Argentina A Special Report From Oil and Gas Investor and Global Business Reports

Photo courtesy of YPF July 2011 - OilandGasInvestor.com P-1 ARGENTINA OIL AND GAS The Revival of Century-Old Industry 2015: A Time of Transition

eat-lovers’ mouths water at the thought of an Ar- Yet 2015 seems to be a turning point for hydrocarbon gentine steak, but another kind of Argentine dead production in Argentina. Producers extracted about 1.4% Mcow has been tantalizing oil and gas investors in more oil and 1.8% more gas in July 2015 than they had in recent years. In 2013, the U.S. Energy Information Admin- the same month a year ago, which indicates that the last few istration (EIA) announced that the world’s second largest years of local and foreign investment are finally paying off. shale gas reserves and fourth largest shale oil reserves lie Three companies dominate hydrocarbon production in beneath Argentina’s subsurface, mostly at Vaca Muerta, in Argentina: Yacimientos Petrolíferos Fiscales (YPF), Pan the province of Neuquén. American Energy, and Total. From 2010 to 2014, YPF and Yet Argentina has been drilling for oil and gas for over Pan American Energy produced 55% of all the oil that Ar- a century. When walking through Comodoro Rivadavia’s gentina produced, while YPF and Total produced 54% of streets in Patagonia, the dust blown up by the city’s infa- all the gas that Argentina produced, according to data from mous gales could easily distract a passerby from noting a Argentina’s Secretary of Energy. In 2014, YPF was the top bronze plaque on a nondescript building that reads: “In this oil and gas producer in Argentina. From 2010 to 2013, Total place were raised a tower and installation with which Well dominated gas production as YPF produced an average of N-1 was drilled, which preceded the discovery of oil in the about 18% less every year. But in 2014, YPF took the top region—YPF’s golden anniversary, 1907-1957.” Whether spot for both oil and gas when it produced almost 2% more Argentina’s newest and most massive hydrocarbon discov- than Total. Since 2010, Pan American Energy has been con- ery will sustain the country’s oil and gas industry for an- sistently the second most prolific oil producer and has pro- other 108 years remains to be seen. duced about half of what YPF produces every year. Oilmen and investors are now well aware of Argentina’s Argentina has five hydrocarbon-producing basins. From abundant resources and favorable geology. Vaca Muerta may northernmost to southernmost, they are the Northeast ba- hold about 16.2 billion barrels of shale oil and 308 trillion cu- sin, Cuyana basin, Neuquén basin, San Jorge Gulf basin, bic feet (Tcf) of shale gas, according to the EIA, and its shale and Austral basin. Most of Argentina’s oil comes from the is exceptionally thick. The abundance of shale resources is San Jorge Gulf and Neuquén basins, which together pro- good news for a country hooked on oil and gas. While hy- duced 88% of the country’s oil from 2010 to 2014. During drocarbons normally supply about 60% of a country’s energy the same time, the Neuquén and Austral basins produced needs, Argentina relies on hydrocarbons for almost 90% of about 79% of the country’s gas, of which Neuquén pro- its energy supply—54% coming from gas, 33% from oil. duced 55%. Argentina has a long and rich history with natural gas, Ernesto López Anadón, president of the Instituto Ar- as Osvaldo del Campo, CEO of Galileo Technologies, ex- gentino de Petróleo y Gas (IAPG), reflected on the features plained: “Argentina has been developing its natural gas of Argentina’s producing basins: “Each province has its industry for more than 80 years, making it one of the coun- own basin with distinct characteristics…the Neuquén basin tries with the longest history in this field…in 1979, Argen- differs from San Jorge in that it is prone to light oil with tina discovered Loma La Lata during one of the worst eco- much more gas content than the San Jorge basin. And then nomic periods in the oil and gas industry. Fifteen years later Vaca Muerta has good organic content, good quality of rock … Vaca Muerta is 100 times bigger than Loma La Lata, and that can be fractured, and the kind of access to water and history will repeat itself.” other infrastructure needed to develop the oil and gas sector that the other basins lack.” The Industry in Numbers If YPF, Pan American Energy, and Total are the main Despite Argentina’s hydrocarbon addiction, the country has corporate players, the provinces of Neuquén, Chubut, and had to look to neighbors like Bolivia to get its fix, as oil and Santa Cruz are the main government players, along