Latin America’s shale gas potential: Poised to exploit shale

Total
Mulling options: Several Latin American countries are investigating shale gas exploration
Credit: Total

Among Latin America’s reserves of rock-bound gas, Argentina’s have the greatest potential. While the country readies itself to harness this fuel, concerns exist around its extraction, finds Ivan Castano.

Argentina may not be the most popular country with foreign investors, but its plan to lead Latin America’s development of shale gas is likely to bring back some in droves – at least those brave enough to deal with the country’s mercurial politics.

It is not, however, the region’s only country keen to strike gold from the increasingly popular non-conventional fuel, which has thrown governments and oil companies into a scramble to explore and develop every deposit they can unearth.

Shale gas lies in ancient rock formations thousands of metres underground. Today these are broken down in a highly controversial and powerful horizontal drilling process called ‘hydraulic fracturing’, or ‘fracking’, which its opponents say uses toxic chemicals and can cause earth tremors.

As global conventional oil and gas resources run out, the need to churn out shale gas has grown. The US, which claims to have 19.5 trillion m3 (687 trillion cubic feet [tcf]) of recoverable and 62.4 trillion m3 of total shale gas reserves, hopes the resource will account for half of its natural gas production by 2035.

China’s 36.1 trillion m3 of recoverable shale gas, disputed by some to be lower, is making that nation rush into the game too. It has set producers a target to recover 30 billion m3 a year, though it has not provided a specific time frame. Some analysts say a lack of technological know-how may delay its growth plans.

And now there is Latin America. The region, which has seen huge prosperity in recent years because of China’s furious demand for its mining and mineral resources, is expected to spend over $40 billion to develop its shale gas resources, according to Frost & Sullivan’s (F&S) Latin American energy analyst Julio Campos.

Argentina’s 21.9 trillion m3 of recoverable shale gas reserves and its total 76.5 trillion m3 reserves are the third largest in the world and the largest in Latin America.

According to the International Energy Agency (IEA), Brazil ranks second, with 6.51 trillion m3 (total of 28.3 trillion m3), while Chile is third with up to 2.27 trillion m3 extractable among 8.50 trillion m3 in total reserves.

Respective recoverable and total reserves in the rest of South America are: 1.40 trillion m3 and 5.44 trillion m3 in natural gas giant Bolivia, 0.595 trillion m3 and 2.35 trillion m3 in Argentina’s tiny neighbour Uruguay and 1.98 trillion m3 and 7.05 trillion m3 in Paraguay.

While Brazil has the biggest potential after Argentina, it is unlikely to play the shale game. Its main focus is deep-water oil exploration, say analysts. Venezuela, which has 5.10 trillion m3, is also uninterested as ‘it has natural gas and oil coming out of its ears’, according to Campos.

Game changer

Argentina and Chile have the greatest interest in developing shale gas. Argentina wants to cut increasingly expensive oil imports by boosting natural gas production for local and international sale. For Chile, shale could be a game-changer for a country reliant on natural gas imports, mainly from Argentina, with which it has had strained political relations for years.

Advanced Resources International Inc
South America has signifcant shale gas exploitation potential
Credit: Advanced Resources International Inc

Argentina’s key deposits lie in its Neuquen and Chaco-Paranaense basins and the Gulf of San Jorge. President Kristina Fernandez has not yet announced a specific plan to develop its shale resources but is expected to do so later this year.

State-owned energy company YPF is not sitting on its hands, however. It recently announced plans to invest $32 billion over five years to develop its shale gas resources, of which $4.5 billion must come from private investors. To achieve that, it has also struck a string of development partnerships to extract shale from its vast Vaca Muerta basin in the Neuquen region. Notable among these deals are alliances with Chevron, Gazprom and China’s Bridas Energy Holding.

February saw Argentina inaugurate the 120 000 m3 El Orejano shale well in Vaca Muerta. The deposit, which lies 2700 metres underground, was developed by YPF and is the first completed by an Argentina company.

The first shale well is owned by France’s Total and is located in Aguada Pichana. YPF, which built the well with Exxon and local firm Gas y Petroleo Neuquen, plans to set up another 18. The gas will be sold at $7.5 per million BTU, according to YPF sources. While Argentina’s president inaugurated the new field, Spain’s oil and gas company Repsol made the claim that YPF had copied its shale development plans for the country.

