Big Oil Gets In Early on Argentina Shale

By Sarah Kent and Taos Turner Features Dow Jones Newswires

NEUQUÉN, Argentina -- Around 5,000 miles from the booming oil towns of West Texas, some of the world's biggest oil companies are trying to do what they failed to do with U.S. shale: Get in first and early.

Continue Reading Below

Royal Dutch Shell PLC, Exxon Mobil Corp. and others are making another go at taking the shale industry global, starting with a grand experiment here in a desolate swath of western Argentina. This sprawling piece of Patagonia, known as Vaca Muerta, which means "dead cow," potentially has as much oil and gas as the biggest basins in Texas or North Dakota.

Replicating the U.S. fracking boom elsewhere has taken on fresh urgency in an era of stubbornly low and volatile oil prices. Outmaneuvered early on in the U.S. by smaller companies, Exxon, Shell, Chevron Corp. and others see Argentina as one of their best opportunities to expand shale, which generally features projects that can be ramped up or down with prices.

The Vaca Muerta has long been a focus of this sometimes quixotic quest, but a business-friendly government at all levels that is actively working to encourage drilling is fueling optimism that shale development in the region could finally begin to take off.

Hurdles still remain and costs in Argentina are significantly higher than the U.S. But this time around, the big-oil company executives are determined not to miss out, hoping to leverage their big balance sheets and experience with foreign governments to make international shale work.

And they want to prove wrong critics who say they can't drill shale as well as specialists in the U.S.

Continue Reading Below

"Our position is: Hell no! We will show that we can drill and complete wells better than the best," said Andrew Brown, Shell's head of exploration and production. "We're showing it in Argentina."

This year, Exxon is expected to move from experimental pilot to proper development in the region, taking a step toward investments that former Chief Executive Rex Tillerson last year said could exceed $10 billion in the coming decades.

France's Total SA -- which has repeatedly said that expanding its foothold in U.S. shale is too expensive -- is also planning to ratchet up production in the Vaca Muerta. Chevron has made investments of over $1 billion in Argentine shale projects and BP PLC is in the country through its joint venture Pan American Energy.

Last month, Shell started up a new treatment plant on the Vaca Muerta's dusty plains with the capacity to process 10,000 barrels a day of shale oil and six million cubic feet of gas daily. On a recent windswept afternoon, a Shell oilman stood atop a 560-ton rig, hauled over from the Permian plains where it had recently been in use.

Sporting a red fire-safety suit and protective yellow gloves, he pointed to a series of computer screens that spewed out data on the rig's effort to push thousands of feet of steel casing deep into the earth below.

Senior drilling engineer Wouter Miedema, who has worked in shale projects in the U.S. and Canada, said he was struck by the similarities between the geology of the Vaca Muerta and the most productive shale fields of North America. "It's amazing to think that on the other end of the planet you've got shale like this," he said.

The expanse of iron-toned dirt into which he was drilling is thought to hold 27 billion barrels of technically recoverable oil and 802 trillion cubic feet of gas embedded in a layer of shale that is up to 1,700 feet thick, according to the U.S. Energy Information Administration. That ranks its geology up there with some of the best fields in the U.S., executives and analysts say.

For now, Shell is investing under $200 million a year to see if it can make shale work in Argentina. It isn't enough to reach a level comparable with U.S. shale, though Shell executives say the region could be a big producer.

Major companies like Shell were late to get in to shale production in the U.S. When they did venture in, they found the process to be different than the engineering feats that characterized other oil exploration and output.

Still, companies want to take it slow in Argentina, because they have been burned in the past. Their previous wildcatting attempts in shale from Europe to Russia and China have been stymied by a variable cocktail of poor drilling results, political opposition, regulatory hurdles and the dramatic drop in oil prices that began in 2014.

Argentina's shale is no sure thing. Companies have to spend more time and money figuring out the best places to drill in Argentina, where the Vaca Muerta is still relatively unexplored territory compared with the U.S. shale patch. On cost, infrastructure and manpower, it can't yet compete with the U.S.

According to Shell, steel casing here costs 40% more than it does in Texas, even though it is made in Argentina. Casing accounts for up to 25% of well costs, so that price difference makes drilling here much more expensive, Shell says. In March, Exxon told analysts that it currently costs two to three times more to drill a well in the Vaca Muerta than it does in the U.S.

Recent progress on costs has infused oil companies with hope about the Vaca Muerta, including agreements with local unions and a government pledge to keep natural-gas prices high.

Shell's local well costs, including drilling and completion, have plummeted from about $35 million for their first well in 2012 to under $10 million now. In February, the company drilled a five-kilometer horizontal well for roughly $5 million. The company said it was the cheapest of its kind ever tapped in Argentina.

"This will take off," Shell CEO Ben van Beurden said. "It's just a matter of lining everything up."

Write to Sarah Kent at sarah.kent@wsj.com and Taos Turner at taos.turner@wsj.com

(END) Dow Jones Newswires

May 04, 2017 05:44 ET (09:44 GMT)