Argentina beats a dead cow, and finds oil

 Argentina has oil! Lots of oil. The problem is politics. More specifically, high export taxes that effectively cap the price of oil for producers.

In November, Repsol YPF found a billion barrels at Loma La Lata. (That’s “Tin Can Hill” in English, which I really like.) Loma La Lata is in the Vaca Muerta region (yes, Tin Can Hill is in Dead Cow) which has seen previous shale oil discoveries. In December, it made another discovery.

How fast can the oil be pumped out of the ground? Shale oil (also called “tight oil”) is produced by hydraulic fracking, where you drill a vertical well, turn it horizontal through the shale, blast explosives into the rock, and then pump pressurized fluid in to break it up further and liberate the hydrocarbons.

Shale oil wells have hyperbolic decline rates. A typical well might initially produce 900 barrels per day, declining to 200 by the end of the first year, and well under 100 by five years. Wells are generally spaced at 160 acres. So, back of the envelop: YPF is prospecting 428 square kilometers, or 661 160-acre blocks, which at an average daily production (over five years) of 260 bpd translates to about 170,000 barrels per day. Multiply that by two (for the second field) and you have just increased Argentina’s production from around 800,000 bpd to 1.14 million! Actual exploratory wells in the Vaca Muerta have started at 500 bpd, which would still leave you with 990,000 bpd after just these two discoveries.

Existing production will decline, but Argentina is lucky in the sense that it can adopt technologies from elsewhere: oilfield surveillance is two decades behind the U.S. Better oilfield surveillance means better use of secondary recovery techniques. As far as those techniques go, YPF is a world leader. Combine new surveillance technology with YPF’s existing expertise, and there is a good chance that existing fields will continue to produce for some time. In 2010, YPF managed to replace all of its reserves entirely through secondary recovery.

(In terms of gas, the picture is even brighter: Argentina looks to have the second-largest shale gas reserves on the planet, after the United States. But that is for another post.)

The production tax regime is fairly light, as these things go. The provinces charge a 12% royalty, plus a 2% revenue tax on upstream companies. The feds then charge a 35% income tax. Taxes have to be relatively light, because production is expensive! Operating costs in shale plays in Texas are around $8 per barrel; in Argentina they are likely to be around $10. Capital costs are even higher: wells cost about $12 million in Argentina. Total costs, then, could range as high as $56 per barrel. Now that is a worst case scenario: a more-likely number is $27 and it could be as low as $19 ... but the high number is not outside the realm of possibility. Certainly marginal costs will go that high once production ramps up.

And therein lies the rub. Argentina controls oil prices. Well, no, it doesn’t quite control them; it only does that for gas. (And that is why shale gas development is not going to go very fast.) But it has very high export taxes which effectively cap the price of oil at $42 per barrel ... which is a bit of a problem for high-cost shale plays. 

The system actually works as follows: when the international price goes above $42, the export tax kicks in at $18.90 per barrel. When the international price hits $60.90 ($42 + $18.90), the tax effectively becomes 100% of all revenues above $42. Argentine firms have managed to get around that by selling at higher domestic prices: in 2011, some companies realized crude sales as high as $60 per barrel, with an average around $55. (See page 14.)

This is going to be a mess to change. Shale oil could get a special rate, of course. (In practice, that would probably be a rebate of some sort.) Domestic oil prices could be allowed to rise. (Probably not a terrible idea, although who knows? Maybe there are giant increasing returns to oil consumption in the agricultural sector.) Export taxes could be lowered in general. (Which also, of course, means allowing domestic prices to rise ... and would deprive the government of much-needed revenue.) But it is still going to be a mess. No American has any business these days criticizing foreign democracies for having sclerotic political institutions, but President Fernández has a tricky political situation at home. I would not be that optimistic.

And then, of course, there are the Mapuche. As Setty has pointed out, early statements from the industry do not bode well.

I wish Argentina luck. But I think it might take a little longer than the analysts believe.

Comments

[Peter]

I thought the problem with oil-bearing shale is that the amount of energy required to extract the oil is almost as much as the energy produced. Sometimes even more.

[Noel Maurer]

No, you're thinking of oil shale, which is different from shale oil. Oil shales are essentially kerogen-containing rocks. You mine the rocks, and then heat them to extract the oil. That's not economical.

Shale oil (or tight oil) is oil contained in the interstices of rocks, not inside the rock itself. You fracture the rock (as described in the post) and the oil flows out.

Does that clear it up?

[Will Baird]

"You mine the rocks, and then heat them to extract the oil. That's not economical."

Shouldn't that be appended with a "at the current price of oil"?

[Noel Maurer]

Energy input costs rise with energy prices.

[Peter]

Okay, I see the difference. Though it sounds as if the extraction of shale oil/tight oil is fairly energy-intensive itself.

[Noel Maurer]

Not as much as you might think. The ratio is low enough as to be almost inconsequential, at least compared as to other cost.