with the gas production has steadily fallen since 2010. In the last five national government. These three provinces regulated the years, the drop in gas production has outpaced the drop in production of almost 70% of total oil production from 2010 oil production. From 2010 to 2014, gas production fell by an to 2014. Yet Neuquén stands out as the most important pro- average of about 3.1% while oil production fell by an aver- vincial player, overseeing about 45% of Argentina’s total age of about 2.5%. gas production, the most vital hydrocarbon to the country’s Oil and gas production continued to decline in 2014, economy, over the last five years. when oil production hit a record-low of about 532,159 bar- rels per day (bbl/d), while natural gas production also bot- This report was prepared by Alice tomed out at about 113,654.8 Mm3 per day. In 2011, Argen- Pascoletti and Juan Ramirez of Global Business tina became a net energy importer for the first time since Reports. For more information contact: 1984. Getting its hydrocarbon fix has come at a cost—Ar- [email protected] gentina now has an energy trade deficit of about $7 billion. P-2 December 2015 - OilandGasInvestor.com December 2015 - OilandGasInvestor.com P-3 ARGENTINA OIL AND GAS most important projects in the last sevenGlobal years, Business Reports especially in Patagonia: www.gbreports.com ARGENTINA OIL AND GAS 2015 | PRE-RELEASE “Since 2008, Contrera’s main proj- ects in Argentina have related to the State of the Industry expansiontion has of outpaced the country’s the drop gasin oil trans produc- - tion. From 2010 to 2014, gas production fell The Good, the Bad, and the Ugly port capacity. The government and ENARSAby an average aimed of at about increasing 3.1% while trans oil pro- - duction fell by an average of about 2.5%. port capacity of the pipes that come Infrastructure Oil and gas production continued to de- from all regions.” Some foreign oil and gas investors cline in 2014, when oil production hit a may wonder whether old, leaky pipe- Likerecord-low pipelines of aboutand intra-field 532 barrels roads, per day companies(bpd), while in Argentina natural gas will production need to also San SalvadorNOROESTE lines will disrupt production; whether de Jujuy improvebottomed the roadsout at aboutand highways113,654.8 Mm3 that per single-lane roads will cause traffic Salta connectday. oil In 2011,and gas Argentina fields became to cities a netand en - jams and delay important deliveries; Asuncion or whether logistics companies will ports.ergy López importer Anadón for the explained:first time since “Up 1984. Formosa to now,Getting the itslack hydrocarbon of adequate fix has transpor come at- a CHACO be professional enough to foresee San Miguel cost—Argentina now has an energy trade SantiagoPARANENSE tation options to and from the Neu- de Tucuman del Estero Resistencia Posadas and fulfill delivery times. Oil and gas deficit of about $7 billion. Corrientes infrastructure, transportation infra- quén has not been a problem since oil Catamarca 2.35 Yet 2015 seems to be a turning point for La and gas activity does not yet compare structure, and logistics are three is- hydrocarbon production in Argentina. Pro- Ribja to the activity in, for example, the sues that pose distinct challenges in Billion Barrels ducers extracted about 1.4% more oil and BOLSONES United States. But if the number of Argentina, but that also provide sev- 1.8% more gas in July 2015 than they had in Cordoba PROVED OIL RESERVES rigs and fracking equipment were to eral opportunities. Ernesto López Anadón, president, Instituto Jean-Marc Hosanski, managing director, the same month a year ago, which indicates San Juan Santa Fe Parana Source: U.S. EIA Argentino de Petróleo y Gas (IAPG) Total Austral triple, then the lack of roads and rail- López Anadón of the IAPG does that the last few years of local and foreign Mendoza roadsinvestment would be are a finally problem. paying Theof. need CUYANASan Luis not believe that oil and gas infrastruc- SAN companies is Contreras Hermanos, which built much of the to transferThree companieswater, propane, dominate chemicals hydrocar - Santiago LUIS ture will be a problem: “The industry is capable of sup- MERCEDES and trucksbon production will surpass in Argentina: the capacity Yacimientos of Motevideo plying the rigs, pumps, motors etc., that are required to internal road network in the fields of the San Jorge Gulf Buenos PUNTA DEL La Plata 11.14 our currentPetrolíferos infrastructure. Fiscales (YPF), That Pan American said, Aires ESTE sustain increased activity.” basin throughout the 1960s and 1970s. federalEnergy, and and