Economics Of Vaca Muerta’s Development Trumps Climate Concerns

(Energy Analytics Institute, Piero Stewart and Pietro D. Pitts, 20.Nov.2018) — Argentina’s Vaca Muerta unconventional shale gas formation in Neuquén is at the center of an energy revolution taking place in this South American country. Numerous direct and indirect developments related to production of the formation’s resources will generate multi-billion revenue streams that will drive future economic growth.

Continued development of Vaca Muerta’s shale gas will allow Argentina to: multiple its crude oil and natural gas reserves by factors of five and 14, respectively; sell oil and gas to the world; activate all of its productive sectors; generate 500,000 direct and indirect jobs by 2024; and fulfill its energy demand for 150 years.

In essence, a real game-changer if there ever was one.

These economic-driven actions will take priority over the environment and any negative effects such activities will have on climate change. Considering ongoing uncertainties in Argentina related to inflation, a volatile currency and unstable energy prices, it’s understandable why the decision by government to support continued frack-driven developments has been an easy one.

Argentina’s current economic downturn appears to have made the decision simple for the administration of President Mauricio Macri given the potential of the country’s hydrocarbon sector to rapidly and meaningfully impact fiscal coffers.

Macri’s market-friendly administration continues to push forward with efforts to improve reforms and attract foreign direct investment as well as investment from local players, and especially as they relate to Argentina’s massive unconventional shale resources. In terms of the oil and gas sectors, the main point of discussion across the country remains the Vaca Muerta shale formation, located in the Neuquén basin, and the only other such formation producing in the Americas.

“Vaca Muerta is a positive revolution, and an energy revolution for Argentina. It continues to move along and we continue to confront our problems and those of the world, and this development continues,” said Macri this summer during a ceremony in Neuquén broadcast by Argentine newspaper La Nacion. “And, we are not going to stop until we have exported $30 billion in gas and oil from Vaca Muerta.”

For all practical purposes, production of Argentina’s shale gas resources remains in its infancy as a forthcoming shale boom is still to come. Located in the southern most region of South America, Argentina holds the world’s second largest recoverable shale gas resources with 802 trillion cubic feet (Tcf), and the fourth largest recoverable shale oil resources with 27 billion barrels, according to data posted to the website of Washington, DC-based U.S. Energy Information Administration or EIA. The bulk of these resources are found in Vaca Muerta.

Source: EIA
Source: EIA

However, the lead up to the exponential fracking boom in Argentina has been slow due to internal issues and not issues below the surface.

“Two and a half years ago we were on the verge of an energy collapse. We changed the rules and this summer we will export our first gas to Chile,” said Macri during the ceremony in Neuquén. “We expect to not only supply Chile, but the rest of the world with our energy.”

Argentina is on the right path to make large-scale development of Vaca Muerta a reality. Responsible development of its unconventional resources has potential to be an once-in-a-lifetime economic engine for the country, Chevron Africa and Latin America Exploration and Production Company President Clay Neff said in an official statement in October 2018. However, “a stable and predictable business environment is essential to draw the investment capital needed to ensure Vaca Muerta reaches its potential,” said Neff.

FRACKING DEBUNKED

Despite the tremendous potential, development of Vaca Muerta will not come without opposition. For the government, the debate has been purely economic. For green groups, the debate has been about climate change for a number of reasons.

Extraction of Vaca Muerta shale gas relies on a much debated drilling technique called hydraulic fracturing or fracking. The technique breaks rocks at depth with fluid pressure, and this is accomplished by pumping water into a well at very high pressures, reported the EIA on its website.

Over at least the last two decades this method has taken off in the U.S. Its implementation is credited with boosting revenues and jobs while at the same time assisting the energy-starved country reduce reliance on hydrocarbon imports.

Despite economic positives, the use of chemicals during fracking has created a buzz among environmentalist about its dark side and challenges the technique poses in meeting goals established by the Paris Agreement. The agreement’s central aim is to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius, according to data posted to the website of the United Nations.

“We are on a very dangerous path in terms of increasing greenhouse gases in the atmosphere and fracking is only increasing that,” said Physicians for Social Responsibility (PSR) Environment & Health Program Director Barbara Gottlieb in a phone interview from Washington, DC.

