Argentina's Vaca Muerta Is a Refuge in the Shale Storm

3/4   in the series The Growth of Global Fracking

Productivity and costs soared as the US shale industry rapidly evolved over the past 7 years, drilling longer and longer horizontals much faster from multi-well pads that often came with walking drill rigs, a completely new technology.

Much of this technology was engineered by oil service market leaders Helmerich & Payne, Nabors Industries, and Patterson-UTI Energy, which carved out a swath of the shale patch by providing higher-horsepower AC-powered rigs to punch out those long laterals. Before the oil crash, just as the new gear was peaking, these companies made up about half of the unconventional shale-drilling market and about 85% of the industry's cutting-edge AC-drive rig fleet.

But no one's safe during the oil crash, and the rush to stack drilling and completion equipment has sidelined a lot of business. 

Across the US, about 440 A/C electric land rigs and 720 SCR/mechanical rigs have been idled since late 2014, according to Helmerich & Payne.

Even H&P, with the largest advanced fleet in the US, has been KO'd by the collapse, stacking 180 FlexRigs worth $4bn, which is two-thirds their market cap.

And this slow-motion train wreck promises to continue. The US rig count will remain crushed by global forces like the unexpected lifting of Iran's nuclear sanctions, continued increasing US productivity, and OPEC's kamikaze market share blitz — pumping 32mmbpd. Those seismic events would have been muted if China hadn't stopped sucking up half of all oil demand growth, which it had reliably done for over 15 years.

Fortunately, H&P and the other oil service firms have headed overseas and to South America, bringing disruptive technologies that allow the new shale plays to leap-frog decades of tinkering and experimentation.

Come for the incentives, stay for the oil

The new technology has been quickly put to work exploring shale in Argentina's massive Vaca Muerta, which hugs the foothills of the Andes.

The US EIA estimates the South American country has the world's fourth-largest technically recoverable shale oil resources at around 27 billion barrels, putting it snugly behind Russia, the United States, and China.

H&P has already brought 19 FlexRig 3's from the US, reaching full deployment by the end of the second quarter of fiscal year 2015.

H&P President John Lindsay commented, "We're pleased to announce a growing presence in one of the most promising unconventional plays outside of the US. These contracts allow us to continue our efforts to demonstrate the FlexRig in key markets around the world."

H&P's arrival in Argentina, along with the other oil services companies,  was perfectly timed.

A surge in exploration

The government had recently updated its energy laws to ease exchange controls for investors in the oil and gas sector, and added a government-supported hydrocarbon price — originally $77 per barrel of oil, now $67 as a result of the  price collapse, and $7.50 per Mcf of natural gas. This guarantee attracted most global oil companies and their well-capitalized investment budgets.

So although the Vaca Muerta is where Bakken development was a decade ago, fresh cash and technology is rapidly ramping up. In July 2013, YPF signed an exploration deal with Chevron to develop tight shale oil and gas resources. After Chevron agreed to invest $1.6 billion and drill 132 wells, the investment floodgates opened.

In September 2013, Dow Chemical Company’s Argentine subsidiary, Dow Argentina, announced it would drill 16 horizontal natural gas wells in 2014. Then Shell said it would invest $500 million in 2014, up from $170 million the year before. YPF also signed a memorandum of understanding with PETRONAS, the state-owned oil company of Malaysia (that deal was completed as a three-year, $550 million pilot project in August 2014). In October 2014, YPF announced it had signed a confidential deal with Russia’s Gazprom, the world’s largest natural gas producer.

By last March, Chevron and YPF announced 161 wells had been fracked and an additional $1.6 billion would be invested by year’s end with a goal by April 2015.

Vaca Muerta has world-class potential 

Though exploratory wells cost $15 million at the beginning, YPF’s current costs average $11 million, and the company expects to reduce them to $7.5 million by deploying pad drilling and walking rigs, an H&P specialty.

But that’s still shy of the $4-5 million target, or the cost of wells in the prolific Bakken and Eagle Ford Shales, according to Platts.

Without reaching these levels, “the wells won’t be profitable,” said Alex Fleming, a senior manager in oil and gas at EY Advisory, a US-based business advisory.

It’s a sort of chicken and egg dilemma. Without profits, the necessary $20 billion a year needed to develop the play won’t come. And without this investment drilling tens of thousands of wells, the economies of scale won’t be reached.

But good news seems to arrive constantly. The cost of drilling will fall at least 10 percent by the end of 2016, according to Rigzone, because Argentina started using its own frac-sand, rather than the expensive imported stuff. 

YPF finished a plant convenient to the Vaca Muerta that refines local yellowish sand, turning it into the fine sand used in fracking. 

And now come the payoffs. A recent discovery of a ‘super well’ in the Vaca Muerta bodes well for the basin.

YPF and Chevron's super well has had an impressive initial production of 1,630 barrels per day -  higher than anything before.

H&P goes native

H&P's FlexRig3 has become a reliable workhorse, drilling wells from 8,000 to 22,000 feet. And the rig can also be equipped with an optional skidding system for pad work, which is a primary reason the FlexRig3 has been brought to the Vaca Muerta.

Now well-honed, the FlexRig3's first pad work was carried out 11 years ago before 'pad drilling' was an investor buzzword, and YPF and Chevron have already taken advantage of this vast experience.

As a pioneer widely credited with the vision to start building new AC rigs before the rest of the industry, H&P is the gold standard of constant innovation.

Since H&P introduced the first AC drive FlexRig, multiple generations were developed (5 so far), each with its own specialty or technological advance. For example, the FlexRig5 is designed to address extended reach horizontal wells for multi-well pad development in unconventional shale resources. The FlexRig4 offers versatility and can be trailerized. But the Flex3 emerged as the industry standard in US and has migrated to Argentina.

Ramping up

Production from the Vaca Muerta is expected to double by 2018, according to a new development study from research firm Wood Mackenzie Ltd.

While a marked ramp-up can be expected by 2020, the study highlights that oil and gas output in 2016 should be moderate with year-over-year production at 10%. Wood Mackenzie estimates total capital spending for 2016 to reach $1.2 billion as companies prepare for full development.

Horizontal wells will become the development of choice as operators are increasingly able to target the most productive intervals of the play, the firm says. “YPF partners continue to decrease drilling and completion costs aiming to move into ramp-up and development phases,” explained Horacio Cuenca, Wood Mackenzie research director for Latin America.

Is fast-paced innovation the real game-changer?

Image: FlexRig, H&P