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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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Could Argentina’s Dead Cow Shale Patch Help Solve The Energy Crisis?

  • Latin America’s third largest economy is reporting record-breaking hydrocarbon production. 
  • Shale oil and natural gas output from the Vaca Muerta basin have been vital in Argentina’s push to ramp up production.
  • Some analysts are forecasting that Argentina will be pumping 1 million barrels of petroleum by 2026 seeing exports reach 500,000 barrels per day or more.
Dead Cow Oil

In a surprise development, Latin America’s third largest economy Argentina reported record hydrocarbon production for May 2022. For that month Argentina pumped an average of 574,465 barrels of crude oil and 136 million cubic meters of natural gas per day. Those volumes represent a 0.9% and 6.8% increase respectively over a month prior and a notable 13.9% and 6.9% higher year over year. The key driver of that impressive leap in production volumes was growing shale oil and natural gas output from the Vaca Muerta.  Ministry of Economy data shows (Spanish) that Argentina pumped 241,024 barrels per day of unconventional oil for April 2022 which amounts to 42% of the country’s total petroleum production. That is 6% greater than a month earlier and an impressive 57% higher year over year. Unconventional natural gas production is also surging seeing Argentina pump 75 million cubic meters of unconventional natural gas during April 2022, which was 15% greater month over month and a whopping 38% higher than a year earlier. Those impressive numbers make Argentina Latin America’s largest natural gas and fifth largest oil producer after Brazil, Mexico, Colombia, and Venezuela.

This tremendous production growth can be attributed to the successful exploitation of the Vaca Muerta shale. The geological body, which covers 12,000 square miles, is a late Jurassic to early Cretaceous age formation located in the Neuquén Basin, which covers most of Neuquén Province. That sedimentary basin, where conventional oil production started in the early twentieth century, is at the core of Argentina’s hydrocarbon sector is responsible for 46% of the country’s oil output and 67% of the natural gas produced. The exploitation of the Vaca Muerta is vital to the recovery of Argentina’s long-running economic crisis which has seen the country default nine times on its sovereign debt since independence.

The geological formation is believed to be the world’s second largest shale gas and fourth largest shale oil resource. The US EIA estimated in 2013 that the Vaca Muerta contains recoverable hydrocarbon resources totaling 308 trillion cubic feet of natural gas and over 16 billion barrels of oil. Argentina’s national government in Buenos Aires believes the geological formation possesses even greater volumes of hydrocarbons. In 2018 the Secretariat of Energy announced that the Vaca Muerta contained unconventional resources totaling 27 billion barrels of oil and 802 trillion cubic feet of natural gas. Those numbers include the formation’s proven reserves of 2.1 billion barrels of oil and 11.9 trillion cubic feet of natural gas. 

Those numbers point to the successful exploitation of the Vaca Muerta being a game changer not only for Argentina and its distressed economy but for South America where there is a growing focus on the need to enhance energy security. The exploitation of the Vaca Muerta also has the potential to ease the current global energy crisis where underinvestment by oil companies due to the 2015 oil price crash and pandemic along with the invasion of Ukraine has led to chronic energy shortages and soaring prices. Buenos Aires’ latest data indicates that the Vaca Muerta is finally delivering on the considerable promise shown by the formation over a decade ago when discovered by Spanish energy major Repsol. 

Some analysts are forecasting that Argentina will be pumping 1 million barrels of petroleum by 2026 seeing exports reach 500,000 barrels per day or more. For that to occur there will need to be substantial production growth, of around 77% from current volumes, with Argentina only pumping an average of 565,143 barrels of crude oil per day for the first five months of 2022. Natural gas output over that period is expected to surge to as high as 260 million cubic meters per day, which will allow Buenos Aires to significantly ramp up exports, which according to S&P Global will see Argentina rival Australia and Qatar for LNG exports. If those events occur, it will improve Argentina’s precarious balance of trade and deliver a substantial economic windfall for Buenos Aires while ensuring the country’s energy security.

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For that to occur, there must be significant ongoing investment in exploration and development drilling as well as related activities such as the development of crucial industry infrastructures like pipelines, and processing and storage facilities. Analysts estimated in 2018 that an investment of $120 billion in the Vaca Muerta between then and 2030 is required for the formation to be fully developed and realize its hydrocarbon potential. Elevated breakeven prices, estimated to be as high as $55 per barrel, in an operating environment weighed down by low oil prices deterred capital expenditures, but the recent oil price rally is acting as a powerful tailwind for investment. Soaring energy prices, with the international benchmark Brent gaining a whopping 37% since the start of 2022 to be selling for over $107 per barrel, are adding considerable momentum to the Vaca Muerta’s oil boom and foreign energy investment.

The attractiveness of investing in the Vaca Muerta is enhanced by the high-quality light sweet crude oil produced by the formation. The principal crude oil blend produced in Neuquén Medanito is a light and sweet grade, with API gravity of 42.5 degrees and very-low sulfur content of 0.2% which is low in contaminants. That makes Medanito cheaper and easier to process into high-quality low sulfur content fuels, seeing demand for the oil surging in European and U.S. refining markets. Some of the crude oil extracted from the Vaca Muerta is even lighter and sweeter making it an ideal diluent for blending with the heavier grades produced in southern Argentina. These characteristics mean that the petroleum produced in Neuquén has a low carbon footprint when extracted, refined and burnt, particularly in comparison to the heavier sour grades extracted in Venezuela, Colombia and Ecuador. 

The characteristics of the oil produced in the Vaca Muerta augment the attractiveness of investing in the shale formation. This is particularly so in a world where decarbonizing the economy and reducing pollution are priorities, thereby making it critical for energy companies to reduce their carbon footprints. Buenos Aires’ focus on implementing measures to boost foreign hydrocarbon investment further bolsters the benefits that foreign oil and gas companies can obtain from investing in the Vaca Muerta. The latest measures include plans to ease capital controls for energy companies and the launching of tenders for the construction of a crucial multi-billion-dollar pipeline connecting the Vaca Muerta to crucial energy markets in the Buenos Aires province. 

By Matthew Smith for Oilprice.com


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