total production against 45.5% a year earlier. Indeed, a month prior, shale oil, for the first time ever, made up more than 50% of Argentina’s total petroleum output. For that month, shale gas production averaged 2.7 billion cubic feet per day, seeing it comprise almost 61% of total natural gas output against 54% a year earlier. Hydrocarbon production in the Vaca Muerta will keep climbing despite the volume of natural gas lifted for November 2023 being lower than the all-time high of 5 billion cubic feet per day reported for August 2022.

National oil company YPF, which is 51% owned by the Federal Government in Buenos Aires, plans to invest between $5 billion and $6 billion annually, with around half of that expenditure earmarked for shale oil and gas operations. YPF expects to double crude oil production and be pumping 30% more natural gas by the end of 2028. Argentina’s national oil company is the Vaca Muerta’s largest landholder and the country’s main hydrocarbon producer accounting for half of all oil production and 27% of national natural gas output. YPF’s forecast production growth is supported by plans to drill 5,850 wells across its acreage by the end of 2027, with 2,850 wells to be drilled for new shale oil developments during that period. The company’s projected production growth will give Argentina’s oil and natural gas output a solid boost contributing significantly to the country’s economic recovery. 

Foreign energy companies, including Big Oil, are also making sizeable investments in the Vaca Muerta, with Exxon, Chevron and Shell, along with many smaller upstream drillers active in the shale play. This growing investment has seen Vista Energy, Shell, and then Pan American Energy, which has BP as a majority shareholder, become the second, third and fourth largest oil producers in the Vaca Muerta. Shell intends to expand oil production in the Vaca Muerta by investing more than the $500 million it is currently spending on operations in the shale play. The supermajor claims the development of the hydrocarbon rich Vaca Muerta will see Argentina become a leading natural gas supplier in South America and a net exporter of the fossil fuel. 

Those factors, along with the Vaca Muerta’s competitive steadily decreasing breakeven price, currently pegged at around $36 per barrel, make it easy to understand why the shale play is attracting considerable investment. This is enhanced by the light sweet oil, with API gravity of 40.8 degrees and 0.15% sulfur, according to Equinor’s latest assay, being produced by the formation. Those characteristics not only make it cheaper as well as easier to refine into high-quality, low, emissions fuels but endow Vaca Muerta’s oil with a low carbon footprint to extract and process. Rystad believes the growing investment will lead to 400 new wells coming online annually by the end of the decade, supporting the production of one million barrels daily. 

The considerable growth in hydrocarbon output will bolster Argentina’s crisis-prone economy. According to the Ministry of Economy, hydrocarbon operations contributed 11% of Argentina’s gross domestic product (GDP) during 2022. This is expected to rise at a steady clip as the exploitation of the Vaca Muerta gains momentum and Argentina’s hydrocarbon production grows, with oil expected to peak at 2.2 million barrels daily by 2035. The ministry expects Argentina’s oil industry to be generating nearly a fifth or 19% of the country’s GDP by 2030. That will give the economy, and Buenos Aires coffers a solid boost, at a crucial time with Latin America’s third-largest economy caught in its worst crisis since the 2001 collapse. Indeed, newly inaugurated President Javier Milei is committed to reinvigorating Argentina through radial economic reform and shock therapy, which will make the situation worse before his policies stabilize the economy.

By Matthew Smith for Oilprice.com


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