Shell to Triple Argentine Shale Spending as Winds Change

Royal Dutch Shell Plc’s Argentine unit plans to triple shale investments on prospects that the government will change energy policies to spur development of the Vaca Muerta formation and cut fuel imports.

Shell Argentina will increase its shale capital expenditures to about $500 million next year from $170 million at year-end, Chief Executive Officer Juan Jose Aranguren said. The company that mainly refines crude in Argentina will boost test drilling in Vaca Muerta with a long-term goal of producing light crude from its shale operations, he said.

Argentina will need $300 billion to develop Vaca Muerta in a six-year period that would make the country oil sufficient starting in 2020 and will keep producing for as many as 40 years, Aranguren said yesterday in an interview at his Buenos Aires office. Vaca Muerta, the world’s second-largest shale gas and the fourth-largest shale oil formation, is in Neuquen province in southwestern Argentina.

“Now we feel a different wind blowing and we are assessing our possibility to invest in exploring the resources,” Aranguren said. “When you reach a situation where Argentina is importing 20 percent of its energy needs, a 180-degree change is needed in the energy policy.”

Repsol Settlement

Argentina seized a 51 percent stake in YPF SA from Repsol SA in April 2012 to stem fuel imports that doubled to $9.4 billion in 2011 and cost the country $10 billion in 2012. Repsol, based in Madrid, said Nov. 28 it is negotiating final terms of a compensation deal with the Argentine government to end a 19-month conflict over the seizure.

In addition to the Repsol-YPF settlement talks, Aranguren cites YPF’s $1.24 billion shale accord with Chevron Corp., the second-biggest U.S. oil producer, as another favorable development for Vaca Muerta. Aranguren also cited the Argentine government’s plan this year allowing companies that invest $1 billion over a five-year period the ability to sell as much as 20 percent of their output abroad without paying export taxes.

“Lawmakers may write a new energy law in the next two years to establish a solid legal framework to attract investment,” Aranguren said. “Argentina needs to offer some confidence to investors in order to bring capital back to Argentina.”

Hydrocarbons Law

Argentina’s existing hydrocarbons law was adopted in 1967, when the country didn’t have any offshore or unconventional operations and environmental concerns were less of an issue, Aranguren said.

“We have an opportunity in the next two years to make these changes materialize in a law,” he said.

Aranguren, 59, was named president of Shell’s Argentine unit, or Shell Compañía Argentina de Petróleo SA, in 2003, the same year Nestor Kirchner was elected president. Kirchner asked consumers in 2005 to boycott Shell after it raised fuel prices.

Former Argentina Trade Secretary Guillermo Moreno imposed 83 fines on the company and took Aranguren to court. All cases were dismissed. Moreno was ousted Nov. 19 after eight years of using strong-arm tactics that earned him a reputation as a bully.

The firing of Moreno “is a signal that they can’t continue running the country the way they were running it,” Aranguren said.

Shale Expansion

Shell expanded into shale exploration. It has four wells in production at Vaca Muerta, is drilling two more and is analyzing opportunities to increase its shale acreage, he said.

“If the Vaca Muerta operations go well we will be able to integrate them with our downstream operations in the country,” Aranguren said.

Initial oil production of 465 barrels a day started in March from its 65 percent-controlled Sierras Blancas venture in Vaca Muerta. Medanito SA owns 25 percent of Sierras Blancas, and the Neuquen state-controlled Gas y Petróleo del Neuquén SA owns 10 percent.

The drilling tests at Vaca Muerta are encouraging, he said. Still remains to be seen whether Argentina has the political maturity to update the hydrocarbons law, which would ultimately secure investments, Aranguren said.

“There is no more time, even for this administration to run the economy with this level of energy deficit,” he said, referring to 2015 presidential elections. “This is an opportunity for the opposition party if they want to be elected but also to the official party in order to start solving the energy dilemma we are having at the moment.”

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