During fracking, an intricate blend of chemicals, many toxic, and silica sand are added to clean water and pumped underground at extremely high pressure to fracture deep rock bands that contain small bubbles of methane. The methane as well as other naturally occurring dangerous gases and the non-contaminated water, are brought back to the surface, according to data on PSR’s website. The result “is toxic air pollution and toxic threats to local drinking water. A burgeoning literature of scientific and medical studies shows increases in serious health outcomes associated with living near fracking sites,” says PSR.

“To keep up with the growing volume of wastewater now being generated, drilling companies increasingly are injecting it back deep underground into wastewater wells. This practice helps keep the wastewater out of local water supplies but has been linked to small- to medium-sized earthquakes in some locations,” wrote Avner Vengosh, professor of geochemistry and water quality at Duke’s Nicholas School of the Environment, and Andrew J. Kondash, a PhD student in Vengosh’s lab who was lead author of a paper published Aug. 15 in Science Advances.

TWO-WAY GAME CHANGER

More than a hundred years ago explorers searching for water in Comodoro Rivadavia, Chubut discovered Argentina’s first conventional petroleum resources. That was in December 1907. Fast forward to 2018 and there are upwards to 28 areas in Vaca Muerta under concession by nearly 12 companies, according to Argentina’s Ministry of Production and Labor.

Vaca Muerta covers more than 35,000 square kilometers and extends over four Argentine provinces: Neuquén, La Pampa, Río Negro and Mendoza. The shale formation contains 40% of Argentina’s unconventional gas and 60% of the country’s unconventional oil, and contains more unconventional shale gas than Russia, and more unconventional shale oil than Venezuela. These reserves are sufficient to supply all of Argentina’s energy demand for 150 years, according to Argentina’s Ministry of Production and Labor.

In August 2018, Argentina’s production of conventional and unconventional gas reached 69.8 million cubic meters per day, the Neuquén government reported in an official statement on its website. Of these figures, unconventional gas amounted to 43.2 million cubic meters per day or 61.9% of the total gas figure.

In five years, Argentina expects combined unconventional gas production to reach 260 million cubic meters per day, of which 100 million cubic meters per day would be destined for export. Before then, Argentina expects to be a new exporter of gas by 2021, Argentina’s former Energy Minister Juan J. Aranguren said during a presentation in Houston in May of 2018.

Even so, in 2018 the country will save an estimated $400 million by not importing LNG and gas-oil. And more importantly, after 11 years the country will again export gas to Chile, according to Argentina’s Ministry of Production and Labor.

Vaca Muerta is situated 2,000 meters to 3,000 meters below ground and thickness of the shale horizon is between 30-450 meters. In comparison to U.S. shale plays, the thickness in the Wolfcamp formation is between 200-300 meters; Eagle Ford, 30-100 meters; Marcellus, 10-60 meters; Haynesville, 60-90 meters; and Barnett, 60-90 meters, according to data from YPF.

Typical Vaca Muerta wells take 37 days to drill and require around 500 workers and an investment of between $10 million to $12 million, according to Argentina’s Ministry of Production and Labor. All of these investments are equivalent to $250 billion over the next 30 years, the ministry said.

Argentina is transitioning from less clean to cleaner sources of energy in order to mitigate any impact on climate change. The country benefits in some ways since natural gas represents over 50% of the energy mix, said Aranguren. “As a consequence, our carbon footprint is better than the average footprint of OECD countries.”

“Argentina is currently revising its energy planning and, in December 2017, released a new set of energy scenarios, which would lead to significantly lower emissions — if additional measures are implemented —compared to current policy projections,” advised Berlin, Germany-based non-profit Climate Analytics, with offices in Togo and the U.S., in its May 2018 report titled Climate Action Tracker. “With the lower end of the scenarios, assuming a more modest growth of energy demand and optimistic assumptions on renewable and nuclear additions, Argentina could even overachieve its unconditional climate target submitted under the Paris Agreement,” the reported concluded.

Yet, assuming project investments due come, environmental threats will only increase as shale production grows.

Development of these resources will come at a high price to the climate, and not just in Argentina or South America. While the technique used in shale extraction will boost gas production, generate jobs and spur economic growth, it will also boost the country’s emissions of the potent greenhouse gases methane (CH4) as well as toxic and carcinogenic volatile organic compounds (VOCs).

“We know oil and gas well sites everywhere leak methane. Our concern with that has nothing to do with toxicity but with the tremendous damage it does to the climate. Methane is an extremely potent greenhouse gas. It’s 86 times more potent than CO2 over a 20 year time frame. And those effects on the climate from methane affect all of us everywhere,” said Gottlieb, who guides PSR’s national work on climate, energy and air quality.

