When we think about the country that is fueling all the growth in South America, Brazil is the first country that likely comes to mind. No wonder, it's the seventh-largest economy in the world and the largest in Latin America. The resource-heavy country also possesses vast offshore oil reserves which have the potential to keep its economic machine well-fueled in the future.
However, new data from the EIA shows that Argentina has large quantities of its own of energy resources. The country is now ranked fourth in the world in terms of technically recoverable shale oil resources, with 27 billion barrels of oil. Not only that but it has estimated technically recoverable shale gas resource of 802 trillion cubic feet, which ranks it second in the world when it comes to potential shale gas reserves. These resources have the potential to turn Argentina into a global energy powerhouse as it develops its vast reserves.
For perspective, estimates for Brazil's major offshore pre-salt reserves indicate the potential for 70-100 barrels of oil equivalent, or boe. The country's national oil company, Petrobras (PBR 0.12%), is still in the early stages of developing those reserves; its current goal is to reach production of 1 million barrels of oil per day by 2016. However, the company is still in the process of collecting information and mapping the pre-salt region, a project that won't be complete until 2018. What that means is that this play has a long way to go until we know the full extent of the resource potential, but its already producing impressive results.
Argentina is a lot further behind in developing its estimated potential of more than 165 billion boe in shale reserves -- on a boe basis, that is more oil and gas than Brazil's lauded offshore oil fields. The real question, though, is how much of those technically recoverable reserves will actually be produced. While that's a risk to exploration and production companies, the potential reward for investors is substantial because these companies are so early to the play's development. One look at the map below will show you the vastness of the country's shale basins:
Source: EIA
One of the most promising potential plays in the country is in the Neuquen Basin in what is called the Vaca Muerta formation, which actually means "Dead Cow" in Spanish. One of the first movers here is Chevron (CVX 0.57%) which drilled two exploratory wells into the formation last year. The company is drilling another exploratory well this year with plans to drill three more appraisal wells. It's looking to expand its presence in the country even as it evaluates the results from those wells.
In order to expand, Chevron has been working on a joint venture agreement with YPF (YPF 0.39%), which is the national drilling company in the country and a key holder in the Vaca Muerta field. The $1.5 billion venture would help jump-start the development of that field and could be worth up to $15 billion in total future investments. Foreign investments like Chevron's will be important in developing the play; its estimated that about $3 billion would be required just to get the shale gas extraction started, with upwards of $25 billion needed to develop Vaca Muerta's shale oil and gas potential.
Another company to watch here is EOG Resources (EOG 0.67%). The company is also focused on the Vaca Muerta formation after signing two exploration contracts and one farm-in agreement with YPF. Last year, the company participated in the drilling of a vertical well which is producing, and also drilled a monitor well and a horizontal well. EOG is currently evaluating the results of these wells so its still in the very early stages of the process.
A final name to watch here is Halliburton (HAL -0.34%), which recently participated in the completion of the largest shale well in the country. Argentina represents an important growth opportunity for a company that has been expanding its business internationally. Overall, Latin America has been a fast-growing market for the company, with sales in the region growing 21% year over year. If the Argentinian shale resources turn out to be as good as early reports indicate, then it could really help fuel Halliburton's international growth.
The big concern when it comes to foreign investment is with the Argentinian government, which had already stepped in to take control of this resource last year when the government took back control of YPF from Spain's Repsol. That move indicates that there is a risk that operators such as EOG or Chevron could also one day have assets in the country seized. Further, just the overhang of that risk could mean that those two companies might not invest as heavily in the country. If the resource is as great as the numbers indicate, then that could mean that the opportunity for earning high rates of return will simply be left on the table.
The bottom line here is that Argentina has the potential to become a dominant force in the world's oil markets. There are several interesting companies investing to develop its emerging shale resources, giving investors a range of opportunities. However, there are real risks, both geopolitically and regarding the economic viability of the resources, which could end up crimping returns.
