Argentina: Best Candidate for Next Shale Boom?


A conversation about Argentine shale prospects is rarely loud enough to be heard. Instead, the oil and gas industry discusses at the length the outlook for U.S. shale.

Of course, the key question about shale today is: how it will fare given the slumping price of oil? The answer is of critical importance to energy markets, company fundamentals and the global economy.

Yet one lesson is already self-evident: shale oil, like shale gas before it, has transformed the industry landscape and its core dynamics. Given this fact, it is important to look beyond discussions of the present – of how U.S. shale can create a new oil price orthodoxy and if OPEC budgets can endure at $50 per barrel – and take a moment to consider the candidates for a future shale boom.


Shale oil and gas development outside the United States and Canada remains in its infancy. Progress in Europe is painfully slow, Russia’s progress has stalled and although China certainly deserves consideration and will experience growth, we believe it is a less-exciting prospect than Argentina.


A few years ago, European shale gas prospects had policy wonks running from one roundtable to the next, fervently spouting potential revenue numbers. On the horizon, an energy future less dependent on Russia appeared within grasp. Energy security – the buzz phrase of those dealing in the interaction of geopolitics and energy – was there for the taking.

What followed was that geology and economics conspired against policymakers. In Poland, major after major has withdrawn from the country. Meanwhile in Ukraine, Chevron will pull out of its $10 billion shale commitment and Shell’s activity looks at risk. The UK remains in the early exploration phase, with the economic argument overcoming grassroots opposition; the UK government supports exploration activity in light of justifiable concerns about North Sea production declines.

Elsewhere in Europe, however, opposition to the technique of hydraulic fracturing persists despite the potential benefits. The lack of success in Poland has not helped the “potential benefits” argument.

Another focal point, the giant Bazhenov shale formation in Russia, will likely not be developed whilst two factors endure:

  • Western sanctions preventing the supply of goods, technologies and/or associated services for the hydraulic fracturing of shale formations, and;
  • A $50 to $60 per barrel oil price.


Chinese shale is a better prospect. Hugely ambitious targets have been set by a Chinese government eager to grow the share of primary energy consumption supplied by natural gas from approximately five percent to 10 percent by 2020.  In 2014, Sinopec made the most notable breakthrough when its Fuling field entered commercial production. In the face of geological challenges, however, the target for shale gas production by 2020 was recently cut by a staggering 50 percent, to 30 billion cubic meters (1.1 trillion cubic feet) per year.

Water stress, land access difficulty and challenging geology – requiring significant adaptation of U.S. technology – mean that there are many hurdles for the Chinese to overcome. In Argentina, there is fresh water abundance, good access and exceptional geology from a commercial development point-of-view.

Last of all, development activity in China is dominated by Chinese NOCs (national oil companies). This means that their technical leadership has less experience developing unconventional resources than the international oil companies in Argentina.

However, rapid infrastructure development is a Chinese speciality. Therefore, challenges will continue to be overcome by well-supported NOCs, driven by the state’s commitment to increasing domestic natural gas production.  This will likely mean higher levels of capital spending on exploration and production in China than Argentina, but it does not make the former the better shale development prospect.


The U.S. Energy Information Administration has estimated that Argentinean shale formations possess approximately 27 billion barrels of oil and 802 trillion cubic feet of gas (technically recoverable). The geology has been assessed as excellent, possessing a thickness ideal for the commercial production of hydrocarbons. A combination of existing infrastructure and political interest make these shale prospects the most promising outside of the United States and Canada.

As for the oil price decline, Argentina appears to have a degree of insulation, with insiders saying that the country’s budding shale industry remains viable with West Texas Intermediate at $60 per barrel. Argentina has pipelines that shale developers can use, around 24,500 miles of them (the biggest network in South America). As conventional gas production has declined, such pipelines are underutilized, primed for a hydrocarbon rush from shale. They also provide export market access. In short, existing pipelines lower the capex requirement for shale developers and provide readymade market access.

