Tears for Neuquen

Future development of Argentina’s oil and gas resources has become—in just a matter of months—uncertain. And at risk is what the E&P industry had come to believe just last year might be the greatest shale play outside North America: the Vaca Muerta of the Neuquén Basin.

Heralded as similar to the Eagle Ford in the bounty it holds and the likelihood of fracture-stimulating it out, Core Laboratories NV cited the rock earlier this year with only two others—the Permian Basin’s Wolfcamp and North Africa’s Tanezzuft—as the most intriguing locations today of new oil in old places. Organic-rich and covering some 11,600 square miles, the formation of early Cretaceous and late Jurassic age is often several hundred feet thick at about 7,000 to 9,000 feet, according to the rock-analysis firm. And, the shallower sandstones of the basin have already given up more than 1 billion barrels. “Early estimates of hydrocarbon recovery factors of as little as 4% would justify economic development,” the firm concludes.

But, increasingly aggressive government restrictions in the country—upset by a newly net oil- and gas-import profile—are a “disaster waiting to happen,” according to Tudor, Pickering, Holt & Co. Securities Inc. equity-research analysts.

After expropriating Repsol SA’s 51% share of Argentina-focused YPF SA this spring, the government now aims to review oil and gas operators’ drilling budgets, “which, if not to its liking, will result in expulsion,” TPH reports. Producers, including Apache Corp. and Williams Cos.’ E&P rollout WPX Energy Inc., already face government control of the price they may get for the oil and gas they surface. “We continue to expect capital to dry up for Argentina-focused E&Ps in the near term,” the analysts forecast.

YPF shares that were $41 in January have plummeted more than 70% since, while shares of other international E&Ps, such as super-major ExxonMobil Corp. and super-independent Anadarko Petroleum Corp., have moved only slightly up or down this year—mostly in tandem with Brent.

Apache Corp. has some 1 million net acres in the Neuquén Basin that contribute some 6% of its global production, according to TPH. WPX, through its 69% ownership of Apco Oil & Gas International Inc., has some 250,000 net Neuquén acres that contribute 3% of WPX’s production. EOG Resources Inc. has some 100,000 net acres.

One private, U.S.-based investor says the country—despite its purported attempts toward a Western-esque, progressive economy—has been an internal “no no” from the firm’s start: “One of our rules of investing is ‘Don’t put money in Argentina.’” Another private investor adds, “We’ve been out of Argentina for several years now…We don’t know if we will wake up one morning and find out the assets have been confiscated.”

The TPH analysts, who downgraded YPF this spring to Hold while “tempted to drop coverage” altogether, further rated the stock Sell in early August at $11.62.

“We have reduced the chance of commercialization to 20% for existing reserves and 10% for unconventional assets.”

They add that Repsol may be better for the separation: “YPF had been a headache for some 10 years….”

The neighboring Falkland Islands—ruled by British contract and property law—may benefit from producers and oilfield services exiting Argentina. Noble Energy Corp.—via Falkland Oil & Gas Ltd.—has an interest in exploration prospects there, and Europe-based E&Ps have been buying in as well. TPH’s London-based analyst Anish Kapadia expects more “because they no longer see opportunities to invest in Argentina.”

YPF, with 3 million Neuquén acres, had been planning to develop the shale for almost five years, Kapadia had noted pre-expropriation. “Although new to the shale game, YPF has been learning fast…, collaborating with the likes of ExxonMobil and EOG and…hiring 80 staff a year and training them to have a specialization in shale.”

Today, the TPH analysts expect YPF’s most talented personnel will walk. “We were genuinely excited by the shale prospectivity in Argentina, but it may now be time to run a mile….”

The 2012 Summer Olympics, which concluded in London at press time, was on its way to Brazil for 2016. One industry member quipped: “It’s a good thing it isn’t going to Argentina; we might never get it back.”