SOUTH AMERICAN SHALE
ROBERT PERKINS
News Correspondent
FRACTIOUS
TIMES
South America is poised to play
a leading role in the global shale
revolution, but a surge in resource
nationalism and fresh political
divides have cast a shadow over
the future promise of energy
independence for its key players
Argentina’s controversial move to
renationalize its former energy champion
YPF earlier this year came, notably, on the
heels of a massive shale discovery by the
company’s former Spanish owners Repsol.
In addition to sparking a bitter feud with
Repsol, the asset grab has raised the
profile of the region’s unconventional
resources and sparked a greater sense of
urgency over their future development.
In just a few years, the US shale boom
has seen the majors recognize that they
need to be involved in the shale business
and Latin America is firmly on the map.
But at the cusp of a potential revolution
for shale oil and gas development in the
region, a surge in resource nationalism
has already upended the political and
energy landscape of South America.
From Hugo Chavez in Venezuela to
Cristina Fernandez de Kirchner in
Argentina, governments’ behavior has
thrown up tough questions for the
industry over access to resources and the
political risk of going after them.
The US Energy Information Agency
estimates that technically recoverable
reserves of shale gas in Latin America
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DECEMBER 2012
amount to over 1,900 Tcf, a figure
which does not include estimates of
Colombia’s emerging shale potential. But
that figure dates back to early 2011 and
is already seen as conservative. Including
Mexico, energy consultants IHS estimate
that Latin America’s unconventional
resources total a staggering 16,909 Tcf of
gas and 2,250 billion barrels of oil in
place, of which – admittedly – much less
will actually be produced.
So far Argentina leads the pack in
unconventionals, according to IHS, with
6,037 Tcf of gas and 1,135 billion barrels,
mostly in the Neuquén and Austral basins.
According to the EIA estimates, Argentina
has 774 Tcf of technically recoverable
shale gas resources – the world’s third
largest assessed endowment, behind only
China and the US. Colombia, Mexico and
Brazil follow as holding the biggest shale
potential in the region.
While the resources are there, there are a
host of challenges to attracting sufficient
capital needed to scale up the industry,
industry watchers agree. Big questions
remain over whether regional energy
policies and regulation, in addition to
SOUTH AMERICAN SHALE
local markets, can evolve to support
large-scale shale developments. In
addition to major capital and
technological skills requirements, many
countries will likely need to consider
further price incentives and new policies
in order to promote shale.
In Argentina, the development of shale
gas resources clearly has the potential to
change the country’s energy balance and
largely eliminate its need to import gas
and halt the creeping rise in crude
imports. Justifying the YPF takeover in
April, President Kirchner declared that
hydrocarbon self-sufficiency was in the
national interest.
The political imperative to boost
domestic gas output is clear. Helped by
domestic price caps, Argentina boasts the
region’s second-largest demand growth
behind Brazil at 1% a year. At the same
time, field declines mean production is
currently falling at over 4% a year. This
has caused shortages, as the country
relies on gas for 50% of its energy needs
and, despite massive shale gas reserves,
YPF had to import gas on a net basis for
the first time in 2011 to make up the
growing national shortfall. The cost of
Argentina’s energy imports is estimated
to hit $12 billion this year, at a time
when government subsidies to energy
and transport sectors are eating an ever
bigger slice of its budget.
The giant Vaca Muerta shale play in
southwest Argentina’s Neuquén province
alone is widely considered to have the
biggest oil shale potential outside of
North America. The area holds 23 billion
boe of oil and gas in place, or more than
10 times the remaining proven oil
reserves in all of Argentina, according to
YPF’s former owners Repsol. The Spanish
company believes more than threequarters of the area contains oil with the
rest containing dry and wet gas.
But the investment needed to develop
this resource is huge. Repsol estimated
that it would take around $250 billion
over a decade to fully develop the asset, a
move which could double oil and gas
production in Argentina.
