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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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The Energy Crisis Has Been A Boon For Argentina’s Dead Cow Shale Patch

  • The West’s ban on Russian oil imports in response to Putin’s aggression in Ukraine has sent energy prices soaring.
  • Argentina’s Vaca Muerte shale patch may emerge as a major story in the world’s push to cut Russian oil products.
  • Rising investment, improved drilling techniques, and the building out of critical infrastructure in the Vaca Muerta will cause breakeven prices to fall.

The U.S., UK, and European Union's ban on Russian oil imports sparked by President Vladimir Putin’s invasion of Ukraine has sent global energy prices soaring. The international Brent benchmark has gained a whopping 64% since the start of 2022 while natural gas had surged by a stunning 105%, which has been a boon for a global oil industry beaten down by a prolonged seven-year price slump. There are signs that significantly higher energy prices are here to stay benefiting drillers and hydrocarbon-producing nations alike. This bodes extremely well for Argentina’s nascent shale oil and gas boom which is situated in Neuquen Basin. The Vaca Muerta shale formation is the key geological body for what is shaping up to be an immense hydrocarbon boom. The 7.4-million-acre shale formation, spanning the Neuquén, Mendoza, Río Negro, and La Pampa provinces, is estimated to contain technically recoverable shale oil resources of 16 billion barrels and 308 trillion cubic feet of natural gas, making it the second-largest shale gas resource in the world.  Sharply weaker energy prices were threatening the urgently needed development of the Vaca Muerta. This is because the formation has an average breakeven price of $55 per barrel for new projects and $40 to $50 a barrel for existing operations. In an environment where Brent was trading at less than $50 per barrel, as occurred during 2020, it was difficult to attract the required investment to effectively develop the Vaca Muerta. This threatened the national government’s planned economic revival which was to be fueled by hydrocarbon production from the shale formation. As a result, Buenos Aires implemented a range of measures, including establishing a price floor for crude oil, aimed at securing the additional investment required to develop the Vaca Muerta. The shale formation also has the potential to significantly boost global energy supplies, making its development crucial to resolving the current crisis, which was triggered by a confluence of events, notably a lack of investment since the 2015 oil price crash. 

Ministry of Economy data shows remarkable hydrocarbon production growth since about the middle of 2021. For April 2022, Argentina pumped an average of 609,439 barrels of crude oil daily, which despite being 2% lower month over month was an impressive 21% greater than for the same period a year earlier. Natural gas production of 858,166 barrels of oil equivalent per day declined 1.8% compared to a month earlier and by 1.5% on a year-over-year basis.

Source: Argentina Ministry of Economy and U.S. EIA.

That saw total national average hydrocarbon output of nearly 1.5 million barrels of oil equivalent for April 2022, which while 2% lower than March was a notable 6.8% higher than a year earlier. For April 2022, 41% of petroleum and 53% of natural gas production came from non-conventional operations, compared to 30% and 37% a year earlier. Those numbers underscore the ongoing development of operations in the Vaca Muerta and the significant expansion of shale oil and natural gas in unconventional play. They also show that Argentina’s hydrocarbon operations and production have returned to pre-pandemic levels.

The strong production growth witnessed over the last two years can be attributed to a significant increase in investment which will be further stimulated by the recent oil and natural gas price rallies. The latest developments, which see Brent trading at well over $119 a barrel, saw a number of energy companies operating in the Vaca Muerta earlier this year announce plans to fast-track investment in the shale formation. That includes Argentina’s national oil company YPF, 51% owned by the Argentine government, announcing plans to increase its $3.7 billion 2022 investment plan in response to significantly higher than expected oil prices. This, the company stated, would likely see greater exploration and development activity with a view to further expanding hydrocarbon production.

Related: Gazprom Neft CEO: Russia Already Exports Half Of Its Oil To Asia

Argentina’s rig count is also steadily rising since hitting a low of no active rigs in April 2020 during the COVID-19 pandemic. According to Baker Hughes data there were 50 active rigs at the end of May 2022, which despite being four less than April 2022 was higher than the 45 rigs reported for the same month in 2022.

Source: Baker Hughes and U.S. EIA.

That is a clear indicator of activity in Argentina’s oil patch, notably the Vaca Muerta shale formation, which is ramping up at a steady clip. YPF, in early June 2022, announced that it intended to widen its drilling program. This will see the national oil company drill two wildcat wells in Mendoza, the first such wells in the northern section of the Vaca Muerta, and if they are successful a further 150 wells on two blocks in the area will be drilled. These developments indicate that Argentina’s oil and natural gas output will keep growing at an impressive rate.

Rising investment, improved drilling techniques, and the building out of critical infrastructure in the Vaca Muerta, such as the 563km or 350mile natural gas pipeline connecting the formation to Buenos Aires, will cause breakeven prices to fall. YPF believes that a combination of technology, improved infrastructure, and drilling expertise will see breakeven prices fall to as low as $30 per barrel, making the formation competitive with U.S. shale oil and other Latin American jurisdictions. This will attract further investment, especially when it is considered that it is light and sweet with API gravity of 40 to 45 degrees with less than 0.5% low sulfur content. That makes it easier and cheaper to refine while giving it a low carbon footprint compared to many other oil grades produced in Latin America. Those qualities have seen Argentina’s key crude oil blend Medanito becoming popular among global energy markets with cargoes being shipped to the U.S. West Coast and Europe. In late May 2022 Buenos Aires announced it was easing foreign exchange controls for the oil industry in a bid to attract further investment and bolster production. 


Industry analysts estimate that Argentina could be pumping one million and 1.7 million barrels of oil equivalent of petroleum and natural gas respectively by 2026. That would see the economically crisis-riven country emerge as a world-class petroleum producer capable of exporting around half of the crude oil and natural gas it produces. Such a development, if it occurs, will give the economy a solid boost. It will also make up for any supply shortfalls caused by a lack of drilling activity in North America, while expanding global natural gas supplies at a crucial time, with the gaseous hydrocarbon mix a crucial fuel for the clean energy transition.

By Matthew Smith for Oilprice.com

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