$500-million JV with YPF brings McClendon to Vaca Muerta

Aubrey McClendon
Provided by American Energy Partners Limited, Source: WikiCommons, Author: McNeese Studios

Following its investments in Australia and Mexico, Aubrey McClendon’s American Energy Partners have now turned its attention to Argentina, signing a $500 million oil and natural gas development deal with YPF last week.

For the next three years, the company will engage in shale exploration in a pilot area of 55,500 acres. After that, the two companies plan to expand into another block that covers 92,600 acres.

“We decided over a year ago that we should take the expertise we’ve developed to those countries around the world where the shale code hasn’t been cracked yet,” Aubrey McClendon, CEO of American Energy Partners, told The Oklahoman on Friday. “It’s been tried either by companies too big or too small. We think we have a high level of technical expertise and the ability to watch costs and be the prime mover in combining this world-class technology with world-class cost control.”

With estimated 27 billion barrels of shale oil and 802 trillion cubic feet of shale gas, Argentina is one of the riches shale destinations in the world. Also, with more than 275 drilled wells so far, it is one of only two (alongside China) countries outside of North America that are producing shale gas and tight oil at commercial volumes – according to last year’s EIA report. However, despite Argentina’s commitment to shale exploration, tapping these immense reserves will be neither easy nor cheap. According to a report from The Argentine Institute of Petroleum and Gas (IAPG) released in July, exploration of the Vaca Muerta shale deposits will cost more than US$1 billion over the next 20 years.

This is why, Argentina’s state-own giant YPF has been shopping around for partners who can bring the much-needed cash as well as the technical know-how to the rich Argentinian plays. This has been further accelerated in November when the country’s presidential elections were won by a Conservative pro-business candidate and former Shell executive Mauricio Macri, paving the way for a new government which is intent on seeing the shale boom through.

While Canadian exploration company Madalena Resources has long been active in the country’s prolific Vaca Muerta formation, they are certainly not alone. Back in December 2015 YPF and an Argentine unit of Dow Chemical signed a JV to put additional investment of $500m into the exploitation program at the El Orejano gas field, also within the Vaca Muerta. There have also been rumours of a YPF-Gazprom deal, expected to complete in March 2016.

Argentina is an attractive proposition for operators not only because of its rich deposits and pro-shale government. Another major factor is its proximity to Asian markets (with Australia’s seven new liquefied natural gas export facilities), and its government mandated price controls, guaranteeing sales prices of $7.50 per 1,000 cubic feet of natural gas and $67.50 per barrel of oil, well above Friday’s U.S. price of $2.10 and $29.42, respectively.

“Those are two big reasons why we want to be in Argentina,” McClendon said.

Low domestic oil and gas prices have prompted some operators to consider international expansion, however, according to McClendon, American Energy Partners has no immediate plans to add more international markets portfolio.

When it comes to rock-bottom crude and gas prices(crude oil plunged to $28 per barrel as of today), McClendon believes that a rebound will come sooner than many expect.

“2016 is going to be a great opportunity,” he said. “We think it will rebound from the bottom of the cycle. Given the number of drilling projects that have been deferred or delayed or cancelled, we think people are too negative on oil and gas prices. I’m optimistic by nature and feel it will turn around faster than others think.”

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