The breakdown of methane products includes water vapor and carbon dioxide, both of which trap heat. So even 100 years after entering the atmosphere, methane’s byproducts keep contributing to global warming, according to Gottlieb.

The major sources of U.S. methane emissions are energy production, distribution, and use; agriculture; and waste management, according to the EIA, which is responsible for publishing official energy statistics from the U.S. government.

Vaca Muerta’s potential has already attracted major players from Total, BP, Chevron, ExxonMobil, Shell, Equinor, and Pan American Energy, among many others.

Officials from Argentina’s Energy Ministry didn’t reply to multiple requests for comments. Officials with Argentina’s Consulate in Houston declined to comment when questioned about Argentina’s activities to extract shale resources in the Vaca Muerta.

“We have the technology, capital and resources to actively participate in the Argentina shale revolution,” announced London-based Phoenix Global Resources pls in its 2017 annual report, published in June of 2018. “We firmly believe Vaca Muerta, and other unconventional resources in Argentina, represent the next shale oil revolution,” said Phoenix’s CEO Anuj Sharma in the report.

EXPORTING PROBLEMS

“This is the most important investment in Latin America in the energy, industrial and economic pole. We have made all the necessary modifications and now wait for the petroleum companies to accelerate investments to quickly arrive at a massive development so that the concessions generate more jobs,” said Neuquén Governor Omar Guitierrez during a ceremony in Neuquén in company of Marci and televised by Argentina’s media La Nacion.

Argentina’s fracking boom will directly touch lives in the Neuquén Basin and beyond. Añelo, a small petroleum town of about 8,000 inhabitants and located in the heart of Neuquén – which only some years ago neither had paved roads nor direct residential gas lines or direct water lines in there homes, and was on the verge of collapse – has been converted into Vaca Muerta’s operating center, announced ElTreceTV conductor Jorge Lanata in a special report about the petroleum region.

Many regions of Argentina will produce products for export to Neuquén and Añelo to support operations there. The population in Añelo is expected to exceed 20,000 shortly and construction and expansion of gas pipelines will transport Vaca Muerta gas across Argentina, to Chile and to ports for export.

Based on goals for unconventional oil and gas production between 2018-2023, as reported on the website of Argentina’s Energy Secretary, Vaca Muerta is expected to generate at least $1.4 billion per year in direct activity for national suppliers, boosting local productive capacity.

In Argentina there is the usual concerns people have in the U.S.: the need for tons of water, water disposal, and the desire to avoid contamination of aquifieres, among others, said Gas Energy Latin America Managing Partner Alvaro Rios Roca during a phone interview from the company’s headquarters in Santa Cruz, Bolivia. Neuquén, were Vaca Muerta sits, is very dry with very little population and therefore opposition to fracking isn’t an issue there or in Argentina. In addition, it’s creating thousands of jobs and the activity gets local support, he said.

“What you are doing with pipelines is transporting some of the problems associated with fracking to places that could be hundreds of miles away. We know leaks of methane and VOCs or volatile organic compounds happen where you have compressor stations. Those dangers are mitigated if the compressor stations are distant from human habit ants, that may or may not be the case in Argentina. But, the emissions, i.e. the venting and leakage, both of which occur from compressor stations means you have more methane going into the atmosphere, and again that is not a local issue,” said Gottlieb.

“Development of Vaca Muerta will not be detained by environmental conditions, but rather by macroeconomics inherent to Argentina,” said Rios, who worked formerly as executive secretary of the Latin American Energy Organization (OLADE) between 2006 and 2007 and Bolivia’s Ministry of Hydrocarbons between 2003 and 2004, in an emailed response to questions.

Three officials with Buenos Aires-based Transportadora de Gas del Sur S.A. — which transports 60% of the gas consumed in Argentina, owns a transport network that connects the Neuquén, San Jorge and Austral basins, to the Argentine capital Buenos Aires as well as major consumption centers of southern Argentina, the company reported on its website — didn’t reply to email requests for comments for this article about the safe transport of shale resources across the country.

“We’re talking about climate change and a phenomena that is global. We’re talking about changes in land mass, temperatures, and ocean temperatures. The scale of the problems goes way beyond any national border. It’s a global phenomena and the impacts are global; thus, they should be of concern to people in Argentina, the U.S., Africa, Europe, and in general people all around the world,” said Gottlieb.

(With assistance from Ian Silverman)

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