• YPF well positioned to develop Vaca Muerta shale boom

By Schreiner Parker

Vaca Muerta shale boom

Argentina’s YPF is keenly poised to reap rewards from the country’s vast Vaca Muerta shale formation, which is hoped will eventually produce 1 million barrels per day (bpd) of oil and is seen as one potential solution to the South American nation’s economic woes. State-controlled integrated energy company YPF has been spearheading the development of the prolific shale patch, with shale oil and gas volumes from Vaca Muerta steadily rising and expected to contribute almost half of total crude volumes in the country this year. Argentina is counting on the formation to help it reduce energy imports, achieve energy self-sufficiency and access increased foreign currency, although this will require continued investment in new pipelines and infrastructure as well as macroeconomic stability.

The Vaca Muerta formation has attracted a host of majors to Argentina, with ExxonMobil, Chevron, BP, Shell and TotalEnergies holding significant acreage position of more than a combined 1 million acres, involving substantial capital commitment plans. With YPF holding a share in all major upstream shale projects in the country, the company accounts for more than 30% of total oil and gas production from the shale play. The share of production from Vaca Muerta in YPF’s overall production has grown from less than 5% in 2015 to almost 40% last year and is expected to soon overtake the share of conventional production.

As the play’s development advances, there is evident steady progress in the learning curve. YPF has been employing advanced drilling techniques such as horizontal drilling and simulfrac to efficiently access trapped resources in the Vaca Muerta play.

Inadequate infrastructure and saturated oil and gas takeaway capacity has been a hurdle in meeting local demand and realizing the Vaca Muerta’s export potential. The government is focused on much-needed infrastructure development, which is critical to achieve output growth, raise exports and replenish foreign currency reserves. The much-awaited Nestor Kirchner gas pipeline was recently commissioned, with its first stage expected to add 11 million cubic meters per day (MMcmd). The pipeline is key to ensuring reduced gas imports from Bolivia by meeting local demand. The capacity is expected to double from 2024 with the installation of compressors in Tratayen in Neuquen province, eventually reaching 44 MMcmd of capacity after completion of the second phase in 2025. On the oil side, the Transandino pipeline was restarted earlier this year to deliver on its agreement with Chilean state oil company ENAP for the supply of around 40,000 bpd for 45 days and is expected to continue growing next year to its full capacity of 110,000 bpd. However, completion of the 160,000-bpd Vaca Muerta Norte pipeline, expected by September this year, along with the doubling of YPF’s 270,000-bpd Oldelval pipeline capacity, will remain key to keeping up with increasing shale volumes. The proposed Vaca Muerta Sur pipeline, with expected capacity of 360,000 to 370,000 bpd, will also contribute significantly. 

YPF has announced capital expenditure of $5 billion for 2023, of which $3.6 billion is guided to be allocated to the upstream segment. We have risked this number down to $3.4 billion to consider any potential delays on planned projects and pipelines. It should be noted, however, that $2.3 billion – or more than 60% of upstream spending – is expected to be earmarked for shale development. This share of spending on the unconventional segment has remained relatively steady since 2021, contributing to the observed ramp-up in volumes from the shale play. A significant amount of capital – almost $1.6 billion – will be used to expand drilling operations in Vaca Muerta this year, YPF has said, which is expected to lift shale oil production by 30% this year, helping the company in achieving its overall crude oil production target of 245,000 bpd for the year. YPF is already off to a good start having recently reported a 31% increase in shale oil production for the first quarter of 2023 over the same period last year and a 9% rise in shale natural gas. To fund the enhanced capital investment plan, a healthy balance sheet and growing cash flow profile will be required by YPF. The company has managed to significantly reduce its net debt ratio, calculated as reported net debt divided by the trailing 12-month reported adjusted earnings before interest, tax, depreciation and amortization (EBITDA), to 1.2x from the level of 4.9x seen in the first quarter of 2021. This has been possible due to positive free cash flow generation over the last three years. Another positive is that the company’s debt maturity profile out to 2025 is within reasonable limits, providing a buffer period to ramp up volumes that will enable YPF to generate higher cash flow to pay down debt and fund its capex plans.

Rystad Energy Upstream Solution 07 2023