On 18 February Repsol said that before Argentina expropriated its 51 per cent stake in YPF last year – a move that sent shock waves through the global investor community – it had banned foreign investors from participating in shale projects.

In a statement, the Madrid-based company, which is claiming in excess of $10.5 billion for its YPF stake, said it was ironic for Argentina’s government to change its strategy to suddenly welcome foreign investment on shale. So far Argentina has shrugged off Repsol’s lawsuit.

“They are going to have a hard time attracting more foreign investors if they fail to properly compensate Spain’s Repsol,” says Rodolfo Guzman, a partner at consultancy Arthur D. Little’s Latin American energy practice. “The government must ensure it compensates Repsol fairly. If it doesn’t investors are going to start looking at Argentina with more caution and concern.”

That has not stopped Chevron, which is becoming a major player in the global shale gas rush, from investing in Argentina. In late December, the US oil giant and YPF struck a $15 billion accord to explore Vaca Muerta and develop 100 shale wells, starting this year. The two firms will share exploration, commercialisation, technical and human-resource costs for the venture, they said.

Meanwhile Chile has also identified ‘significant’ yet undisclosed reserves in its Magallanes region. There too the government is expected to come up with a shale development scheme later this year, analysts say.

Argentina and Chile share a key shale gas basin called Austral-Magallanes, which Campos says YPF and Chilean counterpart Geopark are likely to develop through risk contracts and other joint ventures.

Chile also has a tiny fraction of the colossal Neuquen basin, which it may also develop with YPF, Campos says, adding that Chile does not have as much natural gas technological know-how as YPF.

Campos expects both countries’ political friction to be put aside to enable the development of shale.”There is 88 recoverable tcf [2.49 trillion m3] in that basin, which both countries share,” Campos notes.

Chaco-Paranaense

Interestingly the Chaco-Paranaense basin is also shared by Argentina, Brazil, Uruguay, Paraguay and Bolivia. Argentina, however, has the majority of the Chaco portion while Brazil holds the bulk of Parana. Uruguay also has a big chunk of Parana while Paraguay straddles both basins. Bolivia’s north also shares a significant part of the Chaco basin.

Here too, analysts envisage there will be a string of development partnerships between regional and international players eager to extract the basin’s resources. YPF and Ancap, for example, have already teamed to develop Chaco’s Uruguayan slice.

In Uruguay and Paraguay, YPF is seen leading the game as both countries also lack natural gas expertise. But just how much shale gas Uruguay and Paraguay are willing to develop is anyone’s guess. Neither country has announced a specific plan to extract shale and, depending on future natural gas prices, they may choose to continue importing less expensive liquefied natural gas (LNG) than engage in costlier shale exploration projects.

According to a Bolivian energy analyst who requested anonymity, the country is likely to develop its shale resources faster than Uruguay and Paraguay.

“We have a lot of natural gas exploration experience and great infrastructure. We also have the money and the technological know-how.” Bolivia sells gas to Brazil and Argentina, and is likely to want to develop its resources through international partnerships that will allow state gas firm Yacimientos Bolivarianos to retain control, the analyst adds, noting that Chaco apart, Bolivia also has shale gas resources in Camiri, Takoyo and Santa Cruz.

Colombia’s effort

Meanwhile Arthur D. Little’s Guzman says Colombia also holds interesting shale prospects. While it has more modest reserves than other countries, Bogota is making big efforts to attract foreign investors to develop the industry amid the risk of a gas deficit in 2017.

“From a regulatory and incentives perspective, Colombia brings a lot of potential for investors,” Guzman says, adding that the government recently introduced “flexible contracts” that encourage international developers to pursue shale projects. The contracts provide higher compensation and longer exploration and developing contracts than those provided in the oil industry.

Colombia is launching a bidding round for shale projects in 2014 after launching one last year that saw Exxon win several contracts.

Despite the hoopla surrounding it, shale gas has its challenges. For one, it is very expensive to develop. According to experts, a shale gas deposit can cost ten times more to bring on-stream than a conventional oil type. Shale wells also take around six to eight years to bring on stream and have an average life of 20 years.

Furthermore, even though natural gas is 50 per cent cleaner than burning coal, fracking can have negative environmental consequences. The process involves the injection of water, sand and tonnes of chemicals at very high pressure to break the shale rocks. Benzene, toluene, ethyl benzene and xylene are among the chemicals used in the process, which are said to be carcinogenic, and fracking can also degrade landscapes and pollute water too, environmental groups warn.

