The long-term transition to low-carbon energy systems continues to gain momentum. Over the past two years, we have seen an acceleration of societal, political and investor pressure on industry players to move away from fossil fuel-based energy and towards a carbon-free economy. For example, at the start of 2020, only a few oil and gas companies had announced net-zero emissions targets by 2050. Today, dozens of companies have set increasingly ambitious targets, including several with deadlines of 2040 or earlier. The bar continues to rise, especially as shareholders demand broader and faster emissions reductions from the most emitting sectors.
More recently, geopolitical tensions triggered by the invasion of Ukraine and the massive impact on the lives and livelihoods of people in the region have caused turbulence in energy markets in Europe and beyond. . Even before the conflict in Ukraine, the rebound in energy demand caused supply constraints and price spikes for multiple commodities. Today, there is an urgent need for an increased supply of secure, reliable and affordable energy for global markets in the short to medium term. During previous periods of high prices, the oil and gas industry responded by sanctioning multi-billion dollar megaprojects with decades of production life and associated emissions. In contrast, the current imperative to reduce carbon emissions not only requires low-emission hydrocarbon resources, but also rapid time-to-market, the latter being a key feature of unconventional oil.
In the oil and gas industry, the term “unconventional” refers to hydrocarbons that are obtained by methods other than traditional vertical wells. Although most unconventional oil and gas development has been concentrated in North America, alternative sources are being developed in many places around the world, such as China, Saudi Arabia and, most notably, Argentina.
The formation of Vaca Muerta, Spanish for “dead cow”, in Argentina shows potential for increased global supply. In 2019, our research concluded that the geological properties of Vaca Muerta were comparable to major formations in the United States and that it was a promising site for development. Today, after years of improving productivity, including importing best practices, Vaca Muerta’s average technical break-even point is in line with leading unconventional fields in the United States.
Perhaps more importantly, the carbon intensity of Vaca Muerta oil falls well below the global average. This means that increased export production from Vaca Muerta and similar sites around the world could help reduce the intensity of global greenhouse gas emissions and increase the supply of affordable and reliable oil to as the industry evolves.
Vaca Muerta: an overview
According to McKinsey’s Global Energy Outlook 2022, fossil fuels still have a critical role to play in the years to come, despite increasing levels of electrification. 1 Around 2035, the demand for natural gas is expected to increase by 10 to 20% compared to today; it is expected to represent a significant share of total primary energy demand by 2050. This means that in all scenarios, fossil fuels will continue to fill gaps in the energy mix as the world shifts to energy sources alternatives.
In the context of heightened volatility due to recent geopolitical events and technological upheavals, shale oil extraction presents an element of certainty given the modularity of its capital expenditure as well as the shorter lead time between drilling and production compared to conventional oil projects. For these reasons, shale oil can react flexibly to sudden supply disruptions and fluctuations in oil prices.
Argentina has the second most abundant unconventional gas resources and the fourth most abundant unconventional oil resources in the world, most of which are located in Vaca Muerta, 2 located mainly in the province of Neuquén. Additionally, the geology of Vaca Muerta is comparable to major formations in the United States, particularly the Permian Basin and its constituent parts, such as the Delaware and Midland Basins.
Shale wells typically reach peak productivity early in their lifespan and then decline rapidly. With this in mind, the geological features of Vaca Muerta offer relatively high productivity rates, which are often associated with a higher expected ultimate recovery (EUR). In fact, our research shows that Vaca Muerta wells in 2021 peaked production of 82,000 barrels of oil in the first 90 days of production versus 76,000 barrels of oil in Delaware. In addition, the wells of the last three annual Vaca Muerta campaigns have consistently achieved cumulative production at least 23% higher than that of Delaware.
In economic terms, our research shows that the Vaca Muerta technical breakeven price for oil is $36.00 per barrel (BBL) and for gas wells is $1.60 per million British thermal units (MMBtu), both of which conform to most US unconventional fields. at $34.00 to $51.00 per BBL and $1.30 to $1.80 per MMBtu. Higher local drilling costs are primarily offset by higher well productivity, which is the result of higher initial production peaks and longer, sustained production levels.
Additionally, Vaca Muerta Shale Oil is in the lighter oil range and has a low sulfur content (less than 0.5%, compared to 1.0-3.0% typically). This facilitates refining and conversion to gasoline and therefore requires less complex refining technologies. Exports of US light crude to Europe (mainly France, Italy and the UK) and East Asia (mainly China, Korea and Singapore) have also recently increased. 3 Thus, it stands to reason that Vaca Muerta oil could also be placed in these markets, given its similarity to US light crude.
Finally, Vaca Muerta’s production processes have a petroleum carbon intensity of 15.8 kilograms (kg) of CO₂ per barrel of BOE oil equivalent, which is among the lowest carbon intensities for oil and gas operations in the world. the world – and well below the global average of 23.0 kg CO₂ per boe.
Production potential and export opportunity
Today, Argentine crude oil production is between 0.5 million and 0.6 million BBL per day. Provided Vaca Muerta develops towards its potential, this could be doubled over the next five years (by 2027) and tripled over the next ten years (by 2032), potentially putting Argentina in the top 20 of the oil exporting countries. In addition, our analysis shows that natural gas production could increase from approximately 4.0 billion cubic feet per day to 5.4 billion cubic feet over the next five years and 6.3 billion cubic feet over the next ten years, thereby balancing Argentina’s dependence on imports.
These estimates are based on scaling Vaca Muerta’s business from approximately 30 platforms in 2022 to 70 platforms over the next four to five years. This would give Vaca Muerta a rig count per acre similar to Eagle Ford’s rig count in Texas.
Expanding Vaca Muerta’s business will likely require at least $45 billion in investment over the next ten years – which could also help overcome infrastructure bottlenecks – and could be encouraged by a reduction in the surface risk profile.
In the long run, imports of equipment and supplies needed to accelerate oil and gas activity could be fully funded by revenues from increased oil exports and savings from reduced gas imports. Our estimates show that such financing could also generate positive net inflows of around $50 billion over the next ten years. In the same time frame, the increased development of Vaca Muerta could deliver up to $58-70 billion in federal and provincial revenue.
Furthermore, this increased level of activity would intensify the participation of the oil and gas industry throughout Argentina, increasing the industry’s contribution to the country’s GDP from its current level of 1.4% to 8.4%. % by 2032 and potentially creating up to 20,000 direct jobs and 260,000 indirect and induced jobs.
Vaca Muerta represents an opportunity to tap into an additional source of energy that is economical, easy to access and always available. Shale oil is currently not developed on a large scale outside of the United States, and Vaca Muerta provides the first readily available opportunity to do so.
As the world moves further and further away from carbon-intensive energy sources, Vaca Muerta can help on two fronts. In the short term, it can provide the world with much-needed affordable, reliable and secure energy supplies. And in the longer term, it can form the basis for Argentina to unlock additional decarbonization pathways, such as blue or green hydrogen.