When Miguel Galuccio took the top job at Argentine oil and gas producer YPF in 2012, he faced the task of reversing a decade of dwindling oil and natural gas production at Argentina’s biggest energy company.

Shortages had become frequent at service stations as diesel and gasoline supplies dwindled, the same fate to befall natural gas starting in 2004.

Government-imposed price caps had made local energy supplies among the cheapest in the world, spurring a drop in supply and making it tough to attract investment. Oil and gas production sagged by more than 20% for a decade through 2014, and costlier imports surged. The national energy surplus swung to a deficit and accelerated a drain in much-needed dollar reserves for Argentina to service its debts and pay for imports. The country has been shut out of international capital markets since 2001, having failed to fully settle $100 billion in defaulted bonds.

Add in double-digit inflation, a business-averse government and tight controls on sending profits out of the country, and it’s little wonder that oil companies declined to implement new drilling programs. Argentina’s President, Cristina Fernández de Kirchner, renationalized YPF in 2012 and handed the task of reviving production to Galuccio, who at the time was a director of production management in London for Houston-based oilfield services giant Schlumberger.

The new chief executive hatched a plan that entailed developing the country’s wealth of unconventional hydrocarbon resources, wringing more out of maturing conventional reserves, and looking further afield for oil and gas resources as well as opportunities in areas such as petrochemicals.

Unrealized potential

Argentina has promise, though it may take work to realize it. An oil producer since 1907, it has an industry of equipment and services suppliers, engineering universities and a tradition of working in the oilfields.

The country’s resources are immense. The US Energy Information Administration (EIA) estimates that Argentina ranks second in unconventional gas resources and fourth in unconventional oil resources worldwide, with 802 trillion cubic feet of shale gas and 27 billion barrels of shale oil.

“We believe the development of this potential can generate a new energy revolution so that Argentina can become not only energy sufficient but also a key energy supplier for other countries in the region,” says Galuccio.

Under Galuccio, YPF ramped up spending from the outset to explore and develop Argentina’s unconventional resources, the potential of which first gained attention in 2010. The company has invested about $7 billion a year since then, deploying more drilling rigs and widening exploration in shale and tight formations.

The results are clear. Oil production has increased 10% since 2011 to 245,000 barrels per day, and gas production has grown by 25% to 42.4 million cubic meters a day. YPF now produces 44% of the country’s oil and 33% of the gas, up from 35% and 23%, respectively, when Galuccio took over in May 2012.

International oil companies have taken note of YPF’s turnaround as well as the country’s potential and a policy shift that has improved business conditions. Following the renationalization of YPF, the Fernández administration has raised crude, diesel, gas and gasoline prices and held them higher than international levels even during a plunge in global oil prices since mid-2014. The government has introduced tax breaks on importing rigs, extended field licenses and made it easier for oil companies to send profits abroad on large shale developments.

Chevron took the first plunge, launching a joint venture with YPF in December 2012 that has gone on to produce the first shale oil outside North America, to the tune of about 43,000 barrels per day of oil equivalent. Dow Chemical partnered with YPF the following year on a shale gas project, while Malaysia’s state-owned Petronas has done so for a shale oil development. ExxonMobil, Gazprom, Sinopec and other global majors have approached Galuccio for partnerships.

Vaca Muerta, a southwestern shale formation that holds the potential of Bakken and Eagle Ford in the US, has been the main area of focus for development for these combinations.

“Over the past three years we have jointly invested more than $3 billion and drilled more than 300 wells in this strategic location,” Galuccio says.

With Chevron, YPF is developing Loma Campana, a block that’s become the second largest oil-producing area in Argentina.

There’s ample room for expansion. The projects now underway account for only 2% of the land surface area of Vaca Muerta, and their complete development will require at least $25 billion in investment and more than 2,500 producing wells, according to Galuccio.

Cross-border potential

Vaca Muerta is just one energy frontier for Argentina — and Latin America.

“I am confident that Latin America can and will play an ever more important role in the global economy in the coming decades. Our region is blessed with vast natural resources and has a vital and growing young population,” Galuccio says.

Latin America’s proved oil reserves amount to 20% of the world total, second behind the Middle East, according to the EIA.

“Latin America needs to develop its huge energy potential, especially with unconventional resources, to satisfy increasing demand for energy and to reproduce the energy boom that has benefited other countries such as the US,” Galuccio says. “Energy access is a must to achieve sustainable progress across the region.”

Regional cooperation and collaboration is critical to realizing this potential.

“Latin America might appear to be a cohesive regional entity, but we need further integration efforts to build regional cooperation between our countries,” Galuccio says. “We believe it is critical to seize the competitive advantages of each of the local economies and maximize their capacities and outreach.”

National oil companies can play a big role, he says, from joint negotiations for acquiring equipment and inputs for operations, to strategic partnerships “to learn more from one other and enhance each company’s own potential”.

An example would be for Brazil’s Petrobras and Mexico’s Pemex to contribute their offshore expertise to help YPF explore the potential off the coast of Argentina. YPF, meanwhile, would bring its shale experience to the fold.

“We would be helping develop Argentina’s energy potential and also playing a key role in developing Latin American unconventional resources,” Galuccio says. “We need to profit from our complementary know-how to become more and more competitive as a region. Integration and cooperation will deliver mutual advantages for each local champion in particular, and for the region as a whole.”

Broad prospects

Another key for the region is diversification, he says.

“Argentina has a strategic opportunity, for example, to add value to unconventional gas through the petrochemical industry,” Galuccio says. “Polyolefins are a strategic input for many industrial activities and there is a strong market to boost their production. We also see opportunities in the regional market, and YPF will play an important role in their development.”

In August, YPF bought stakes in two petrochemical companies in Argentina for $122 million, making it possible to add value to its increasing gas production to manufacture plastic precursors. “Argentina’s petrochemical sector has enormous potential and it is part of YPF’s growth strategy,” he says.

Innovation in the energy industry is another driver for long-term economic growth in Latin America.

There is potential to develop more renewable energy capacity in the region, but costs must come down and technologies [must] improve to make them more economically viable for wider production and consumption, Galuccio says.

Indeed, fossil fuels will continue to provide about 75% of the world’s energy in 2035, according to the BP Energy Outlook 2035.

“At YPF, our role is to foster Argentina’s potential by making the best of what nature has given us to supply energy to our country and became a regional player,” Galuccio says.

To do this, YPF has teamed up with Argentina’s National Scientific and Technical Research Council, known as CONICET, to create Y-TEC, a company focused on researching, developing, producing and commercializing new technologies, knowledge, goods and services for the energy industry.

The development of nano-scale proppants, a mixture of solid materials like sand used in fracturing to extract shale oil and gas, is one example of Y-TEC’s undertakings. It is also looking into tidal stream energy and next-generation lithium batteries. 

“YPF is leading this paradigm shift to enhance economic development in Argentina and Latin America,” Galuccio says. “The importance of YPF for the country transcends its importance as a business. YPF could change the history of Argentina.” LF