Because of the powerful and deep drilling required, fracking can trigger earth tremors and has done so in the US and the UK.

Apart from the risks, there are also major questions surrounding fracking’s economics. In Latin America, it remains a mystery which basins will be easiest to extract from. According to F&S’ Campos, extraction studies must be pursued first to assess which basins will be most cost effective. The studies, which experts say are currently being carried out in Argentina, Chile and other countries, could alter the development map.

“They may find, for example, that while Chile has more rocks, they are harder to break than in Paraguay, so some developers may decide to concentrate on Paraguay instead of Chile,” Campos muses. He adds that most of the research underway will be ready in two to three years.

Another major challenge could come from falling global natural gas prices. The US, China, Brazil and other major producers are stepping up production, which is forecast to increase some 4.5 per cent annually, Campos says. This, coupled with slow industrial production in recession-stricken Europe and the US, could trigger a gas surplus, with prices falling even further. In 18 months, natural gas could trade at $2.5 per btu, down from $3-6 today, depending on where in the world it is bought, Campos predicts.

With gas so cheap, some Latin American LNG importers may choose to postpone their shale-gas initiatives until gas prices increase.

Mexican conundrum

Meanwhile Mexico has announced plans to develop its recoverable reserves, estimated at 10.7 trillion m3.

State-owned oil giant Pemex has plans to drill 20-25 fields in the Tampico-Misantla area near the Gulf of Mexico to extract shale gas and shale oil. Last year, the company was able to extract the fuel from six fields. However, whether Mexico will actually develop its shale resources will not become clear until the new government releases its energy reform in the second half of the year – a move that is expected to open Pemex to private investors.

“Nothing will be known until this reform comes out,” says David Shields, an energy consultant in Mexico City. Nevertheless the government’s priority is to bolster Mexico’s declining oil output through deep-water exploration projects, which it hopes to carry out through ventures with other companies such as Petrobras, Exxon or Shell, Shields adds.

Beatriz Olivera, energy and climate change campaign director for Greenpeace Mexico, says building up a shale industry may not be so attractive for Mexico.

Fracking costs apart, shale gas’ earth tremor risks could worry the government, as Mexico is a major earthquake zone and has suffered from these natural disasters for years. Moreover, the country has been working to improve its global environmental profile, so drilling for shale may prompt heavier complaints from environmental groups.

“The government’s energy vision is to expand energy output while respecting the environment,” Campos says. “They really don’t want Greenpeace on top of them. The earthquake issue is also a big concern.”

Olivera agrees shale is in vogue across Latin America. However, she notes its development may be stalled unless production costs can be brought down.

That is also the view of Eduardo D’elia, director of environmental group Asamblea Ambiental Ciudadana de Rio Gallegos in Argentina’s Southern Patagonia region. “We don’t need shale gas in Argentina,” he says. “We have plenty of renewable sources we can exploit. Fracking is very expensive and environmentally damaging. Why do we have to go to the last rock we have in the world? There are other ways to diversify our energy matrix.”

Argentina’s shale case is clear, D’elia says: “The government wants to cut its natural gas dependence because 52 per cent of our electricity comes from it and they want to stop importing expensive oil.”

But instead of breaking rocks, Argentina could do more to develop its wind power industry in the antarctic Patagonia region, where D’elia claims winds blow as fast as 120 km per hour. “This is the Kuwait of wind,” D’elia adds. “There are very few places in the world with such constant speeds.”

According to D’elia, turbines in the region could produce 40-50 per cent more energy at a significantly lower cost than those operating in Europe or the Mediterranean.

All said, Guzman of Arthur D.Little is confident Latin America will manage to build up its shale resources. If all goes well, Argentina and Colombia, which he says are most advanced in the production process, could be churning out as much as 1000 cubic feet ( 28 m3) per day by 2018.

It is clear that several Latin American countries have sufficient reserves of shale gas to begin talking about exploratory drilling. What is preventing the mass drilling of wells is the same environmental uncertainty that has stalled shale gas development – or even banned it – in many European countries. But if this is overcome, the example of what the gas has done for the US energy market will be a huge temptation. Whichever country is first out of the blocks, you can be sure several others will be quick to follow.

Ivan Castano is a US-based freelance journalist, specialising in the energy sector.

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