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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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Vaca Muerta's Sweet Crude Attracts Global Energy Giants

  • Argentina's Vaca Muerta shale produces an increasing volume of oil and gas, alleviating the country's economic distress.
  • The development of Vaca Muerta impacts regional trade, reducing Bolivia's gas exports to Argentina and boosting Argentina's self-sufficiency.
  • Vaca Muerta's low extraction costs and high-quality light sweet crude oil make it an attractive investment for global energy companies.
Vaca Muerta

Argentina’s shale oil and gas boom is gaining momentum despite the political and economic dysfunction engulfing Latin America’s third-largest economy. There are signs that Argentina will become a major source of unconventional gas and a top regional petroleum producer. This is occurring at a time when Argentina is being rocked by another financial crisis, which is the worst to occur since the depression of 1998 to 2002. Inflation has spiraled into triple digits, a fifth of the population is unemployed, and over 40% of Argentineans now live in poverty. If the economic crisis roiling Argentina was not enough, the country of 46 million goes to the polls in October 2023 to choose a new president, with far-right libertarian economist Javier Milei the favorite after emerging victorious in the early-August 2023 presidential primary.

In May 2020, during the peak of the COVID pandemic, Argentina defaulted on its sovereign debt for the ninth time in its history. By 2022, there were fears of yet another default as a once-in-a-lifetime drought battered Argentina’s fragile economy where the agricultural sector contributes seven percent of gross domestic product (GDP). Alarmingly, Argentina’s sovereign debt totals nearly $400 billion, which amounts to roughly two-thirds of the country's 2022 GDP of $632 billion. This highlights the considerable burden created by Buenos Aires' excessive borrowing to prop up a fiscally fragile economy. 

The crisis roiling Argentina’s economy is so severe that inflation for July 2023 was 113%, and annual GDP growth is forecast by the IMF to be a paltry 0.2%. The spiraling cost of living, coupled with rising unemployment and poverty in a country frequently beset by economic crises, will drive a backlash against the traditional political parties at the polling booths for this year’s general election.

For over a decade, Buenos Aires has viewed the tremendous unconventional petroleum potential of the 8.6-million-acre Vaca Muerta shale as a silver bullet for Argentina’s economic woes. It was that belief that drove then-President Cristina Fernandez de Kirchner to seize 51% of YPF from Spain’s Repsol so as to nationalize the energy company. YPF, after nationalization, emerged as the key player in the Vaca Muerta, where it controls around 40% of the shale formation’s acreage. 

By June 2023, the geological body was pumping an average of 296,577 barrels of shale oil per day, which amounts to just under 48% of Argentina’s total petroleum output for that period. That volume represents a remarkable 24% increase over the 239,530 barrels per day lifted from the Vaca Muerta for the same period during 2022. Unconventional natural gas production is also rising at a notable rate. For June 2023, 2.9 billion cubic feet of natural gas was pumped from the Vaca Muerta, representing a 6.5% increase year over year. 

It is Argentina’s growing natural gas self-sufficiency which is not only leading to an improved balance of trade for the crisis prone country but also impacting Boliva’s exports and hydrocarbon sector. Argentina is a key recipient of natural gas from Bolivia, which is the Andean country’s second-largest export by value. For over a decade, Bolivia’s natural gas output has been in decline, with exports to Argentina and Brazil expected to end by 2030. The development of the Vaca Muerta and steadily rising shale gas production will likely be the final nail in the coffin for Bolivia’s once-thriving natural gas industry.

In July 2023, the first phase of the Néstor Kirchner Gas Pipeline was inaugurated. The $1.5 billion first stage of the pipeline connects the Vaca Muerta in Neuquen province with Salliquelo, an area west of Buenos Aires where the gas will be processed and added to Argentina’s supply network. This will further reduce dependence on natural gas imports, boost takeaway capacity from the shale formation and go a long way to addressing Argentina’s balance of trade deficit, which for July 2023 amounted to $649 million or roughly a third of the whopping $1.7 billion deficit reported a month prior.

The strong growth in shale oil and gas production from the Vaca Muerta points to Argentina experiencing a solid increase in national hydrocarbon output, which will further reduce the trade deficit and strengthen the economy. For June 2023, Argentina’s oil production totaled an average of 620,195 barrels per day, which, while lower than the all-time high of 631,103 barrels per day hit in March 2023, was a notable 8% higher than the same period a year earlier. 

Such solid production growth has triggered considerable speculation that the Vaca Muerta could be pumping as much as one million barrels of oil by 2030, or more than triple the average of 291,377 barrels per day lifted during the first six months of 2023. If that occurs, it will see Argentina become a major regional and global oil producer which will give the troubled economy as well as government coffers a solid boost.

The light sweet oil being produced from the Vaca Muerta, which is light with an API gravity of 39 degrees to 42 degrees and sweet with a sulfur content of less than 0.5%, is cheaper and easier to refine into high grade fuels. This makes it particularly appealing in a world where fuel emission standards are continuously being tightened. According to consultancy McKinsey, as quoted in LatAm Investor, the carbon intensity for extracting the oil in the Vaca Muerta, which is 15.8 kilograms of carbon per barrel of oil equivalent produced, is one of the lowest globally and below the industry average of 23 kilograms. This enhances the appeal of the Vaca Muerta for foreign energy companies, especially  with considerable pressure being placed on the global oil industry to reduce greenhouse emissions and become carbon neutral.

The quality of the Vaca Muerta play is underscored by this statement from industry consultancy Rystad Energy:

“. . . there are no issues with the quality of Vaca Muerta’s shale oil or its capacity to produce hydrocarbons at scale (after proper stimulation). Its shale is distinguished by its high pressures and substantial thickness. Its oil yield per foot is demonstrably superior to similar horizontal wells in major US shale plays.”


There are also the geological formation’s low breakeven costs to consider. Drilling, lifting and other operational costs have fallen considerably in recent years as the Vaca Muerta has been developed. The geological body has a low average breakeven cost of $35 to $40 per barrel, with consultancy McKinsey & Company claiming the Vaca Muerta technically breaks even at $36 per barrel, which is competitive with other drilling locations in Latin America and lower than most U.S. shale basins. This further underscores the attractiveness of investing in the Vaca Muerta for foreign energy companies that are seeking high-quality, low-cost plays that produce light, sweet crude oil with a low carbon footprint. 

By Matthew Smith for Oilprice.com

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