(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON, July 21 Holders of Argentina's defaulted
debt and their supporters have warned the country risks being
frozen out from international capital markets unless it finds a
way to solve its legal problems by the July 30 deadline.
But away from the bad-tempered litigation in U.S. courts,
which has dominated the news about Argentina for months, the
country is experiencing an oil drilling boom as international
companies seek to cash on its huge shale resources.
In June, there was an average of 107 rigs drilling for oil
or gas in the country, the highest number operating since
records began in 1982, and more than double the number at the
start of 2012, according to oil field services company Baker
Hughes (Chart 1).
Most were hunting for oil rather than gas. Oil-based
exploration accounts for most of the increase in activity since
the start of 2012 (Chart 2).
Chart 1: link.reuters.com/xyx42w
Chart 2: link.reuters.com/baz42w
North American drilling giants like Nabors Industries
and Helmerich & Payne have some of their largest
and most modern rigs contracted to work in the country.
Helmerich & Payne has 10 of its rigs in Argentina,
accounting for a third of its total drilling fleet outside North
America, according to a recent investor presentation.
And a host of smaller drillers are in the country, mostly
working on the Vaca Muerta (Dead Cow) and Los Molles shale
formations in the Neuquen basin near the Andes in central
"The shale play in Argentina is unique because of the rock.
It's thickness. Argentina has kind of won the geological
lottery," a spokesman for Chevron told Reuters in May
("Argentina won lottery with Vaca Muerta shale field" May 22).
"Vaca Muerta is like one big cake, 1,000 feet (305 metres)
thick in places, which means one well can be much more
Chevron has a joint venture with Argentina's
state-owned YPF to develop shale oil and gas in the Vaca Muerta.
"Vaca Muerta could become an important contributor to
Chevron's long term production growth," the company emphasised
in a press release in April.
Neuquen is a long-established oil and gas-producing region
and Vaca Muerta was the source for much of the oil and gas found
in conventional reservoirs in the area.
Vaca Muerta therefore shares many of the characteristics
that made the Bakken, Eagle Ford and Permian shales in the
United States so successful: organic-rich shales with low clay
content in areas that had already produced oil and gas and that
had an established infrastructure.
THE BIG LEAGUE
In its comprehensive assessment of global shale resources,
published in 2013, the U.S. Energy Information Administration
estimated that Argentina has the world's second-largest
resources of shale gas (after China) and fourth-largest shale
oil (after Russia, the United States and China).
Argentina's technically recoverable shale gas and oil
resources amount to just over and just under 10 percent of the
world total respectively, according to the EIA ("Technically
recoverable shale oil and shale gas resources" June 2013).
Argentina is thought to have more shale oil than the United
States - which could potentially push it into the ranks of the
world's biggest oil producers.
Nearly all this shale oil and gas is contained in the Vaca
Muerta and Los Molles shale formations. The Neuquen basin
therefore ranks as one of the most highly prospective shale
plays in the world and one of the most likely to be developed
outside North America.
While the below ground geology is highly favourable, the
above-ground obstacles to large-scale development are
Argentina's history of political and economic instability,
serial debt defaults, devaluations, and expropriatons of foreign
property, including the recent nationalisation of Repsol's
holding in YPF, make outside investors wary.
But the prize is enormous, too big for international oil
companies to ignore, and the country's politicians, from the
president downwards, show a strong awareness of the need for
foreign capital and expertise to develop what could be a
transformational national asset.
Fortune favours the brave, as oil companies can attest. The
biggest prizes globally are all in tough political environments
(Russia, Iraq, Iran, Mozambique) or geological ones (China,
Brazil, Arctic). In this company, Argentina's oil and gas
resources do not appear especially risky.
Apache, EOG, ExxonMobil, Total
, YPF, Chevron and several smaller companies have all
already been active in the Neuquen basin.
For the next few days, investors will remain transfixed on
the unfolding story of whether or not Argentina will pay its
holdout bondholders, find a way to pay exchange bond holders
despite the rulings of the U.S. courts, or default.
Bond specialists have described the prospect of default as a
"catastrophe" that would shut the country out of international
financial markets and send the economy into a tailspin,
according to the Financial Times ("Argentina nears cliff in
risky debt game" July 20).
That assessment is almost certainly overstated. Bond holders
always talk tough about the consequences of default. There is a
long history of sovereign defaults around the world and no
indication defaulters pay a significant penalty after a couple
In the medium and long term, the success, or otherwise, of
oil and gas production from the Neuquen basin is far more
central to the country's prospects.
Argentina's future will be determined not in New York's
court rooms but by whether drilling firms can figure out how to
unlock commercial quantities of oil and gas from its thick
shale, and whether the government can provide them with a
sufficiently stable environment to get on with the job.
(Editing by William Hardy)