While YPF holds around 40% of the
Vaca Muerta acreage, ExxonMobil,
Apache, EOG, and Chevron are involved
and Total is seeking entry.
UK-based energy analysts Wood
Mackenzie estimate that the Neuquén
basin could account for over half of
Argentina’s domestic gas supply by 2025.
Based on forecasts made before the
seizure of YFP, Wood Mackenzie also
predicts the country’s gas shale output
could reach some 2.5 Bcf/day in 2025,
as its conventional production slips fast.
The country’s gas production dropped
4% year on year to 121.4 million cu m/d
in July, according to figures from the
Argentine Oil and Gas Institute (IAPG).
Others are more optimistic. Done right,
within seven to 15 years, Argentina
could see imports of LNG decline and
begin renegotiating import contracts
with Bolivia as well as look at possibly
expanding its own gas exports, according
to Brazil-based consultancy Gas Energy.
Despite its domestic shortfall, Argentina
still exports volumes of gas because it
lacks the domestic pipeline capacity to
deliver them within the country.
YPF has said it wants to invest $37.2
billion through 2017 to develop the
shale resources and maturing fields in a
bid to convert the country into a net ►
ARGENTINA’S ARCHITECT
OF EXPROPRIATION
Argentina’s seizure of YPF was masterminded
by Axel Kicillof, the country’s deputy economy
minister, who at the age of 40 leaped onto the
world stage as one the most influential figures
behind the Kirchner administration.
A student political activist who wrote a
doctoral thesis on the thinking of British
economist John Maynard Keynes, it was
Kicillof who first raised the idea of
expropriating YFP as a remedy to Argentina’s
fast-growing domestic energy supply crunch.
With Elvis-length sideburns and an open
collar, Kicillof has been billed as Cristina
Kirchner’s new closest economic confidant
after winning her over with his energetic
charisma, allegedly.
His appeal to those with an anti-capitalist
bent is clear but he has little experience
in business and even less in public
administration. His sole direct business
involvement was a six-month stint as deputy
administrator of Argentina Aerolineas, the
country’s debt-laden flag carrier airline which
was the renationalization in 2008.
Kicillof has staunchly defended the YPF
takeover on ideological grounds, proclaiming
it as an important recovery of sovereign
control and a victory over corporate
profiteering. Explaining the rationale behind
the YPF nationalization to a Senate hearing
on April 17, Kicillof’s politically-charged
continued over page...
Argentina’s President Cristina Fernandez de Kirchner
heads the presentation of YPF’s new strategic plan
on June 5, 2012. From left to right, deputy economy
minister and architect of the takeover, Axel Kicillof,
planning minister Julio De Vido, Cristina Fernandez,
and YPF’s new CEO, Miguel Galuccio.
DECEMBER 2012
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SOUTH AMERICAN SHALE
...continued from page 37
rhetoric was intensely critical of Repsol’s
management of YPF.
“These businessmen like [Repsol CEO
Antonio] Brufau, how are they going to
understand what we are doing when they
are thinking about the international
expansion of the group? This they have
done, largely, at the expense of the
dividends paid by our oil company.”
Citing debts of nearly $9 billion and an
orchestrated campaign of underinvestment,
Kicillof has rejected Repsol’s claim for $10.5
billion compensation for its YPF stake and
remains a key arbiter over whether the Spanish
major recoups anything at all for the assets.
Kirchner has entrusted Kicillof, as corporate
controller of YPF, with getting to the bottom of
its finances, and poring over its book to find
the “real” value of the company.
Kicillof is now widely expected to discount
most of Repsol’s claim for remuneration and
has promised to scrutinize the company’s
books for “fine print and the secret
information” over the value of the stake.
Citing high-level government sources,
Argentina’s La Nacion newspaper reported
that Kicillof has assured the government that
the final price Repsol gets for its stake could
well be “zero pesos.” Indeed, some reports
already put Repsol’s mounting potential
liabilities from environmental damage, tax
debts and labor claims at $15 billion.
