Chevron Corporation (NYSE:CVX): This Field Could Create the Next Generation of Oil Millionaires

Chevron-CorporationA betting man would wager that most Americans have not heard much if anything about YPF—Yacimientos Petroliferos Federales (NYSE:YPF). It is, in fact, Argentina’s national oil and gas company. And it has the largest holdings in one of the most promising conventional and unconventional oil investments in the world, the so-called “Vaca Muerta” field.

The name means “Dead Cow” in Spanish, but there is nothing bovine about its premise or promise. Chevron Corporation (NYSE:CVX) is one of YPF’s partners in Vaca Muerta and is another major investor and prospector in the rich oil field. Shell, Total SA, and Exxon Mobil are also there drilling, as are others.

Argentina has actually experienced a boom of drilling activity in recent years. At 27 billion barrels of oil equivalent (BOE), it hosts the second-largest shale gas deposits and the fourth-largest shale oil deposits in the world. However, Argentina’s advantage in this era of low and uncertain oil prices is its government-regulated oil price.

Perhaps this is not always a good thing, but in the current world market, it is an excellent thing considering that it has set a price of between $76.00 and $82.00 per barrel of Medanito Light and Escalante Heavy at $74.00 per barrel in 2015. Either one of these prices dwarfs the Brent oil benchmark price of between $40.00 and $50.00 of the past few months.

Light Crude Oil Chart

Chart courtesy of www.StockCharts.com

It is not surprising that YPF enjoyed much higher-than-expected second-quarter earnings last August as it increased output with net income rising to 2.3 billion pesos from 1.5 billion pesos in 2014, according to Bloomberg. The geological and regulatory advantages are attracting more oil majors and juniors such as Calgary’s Madalena Energy. The latest to join the Vaca Muerta party is Gazprom. Russia’s oil and gas giant signed an agreement to develop gas extraction projects in Vaca Muerta, located in Neuquen, on September 4th.

As reported by Bloomberg, the agreement includes conventional and unconventional extraction of hydrocarbons in Argentina and marks the starting point for an overall wider cooperation agreement that could be signed in March 2016. Gazprom will bring its ample technical expertise and financial capacity to YPF, enabling the latter to catch up to companies like Chevron Petronas and Dow Chemical.

YPF, which the Argentinean government took back from Spain’s Repsol in 2012, has long sought major partners for the exploration and exploitation of hydrocarbons in Vaca Muerta, said to have the fourth and second respective largest unconventional oil and shale gas resources in the world—and almost all concentrated in one field—Vaca Muerta. Chevron is already a partner, producing 43,000 barrels of oil per day with YPF. At the same time, Dow Chemical seeks gas in the El Orejano. Other companies such as Malaysia’s Petronas and China Petroleum & Chemical have signed similar agreements with YPF.

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The Vaca Muerta field is also ideal for fracking from both the technical and regulatory/social perspectives. Fracking has revolutionized the U.S. economy and the oil markets, considering that the Saudis have forced a price drop in order to wipe out the profitability of oil wells in Texas, Oklahoma, Louisiana, North Dakota, and Alberta wells countries. The oil majors consider the Vaca Muerta deposit to be as precious an oil and gas prize as Texas, boasting some 30,000 square kilometers of rock dense with oil—even if it’s buried 10,000 feet below the surface, 3,000 meters deep, and trapped in micropores. Fracking, a technique based on the shattering of rock with water, sand, and chemicals (none of which are toxic or unusual) is the only way to extract it.

Dr. Ernesto Gallegos, a geologist at the University of Buenos Aires, and a supporter of a project known as “Energy Independence Argentina” said that there is nothing odd about fracking. The technique has helped producers extract shale oil and gas since the 1940s. Modern technology has made it cheaper and safer. Modern technological advances have made it ever more commercially viable, efficient, and safer to convert the resources into reserves.

YPF has secured plenty of technological expertise thanks to Chevron and other companies with shale experience in Texas and the Middle East. Its advantage is that Vaca Muerta is in an isolated area with fewer risks of contamination to the environment and the population. Fracking in Vaca Muerta precludes any risk of contamination of aquifers because the latter are located at about 700 feet while the shale hydrocarbons are located more than 10 times deeper. Drilling takes place vertically and horizontally.

The pipes are covered with cement to prevent leaks in the area closest to the aquifers. So far, there have been no incidents. The problem is in the cost. A regular oil well can cost about $2.0 million to drill; an unconventional one can easily reach some $6.0 million. This means that Argentina still needs huge foreign investments to open more and more wells. Therefore, the more foreign partners YPF can secure, the better.

Apart from Gazprom, China’s Sinopec has expressed strong interest. They have also given China’s rising presence in South America and planned railway linking the Atlantic and Pacific coasts through the Amazon and the Andes to facilitate importing resources from Brazil (and Argentina).

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