Favorable circumstances do not end there. The Neuquén province, where the Vaca Muerta shale is located, has been Argentina’s most prolific for conventional natural gas output, producing half of all domestic natural gas in 2011. Associated infrastructure supportive of the development and transportation of hydrocarbons is thus available. Second, water stress is low – hydraulic fracturing uses millions of gallons in every well. This is in stark contrast to China where heavy usage and pollution are affecting fresh water availability. Third, the above-ground for the Vaca Muerta is flat, unlike China’s Sichuan basin. This lowers the cost and risk associated with logistics, site access and further infrastructure construction.

Such factors are not just important today, but are vital if drilling efficiencies – in terms of completion days – are to match U.S. standards in the long-term. The likelihood of making such long-term gains helps support the logic for tight margin E&P activity in today’s $50 to $60 per barrel WTI environment.

Hydraulic fracturing courts political posturing and Argentina is no different. The complex Polish case aside, politicians have tended to adopt dichotomous positions, either banning or actively encouraging E&P activity. As the technique can be used to unlock theoretically vast hydrocarbon resources from source rock, potential revenue numbers inevitably make headlines. Environmental concerns receive similar coverage. The position of the Argentine government has been one of active support for and encouragement of exploration and development activity.

The Repsol asset expropriation in 2012, for instance, sent a message to IOCs: we wish you to invest heavily and expediently in our hydrocarbon potential. Although often portrayed as a deterrent to foreign companies, the expropriation can also be interpreted as underlining the importance of shale development to the Argentine government. 

Energy imports are a major strain on the Argentine economy, costing around $9 billion last year. Inflation was 24 percent (the government figure) and a technical default occurred on some government debt in July. In November 2013, U.S. Dollar reserves were reported as $31.7 billion. Against this backdrop, oil and gas production from shale is a means of accessing greater economic security. It is this opportunity that the Argentine government has sought to grasp through attractive regulatory changes.

In July 2013, Chevron committed to a $1.24-billion drilling program in the Vaca Muerta with YPF, the national oil company. A crucial part of the deal was a promotion regime (see Decree 929/13) that allows for the export of 20 percent of hydrocarbons produced from unconventional formations exempt from export taxes. The Argentine Congress built on these changes in October 2014 by amending the Federal Hydrocarbons Law to create a clearer and more attractive framework for companies looking to invest in shale E&P activity.  Noteworthy aspects of the amendment include:

  • The creation of a special type of concession explicitly for “unconventional hydrocarbon exploitation” with improved permitting terms. The creation of this category means unconventional formations can be provided with special treatment, encouraging their early stage development and acknowledging the different E&P challenges from conventional.
  • The pullback of provincial royalty-setting power, enabling greater federal control and royalty rate consistency.
  • The elimination of state-owned entity block reservation privileges.

Despite the Repsol expropriation, a number of IOCs are active in the country, drawn in by the favourable geology and the government’s supportive message. Leading the pack is Chevron, with a $1.6-billion commitment in 2014. Others with acreage include ExxonMobil, Petronas, Shell, Total S.A. and innovative U.S. shale developer EOG Resources. In September 2014, there were 100 rigs operating in the country, double the number of 2009. 

Challenges remain, such as the need to import equipment and goods (i.e. proppant and chemicals for hydraulic fracturing). The 2015 presidential election represents another uncertainty, yet is but a minor risk to policy continuity given the economic circumstance improvements that can be made via shale exploitation. 


One caveat is required to the conclusion that Argentina is the next big shale development opportunity; namely that China has a track record of achieving rapid development goals and that overcoming high barriers to development is certainly feasible. However, while it will take the willpower of state-backed companies to create a shale boom in China, Argentina has the circumstances to achieve this without such a luxury. Whilst the Saudi’s look for the breaking point of U.S. shale, we would be wise to keep tabs on Argentine progress.






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