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exporter of oil and gas, including the
latter in its LNG form. The plan
envisages increasing oil and gas
production 32% over the next five years.
The deal came a month after talks on
developing mature fields and
unconventional oil and natural gas
resources in Vaca Muerta.
The company believes it can finance
80% of the 2012-17 program out of
cash flow and raise the rest through
strategic partnerships and on capital
markets. But many believe the targets
are way too optimistic and are
pessimistic about YPF’s ability to finance
such a surge in shale production. While
the government has tried to accelerate
shale gas production by allowing
companies to sell it above regular set
prices, paradoxically the decree setting
out the legal framework for YPF’s
takeover is actually seen slowing the
search for partners.
Speaking in August, Chevron’s Africa
and Latin America upstream chief Ali
Moshiri said the company plans to drill
120 wells for unconventional resources
in Argentina over the next three years at
a cost of around $1.8 billion.
The April takeover decree essentially
requires companies to submit annual
investment and production plans to a
new government committee. Failure to
meet the targets can result in concessions
being revoked.
Even if the official state tribunal assessing the
value of the stake concludes the government
should pay, Kicillof has gone on the record
saying he believes any payout will be small
compared to value of the massive shale
resources lying in the Vaca Muerta field.
“The new rules are a function of the
government’s concern over declining oil
and gas production and reflect the
government’s belief that companies will
not invest unless forced to do so,” notes
the New York-based consultancy Eurasia
Group. “It is also a reflection of the
increasingly unpredictable and volatile
nature of policymaking in Argentina,
especially towards the energy sector.”
“Once the state starts to show that there are
lots of reserves... and we believe there are...
even if the figure for what we have to pay
these people for how they left the company is
high in absolute terms, I think it’s going to be
low compared to YPF’s potential under state
control. For that reason the figures don’t
worry me,” Kicillof said in April.
Outwardly, these uncertainties don’t
seem to have dampened interest from oil
majors in cozying up to YPF for a piece
of the shale action. Chevron signed a
memorandum of understanding with
YPF in mid-September over potential
cooperation on shale oil and gas projects.
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DECEMBER 2012
“YPF’s success is the success of the
industry,” Moshiri said at a meeting with
YPF on August 24 in Buenos Aires. “The
unconventional oil can revolutionize the
energy paradigm in Argentina as in the
United States.”
Repsol has responded to Chevron’s
growing partnership with YPF by
reiterating a threat of legal action against
any party that invests in its former
Argentine assets.
YPF has also reached an agreement with
Russia’s Gazprom to move forward with
a possible partnership for developing
conventional and unconventional gas in
Argentina and the company’s chief
executive Miguel Galuccio has already
met with ExxonMobil and Apache
executives. He is also expected to travel
to China this year to meet with
representatives of CNOOC and China
Petroleum & Chemical Corp.
While early handshakes and preliminary
deals may be good for corporate egos
and votes alike, it remains to be seen
whether actual spending will follow.
China’s multi-billion dollar investments
in Chavez’s Bolivarian Venezuela have
borne little fruit for the involvement of
China’s national oil companies in heavy
SOUTH AMERICAN SHALE
oil projects there. Likewise, the collapse
of a $7 billion CNOOC deal for BP’s
Pan American Energy stake in Argentina
points to the hurdles that Chinese
investments could continue to face in
the future.
LATIN AMERICA PROSPECTIVE SHALE GAS PLAYS & ESTIMATED POTENTIAL RESOURCES
In Mexico, the Burgos Basin
in Coahuila state is the
extension of the US’ massive
Eagle Ford shale. Pemex has
promised to drill more shale
wells but low gas prices are
seen hampering developments.
MEXICO: 681 TCF
Latin American governments may
not encounter the same level of
environmental opposition to shale
fracking technology that has dogged the
industry in densely-populated Europe,
but many other roadblocks exist.
One of the key problems for shale
developments in South America is the
mismatch between supply and
infrastructure and whether other “above
ground” issues can be overcome.
