Vista Oil & Gas Is Opening the Spigots on Argentina's Vast Shale Play

(Bloomberg) -- Vista Oil & Gas is breathing a new kind of life into Vaca Muerta, the vast shale play under development in Argentina.

Eight years ago, the region was untapped. Then YPF SA, the state-run driller, broke ground, offering the first peek at the basin’s potential. Now, Vista, an independent driller led by former YPF CEO Miguel Galuccio, is planning the next stage of development, putting its first shale wells into production.

While mass development of the region remains uncertain, challenged by tough union contracts and the need for better communications, electricity and transport services, Galuccio said he’s hopeful his company’s success can serve as a beacon to other independents.

Vista Oil & Gas Is Opening the Spigots on Argentina's Vast Shale Play

“Ten independents can change the game here,” Galuccio said as he observed workers atop a rig in Bajada del Palo Oeste, Vista’s flagship shale area. “There’s a herd mentality to investments and Vista’s showcasing what can be done.”

With $5 billion of annual investment, production in Vaca Muerta, which translated means “dead cow,” can surge to more than a million barrels of oil equivalent a day in 2024 from around 250,000 now, according to Houston-based analysts for consulting firm Wood Mackenzie Ltd.

While that figure’s a far cry from the Permian’s 4 million barrels a day, there’s promise for the future. “The Permian is finite,” Galuccio said in an interview at Vista’s headquarters in Neuquen, Argentina, as he sketched wells on a flip-chart. “When drillers face deteriorating acreage, where will they turn for growth? I know they’re looking at Vaca Muerta.”

Vista Oil & Gas Is Opening the Spigots on Argentina's Vast Shale Play

YPF has said it wants to cut the development cost in Vaca Muerta, an 11,500 square-mile formation in Patagonia, to $8 a barrel in 2023 from about $11 today.

Vista’s wells are located at the Bajada del Palo Oeste block it acquired in 2018. This year, the company will add a second shale rig and plans to drill, frack and connect 13 wells in all, Galuccio said. Those wells, which currently cost about $13.5 million each, stretch for 1.6 miles horizontally after drillers have reached rock deep beneath the desert floor.

Galuccio, 50, is by no means a stranger to Vaca Muerta. As head of YPF from 2012 to 2015, he was the architect of the first incursions into the shale play, convincing Chevron Corp. and other heavyweights to take a risk on joint ventures when Argentina was an investment pariah feared for capital controls and volatile government interventionism.

Vista Oil & Gas Is Opening the Spigots on Argentina's Vast Shale Play

Galuccio sits on the board at Schlumberger Ltd. and was previously posted across the world with the Houston-based service provider.

In one of his roles, he led a push for Schlumberger’s workforce to be more integrated. When Galuccio founded Vista in 2017 as a special purpose acquisition company, he subsequently placed an emphasis on what he describes as a new culture in the oil field: Operators and service companies share profits when drilling and hydraulic fracking beat targets, and they share the cost when mistakes are made.

Results have impressed so far, with efficient transport of sand and water to Bajada del Palo Oeste helping Vista to frack quickly. Operating expenses, aided by a currency devaluation and the know-how of shale engineers poached from YPF, also surpassed expectations.

“Vista effectively delivered first year guidance,” Credit Suisse Group AG analysts led by Regis Cardoso wrote in a Feb. 21 report, adding: “The best is yet to come.”

Vista Oil & Gas Is Opening the Spigots on Argentina's Vast Shale Play

The open question is how quickly other independents will follow Vista into Vaca Muerta. “These smaller, nimble companies will play an important role, but they’re just getting started,” said Wood Mackenzie analyst Amanda Kupchella. She highlighted natural gas test wells by Pluspetrol SA, as well as development plans from Phoenix Global Resources Plc and Pampa Energia SA.

Brusque changes to gas subsidies may spook companies already postponing investment decisions until after presidential elections in October.

The vote could see Argentina swing back to protectionism as President Mauricio Macri’s market-oriented reforms falter.

The region has also been targeted by Greenpeace activists. About 40 protesters on Tuesday blocked the entrance to a toxic waste facility, according to an emailed statement.

Galuccio, meanwhile, remains positive. “To unleash this place’s potential we can’t fear progress,” he said.

©2019 Bloomberg L.P.