Repsol Says Argentine Shale-Oil Formation Requires $250 Billion Investment

Repsol YPF SA’s (REP) Argentine unit said $25 billion a year will be needed over a decade to develop shale oil resources at the Vaca Muerta formation in the south of the country, which probably holds about 23 billion barrels.

The estimate comes after further drilling in a Connecticut- sized area of Argentina’s Neuquen province and reviews of the area by independent auditor Ryder Scott, YPF (YPF) said late yesterday in a statement. YPF, the local unit of Madrid-based Repsol, earlier discovered 927 million barrels of commercially viable oil at the Loma La Lata field, also located in the formation.

YPF, producer of more than half Argentina’s crude, is boosting exploration to arrest output declines amid government criticism that local oil companies are failing to invest in production. The resources at Vaca Muerta compare with the 50 billion barrels of oil Brazil estimates it found underneath a thick layer of salt beneath the seabed and which include the largest fields discovered in the Americas in three decades.

“If the exploration proved to be successful in the whole Vaca Muerta formation and immediate intensive development began in the area, current oil and gas production capacity of Argentina could double in 10 years time,” YPF said in a statement. “It would be necessary to make a vast investing effort that would reach $25 billion per year.”

Repsol Gains

Repsol rose 3.3 percent to 21.37 euros as of 3:22 p.m. in Madrid after earlier gaining as much as 4.4 percent. American depositary receipts in Buenos Aires-based YPF climbed as much as 12 percent to $36.30 yesterday in New York and closed 11 percent higher at $35.90.

The development of the reserves will require higher oil and gas prices to be appealing for investors, BTG Pactual SA analysts led by Gustavo Gattass said today in a note to clients. Domestic oil prices in Argentine are about $70 per barrel while gas is about $14 per barrel of oil equivalent, according to the report. Oil in New York is trading at about $100 a barrel.

In October, the government ordered oil and mining companies to repatriate export revenues and in November opposed a dividend payment for YPF as it seeks to stem capital flight. YPF was one of nine companies that also lost financial incentives for oil exploration and production on Feb. 3., following speculation that the government may consider nationalizing the company.

Tapping Reserves

The government could use central bank reserves to pay for a takeover of YPF, Sebastian Vargas, an economist at Barclay’s Capital, said yesterday in a report to clients.

Energy Secretary Daniel Cameron met today with provincial governors in Buenos Aires and said all energy companies need to boost their output out of “national necessity.”

“We will demand that each company produce at the maximum level possible in all of their fields,” Cameron told reporters after the meeting. “This isn’t an attack on their right to property but a measure to respond to a national necessity."

YPF last year invested a record 13.3 billion pesos ($3.06 billion), 50 percent more than the previous year, according to a separate statement yesterday. The company spent 8.9 billion pesos of the investment on exploration and added 137 million barrels of proved reserves with a reserve replacement ratio of 160 percent for the year, according to the filing.

Pre-Salt Reserves

Petroleo Brasileiro SA, Brazil’s state-controlled oil company, expects to invest about $224 billion over five years to develop so-called pre-salt reserves, which hold about 50 billion barrels of oil, according to Brazil’s oil regulator.

YPF’s previous 927 million barrel estimate came from surveying 3 percent of the 12,000 square kilometers of Vaca Muerta licensed to the company, Chief Executive Officer Sebastian Eskenazi said in November. The 927 million resources are so-called contingent resources, which are commercially viable, while the 23 billion are estimated total deposits.

The Vaca Muerta formation, located in Patagonia, means ’dead cow.’ Ryder Scott’s study covered an area of 8,071 square kilometers, in which YPF holds 5,016 kilometers.

‘‘There’s a tremendous amount of resource potential for YPF to develop,” Matthew Portillo, an analyst at Tudor Pickering Holt & Co., said yesterday in a telephone interview from Houston. “It’s an impressive number in terms of the potential size and scope of Vaca Muerta within Argentina.”

Largest Find

The Loma la Lata discovery was Repsol’s largest ever and YPF’s largest since at least the early 1990s.

Argentine officials have discussed nationalizing YPF, Pagina/12 newspaper reported Jan. 29, without saying where it got the information. Pagina/12 regularly runs interviews with top government officials such as Vice President Amado Boudou, who have said that the company needs to do more on production.

YPF may not be able to sustain dividend payments equal to 90 percent of the company’s annual net income amid pressure from the Argentine government, Deutsche Bank AG said in a Feb. 6 note to clients. Repsol, Spain’s largest oil company, owns a 57 percent stake in YPF, while the Eskenazi family’s Petersen Energia SA owns about 25 percent of YPF and operates it.

Brufau Visit

Antonio Brufau, chief executive officer of Repsol, met Argentina’s planning and economy ministers Feb. 6 to discuss the government’s criticism, news agency EFE reported, citing people close to the meeting which it didn’t identify.

Repsol said in November that Loma la Lata’s shale oil is similar in volume to YPF’s existing reserves and its largest find. The company said Vaca Muerta is among the world’s largest and highest quality so-called non-conventional oil and gas resources. YPF is the world’s second-largest company in non- conventional acreage, auditors Wood Mackenzie said at the time.

Repsol is also exploring in Brazil’s Santos, Espirito Santo and Campos basins, including minority stakes in the Guara and Carioca discoveries where the company estimates recoverable reserves of as much as 3 billion barrels.

Repsol last year sold a 40 percent stake in its Brazilian business to China Petrochemical Corp. for $7.1 billion in a deal that valued the Spanish company’s remaining stake at about $10.7 billion. It invested $2 billion in exploring the site.

Brazil Discovery

The discovery of offshore oil in Brazil led to a surge in the market value of state-controlled oil producer Petroleo Brasileiro SA (PETR4), which has about 16 billion barrels of reserves. Discoveries including the Lula and Franco fields contain billions of barrels and are the largest finds in the western hemisphere since Mexico’s Cantarell in 1976.

Total world resources of oil shale, which is more expensive to produce than conventional oil, are conservatively estimated at 2.6 trillion barrels, and the amount of shale oil that can be recovered depends on “many factors,” according to the Energy Minerals Division of the American Association of Petroleum Geologists.

Shale formations contributed to a boom in U.S. oil output that reached a 9-year high in October, according to Energy Department data.

To contact the reporters on this story: Rodrigo Orihuela in Rio de Janeiro at rorihuela@bloomberg.net; Ben Sills in Madrid at bsills@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net

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