Argentina is already seen as a high-risk
investment environment because of its
history of abrogating contracts. The
country with one of the biggest
sovereign defaults in history against its
record hardly inspires confidence
among investors.
But most analysts are optimistic that,
given time, Argentina’s shale gas industry
will emulate the success of the US shale
gas industry. According to a recent poll
by the business advisory group KPMG,
76% of oil executive questions said they
believe that South America will become
the destination of choice for companies
investing in shale gas outside the US.
Well before the YPF takeover, Kirchner’s
increasingly populist mix of price
controls, export tariffs and consumer
subsidies conspired to slow investment in
the country’s energy sector to a crawl.
KPMG recently noted that while
Argentina has a well-developed gas
VENEZUELA: 11 TCF
Colombia’s shale potential in
the Middle Magdalena,
Eastern Cordillera and
Catatumbo basins attracted
significant interest in the
2012 bid round. Nexen, Shell,
and ExxonMobil already have
a Colombian shale foothold.
COLOMBIA: 19 TCF
BRAZIL: 226 TCF
BOLIVIA: 48 TCF
PARAGUAY: 62 TCF
CHILE: 64 TCF
ARGENTINA: 774 TCF
The Neuquén Basin is the
country’s biggest shale gas
basin which Wood Mac
expects to account for >50%
of Argentina’s domestic
demand.
URUGUAY: 21TCF
Led by Petra Energia, local
players are drilling in the Sao
Francisco Basin in Brazil
which could hold over 350
Tcf of gas potential.
Source: EIA's World Shale Gas Resources report, April 2011
distribution infrastructure, it still lacks
the technology, equipment and
services required to support large-scale
production. “The industry’s success
hinges on the availability of capital,
the development of a supplier base,
and the growth of a skilled labor
pool,” KPMG notes.
Challenges to replicating the US model
in Latin America are often blamed on
restrictive licensing terms and rules
governing access to land. But
developments also face challenges
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DECEMBER 2012
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SOUTH AMERICAN SHALE
from the availability of drilling rigs, local
water supplies and sand for fracking.
In the short term, the cost of financing is
higher than other countries and the cost
of exploration studies, wells and frac jobs
could much higher than US projects.
Argentinean shale player Tecpetrol told a
Houston shale conference in July that
the country needs to reduce or eliminate
export taxes on shale gas associated crude
and NGLs. It also called for a temporary
reduction in royalties on production
from shale gas wells and guaranteed
offtake of shale gas during exploration
and appraisal stages.
In Brazil, some eyes have turned from
offshore pre-salt oil field plays to
emerging bidding opportunities for its
other oil and gas horizons.
Better times: Repsol CEO Antonio Brufau and Cristina
Fernandez de Kirchner in December 2010
Led by Petra Energia, a number of local
players are drilling the potentially massive
Sao Francisco basin in Minas Gerais state
which could hold more than 350 Tcf of
recoverable reserves potential, according
to DeGolyer & MacNaughton.
Brazil’s largest electricity company, Cia
Energetica de Minas Gerais, or Cemig, is
hoping shale and tight gas from the
region will help it triple fuel sales by
2016. The company is seeking US
partners with experience in drilling shale
gas to help develop four blocks in Minas
Gerais state and has already drilled two
wells this year.
Like Argentina, Colombia has a strong
political incentive to develop its
unconventionals as production from its
conventional fields declines. At current
demand rates, Colombia will be a net oil
importer by 2017.
Comparisons have already been drawn
between the La Luna field in the Middle
Magdalena basin and the US’s giant
Eagle Ford shale. Further shale oil and
gas deposits lie in the Cesar basin to the
north, Catatumbo, near the Venezuelan
border, and the Boyoca province to the
north of Bogota.
IHS estimates Colombia’s shale could
hold over 3,000 Tcf of gas, and the
country’s oil industry association pegs its
unconventional resources at 92 billion
boe on a P50 proven and probable basis.
