Shale Boom in Argentina

Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Many investors are aware of the current shale oil and gas boom in the United States brought about by the use of fracking technology. 

What investors may not be aware of though is that this technology is now beginning to be used all around the world. One example in the headlines recently is Argentina. 

That country has some of the largest and highest quality reserves of shale oil and gas. This year, the U.S. Energy Information Agency ranked Argentina third globally in terms of technically recoverable shale gas reserves with 7.74 trillion cubic feet of gas. This total is behind only China and the U.S. 

The company at the forefront of shale discoveries in Argentina is the former state-owned oil company YPF SA ADR (NYSE: YPF), which is 57.43% owned by Spain's Repsol YPF SA. 

YPF is eying another 1 billion barrel discovery, which is adjacent to a field in Patagonia's Vaca Muerta formation, which was found to have reserves six times bigger than original estimates at 927 million barrels. Vaca Muerta compares very favorably to U.S. shale formations. It is three times as deep as Eagle Ford in Texas and its yields may be double. 

The company said the hydrocarbons found there were about three-quarters oil and one-quarter gas. The 927 million barrel estimate from YPF is a very conservative, one which says only 4 percent of all the hydrocarbons will be extracted. 

On top of that, there may be a lot more shale oil and gas to be discovered since YPF has explored only a 502 square kilometer area out of the total 12,000 square kilometer area so far. In 2012, the company plans to spend at least $87 million drilling in the area. 

A flood of companies have launched exploration programs in Argentina over the past six months. These companies include many large global firms with experience in shale hydrocarbons such as ExxonMobil (NYSE: XOM), Total SA ADR (NYSE: TOT), Apache (NYSE: APA) and EOG Resources (NYSE: EOG). 

Energy industry leaders in Argentina believe the country can follow in the footsteps of the United States and turn the energy industry from a state of decline into a boom. 

The energy industry in Argentina has definitely been on a downward slope. For example, the country expects to import a record 80 cargoes of LNG (liquified natural gas) in 2012, a 20% increase from this year. 

But for a shale boom to proceed, Argentina must overcome some obstacles. 

First, oil and gas prices are regulated in Argentina. The government has kept prices so artificially low that investment is discouraged. 

Royalties are also low in comparison to other energy-rich countries. The good news here is that the government is offering higher prices for shale oil and gas under the Gas Plus and Oil program, which offers better conditions for the industry. 

Finally, labor relations stink. There have been a number of strikes by oil workers. This needs to improve before Argentina can enjoy a shale boom. 

However, as evidenced by the Gas Plus and Oil program, Argentina finally seems to be moving in the right direction. If it continues along this path, YPF is sure to be the prime beneficiary. 


The author owns no shares in the companies mentioned above.

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