Energía YPF

12.11.2013  | Financial Time | Benedict Mander

Exploration begins at ‘Dead Cow’ formation

The arid semi-desert scrub that covers most of Mendoza conceals one of the great unexploited riches not just in the province, or even the country – but in the world.

The gigantic shale formation at Vaca Muerta, which in Spanish means Dead Cow, is one of the most talked-about prospects of the global oil and gas industry, with the potential to attract investors to the region for years to come.

According to the US Energy Information Administration, Vaca Muerta is home to the fourth-largest shale oil reserves and second-largest shale gas reserves in the world.

While preliminary wells are being drilled in the neighbouring province of Neuquén, after Chevron, the US oil and gas group, signed a deal to invest an initial $1.2bn, Mendoza’s portion of the formation – which accounts for as much as a third of the total – has hardly been touched.

This is expected to change over the coming decade if a range of geological, technical and financial challenges can be overcome – principally the need to secure the billions of dollars that are needed.

But with Argentina shut out from capital markets since its 2001 default, YPF, the state energy company, has to rely on attracting foreign investors into joint ventures.

Aside from the Chevron deal, and smaller investments from Dow of the US and Germany’s Wintershall – interest has been limited. Hopes of a sizeable investment from Bridas, the Sino-Argentine company half-owned by China National Offshore Oil Corporation, has yet to materialise.

Other commonly raised issues include high inflation, export tax, limitations on importing goods and services, restrictions on the right to remit profits abroad in dollars, high labour costs and insufficient skilled labour, according to Jose Valera, co-head of oil and gas at Mayer Brown, a Houston law firm.

Alejandro Bulgheroni, the investor whose family owns the other half of Bridas, says cutting operational costs is central to allowing Vaca Muerta to compete with similar projects around the world. For example, the cost of a shale well in the US is about $3m, compared with $7m-$8m in Argentina.

“Large investments and several years of work are needed for the current good expectations to become reality,” Mr Bulgheroni recently told an energy conference in Buenos Aires.

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