Last year, consultancy Arthur D Little
ignited interest in the Andean country
after putting recoverable shale and tight
gas reserves at 35 Tcf and shale oil
potential as high as 14 billion boe.
In response, Colombia offered 30
blocks containing some form of
unconventional resource potential in
a tender for 115 new licenses which
closed in mid-October.
Argentina’s President Cristina Fernandez de Kirchner unveils plan to expropriate 51% of YPF in April 2012.
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DECEMBER 2012
Despite a host of majors including
ExxonMobil, Shell, Chevron, Sinopec
SOUTH AMERICAN SHALE
and CNNOC showing up for the round,
only five of the 30 unconventional blocks
received bids, all but one from state-run
Ecopetrol. With the government hoping
the round would draw $500 million of
spending on unconventional reserves, the
outcome is a setback.
To its credit, the government has already
been proactive in attracting investors
into unconventionals.
In 2011 it passed a decree offering a
40% discount on royalties on nonconventional projects and a higher crude
price to trigger its “High Prices Tax.”
On the regulatory front, the government
has promised to streamline contractual
periods and conditions and technical
framework for unconventional projects.
The moves have paid off with Shell and
ExxonMobil already taking positions in
Colombia’s reserves of gas trapped in
shale. Chevron is also interested and
state-run Ecopetrol is targeting more
than 50,000 boe/d of mostly shale gas
output from the Middle Magdalena
shale play by the end of the decade, with
first production likely in 2016.
“The interest level is high for both
what we have below and above
ground,” Orlando Cabrales, head of
Colombia’s National Hydrocarbons
Agency told Platts recently. “Below
ground you have rising production
and exciting prospects as well as the
unconventional sources. Above
ground, companies see attractive terms
and a stable legal framework.”
But Colombia is not without its own
challenges for shale. The country is
positioned for potentially low-cost gas
“
South America won’t escape its own shifts in
energy geopolitics when shale projects do take off.
”
imports from Venezuela and lacks an
extensive gas transport and storage
infrastructure. The country also has a
history of political violence while
question marks remain over labor
unrest. The country’s largest oil field was
temporarily shut down in late 2011 by
worker protests and attacks, and future
investment could be hampered by
concerns about further strife.
South America won’t escape its own
shifts in energy geopolitics even when
shale projects do take off.
Another danger is that Latin America
could lose out on much-needed expertise
and money if oil majors choose to sink
their upstream budgets in an evergrowing number of unconventional
options around the globe.
Bolivia could also be a major loser if
Argentina and Brazil, its sole export
markets for natural gas, stop
importing the fuel. Bolivian experts
have recently recommended that the
government review its natural gas
policy, promote exploration and seek
out new export markets.
The unconventional boom has shaken
up the traditional geographical lottery
of conventional oil resources and
effectively created a new shift in the
geopolitics of oil and gas.
Here, competitive advantage in a world
where new technology opens up vast
new energy sources will be key. States
with more benign politics and an
investor-friendly climate will benefit
while others could see their resources
stay in the ground for longer than they
had anticipated.
Resource-hungry China, which has spent
billions of dollars acquiring upstream
assets outside the country in recent years,
has its own shale potential to pursue and
has also developed advanced technologies
for shale development.
Current LNG developments such as
Peru’s LNG plant will have to look
further afield for new markets in Asia
particular as the US becomes a likely
LNG export competitor with the massive
growth of its own shale gas industry.
To some, Latin America is positioning
itself for a long-term, state-dominated
hydrocarbon future as governments stake
their claims to the vast wealth promised
by the region’s potentially huge
unconventional oil and gas discoveries.
But this hydrocarbon future remains
uncertain as the mercurial nature of
ideologically-driven politics in the region
could just as well deter the investment
needed to deliver its promise to those
who yearn for it most.
After all, despite massive reserves,
Chavez’s revolutionary zeal in Venezuela
has failed to see the country’s own oil
production recover to levels seen before
he came to power 14 years ago. ■
DECEMBER 2012
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