provincial Total. From 2010 governments to 2014, YPF With a century-old hydrocarbon industry, Argentina Yet pipelines are another story. Jean-Marc Hosanski, Santa Rosa MACACHIN Trillion Cubic Feet and Pan American Energy produced 55% SALADO managing director of Total Austral, explained: “The main know what needs to be done and have NEUQUINA unsurprisingly has well-established companies that have of all the oil that Argentina produced, while built the country’s oil and gas infrastructure. One of thosePROVED gas NATURAL producing GAS RESERVESregions of Argentina are far from the main been active in facilitating investment YPF and Total produced 54% of all the gas Neuquen Source: U.S. EIA in this area. If governments keep up South consumption centers, and in particular from the Buenos that Argentina produced, according to data CLAROMECÓ Aires region, where about 65% of the country’s natural gas the pace, the rate of infrastructure de- Pacific from Argentina’s Secretary of Energy. In Ocean is consumed. This is why the development of the pipeline velopment2014, YPF will was go the in top line oil and with gas develproducer- COLORADO Viedma infrastructure to transport the gas produced in Tierra del opment.”in Argentina. From 2010 to 2013, Total dom- ÑIRIHUAU Fuego has been a determinant factor in the timing of gas Speakinginated gas at production the 2015 as WorldYPF produced Shale an field developments.” Oil andaverage Gas of about Latin 18% America less every Summit year. But in Rawson PLA. VALDÉS South Sergio Paredes, vice president of CGC, explained how in Neuquén,2014, YPF took Alex the top Fleming, spot for both oil oil and and Atlantic Ocean the company sees a business opportunity in the need to gas seniorgas when manager it produced at almostErnst 2%& moreYoung than RAWSON improve the country’s pipeline infrastructure: “CGC is (EY),Total. gave Since a sobering 2010, Pan Americanview about Energy the has consolidating its position in the midstream sector through impactbeen of consistently increasing the unconventionalsecond most prolific DEL GOLFO oil producer and has produced about half SAN JORGE its interests in TGN GasAndes and TGM. These pipelines activity on infrastructure and labor of what YPF produces every year. extend over 1,000 km, transport more than 40% of the markets. He predicted that while Argentina has five hydrocarbon-produc- SAN JULIÁN natural gas in Argentina, and the grid connects Argentina Argentina’sing basins. unconventional From northernmost activi to south- - ties will require about 1,000 full-time MALVINAS with Chile and Brazil. Furthermore, because of Argentina’s ernmost, they are the: Northeast basin, NORTE AUSTRAL vast shale gas resources, gas transportation is a good long- truckCuyana drivers basin, in Neuquén 2016, the basin, industry San Jorge term investment… Moreover, gas transportation compa- may needGulf basin, up to and 1,900 Austral drivers basin. by Most 2025 of Ar - Rio Gallegos ARGENTINE PETROELUM PRODUCTION, CONSUMPTION, ANDnies REFINER have Ypositive CAPACITY growth (THOUSAND outlooks, BARRELS especially PER DAY), 1980-20 given14 recent if thegentina’s industry oil continuescomes from theto developSan Jorge atGulf Source: U.S. EIA and Neuquén basins, which together pro- MALVINAS Production stockConsumption price increases.”Re ning Capacity its current pace. He also highlighted MALVINAS ESTE 1000 Le Calvet, of Contreras Hermanos, explained that the the needduced 88% to developof the country’s local oil suppliersfrom 2010 to need to revamp Argentina’s pipeline infrastructure has also since2014. imports During of, the forsame example, time, the Neuquén prop- Ushuaia given companies like Contreras Hermanos some of their pants,and chemicals, Austral basins etc., produced traveling about from 79% 800 Buenosof theAires country’s to oil gas,and ofgas which fields, Neuquén can produced 55%. be delayed. Ernesto López Anadón, president of the In- 600 “Vaca Muerta has good organic content, Even if governments and compa- stituto Argentino de Petróleo y Gas (IAPG) Productive Basins good quality of rock that can be fractured, nies succeedreflected onin building the technical the featuresnecessary of Ar - Non-Productive Basins Gas 1980 1985 1990 1995 2000 2005 2010 roadsgentina’s and railroads producing to basins: support “Each a provinceshale and the kind of access to water and other Oil 0 100 200 300 Km infrastructure needed to develop the oil and boomhas in its Argentina, own basin with how distinct companies character - Source: Instituto Argentino del Petroleo y del Gas (IAPG) use themistics. is For another example, challenge exploration for and the pro - gas sector that the other basins lack.” industry. Miguel Di Vincenzo, vice – Ernesto López Anadón, President, IAPG president of global sales and tech- Global Business Reports | ARGENTINA OIL AND GAS 2015 PRE-RELEASE 5 nology at EcoStim Energy Solutions, P-4 December 2015 - OilandGasInvestor.com December 2015 - OilandGasInvestor.com P-5 Fiscal Regime Argentina taxes at the federal, provincial, and municipal levels, and has a relatively attractive fiscal regime: “Income tax is 35% and oil and gas exploitation concessions have a system of royalties ranging from 12% to 18%, which are low compared to other producing countries in the world with similar systems, and a sales tax of 3%. Dividends to foreign beneficiaries are taxed at 10% and capital gains at 15% on net income or 13.5% on sales,” said Miguel Maxwell and Ricardo Ruiz, CEO and oil and gas industry leader, respec- tively, of Deloitte LATCO. As with other aspects of Argentina’s regulatory regime, the interpretation of tax regulations is not straightforward. Enrique Grotz, a partner at EY Argentina, explained: “The Daniel G. Gerold, director, G&G Energy main difficulties in Argentina are not the regulations them- Consultants selves, but rather the interpretation of regulations. Some- times companies and governments interpret regulations dif- the next government will enact fis- ferently. For example, tax laws have an inflation-adjustment cal reforms. Gerold of G&G Energy Photo courtesy of Gas y Petróleo del Neuquén (GyP). clause, but this clause was suspended several years ago. For Consultants doubts that further legal years, companies have been asking for the reinstatement of reforms, like the 2014 amendment of identifies overcoming problems related to logistics as the the inflation-adjustment clause. Though companies pay a the Hydrocarbons Law, will occur: greatest challenge facing the oil and gas industry in Ar- 35% corporation tax, an inflation rate of 30% to 40% makes “Politicians think that the oil and gas gentina: “Our main concern is the still immature logistics the effective tax rate higher. Nevertheless, the real solution industry is booming. But the govern- network, which is necessary to materially expand opera- to these kinds of problems is tackling the root macroeco- ment should offer fiscal incentives tions in Neuquén in a way comparable to a major shale nomic causes. In this particular case, the goal should be to like accelerating the depreciation and development in North America. The volume of sand and tackle inflation since it is not likely that the inflation-adjust- amortization of shale investments. supplies needed for unconventional shale development is ment clause will be reinstated.” Shale assets currently produce little significantly greater than for the smaller well stimulation One of the main concerns that foreign potential inves- but accumulate a given number of bar- efforts performed historically.” tors have about investing in Argentina is whether and to rels in the long run. As a result, E&P what extent they will be able to reap what they sow. Local companies face reduced rates of return players understand that the complexity surrounding the re- since they pay a significant amount of patriation of profits and dividends has muted investment, as income tax at the beginning of under- Alberto Saggese, president of Gas y Petróleo del Neuquén taking shale activity. Costs that are not (GyP), noted: “Developing Vaca Muerta will need about attached to wells like drilling costs and $30 billion per year and large-scale production may begin fracking costs should be tax-deductible in 2020 if these investments begin today. However, before for E&P companies.” these large investments and production begin, Argentina will have to radically change. For example, when the current Import Restrictions pilot projects in Neuquén begin to require additional invest- Importing in Argentina is infamously ment, it is difficult to say whether companies will be willing complicated. Companies wishing to to make these commitments if they cannot repatriate their import foreign goods must pass three profits. Making it easier for companies to repatriate profits veto players. For any import request, would promote investment in the long-term. Argentina will importers must submit a DJAI, or need to make these and other reforms if the country is to sworn affidavit of intention to import. take full advantage of the opportunities in Vaca Muerta.” Though it is the Secretariat of Com- Yet the repatriation of profits and dividends is not im- merce that approves or denies DJAIs, possible, though it is challenging. “Dividends, if authorized, the Argentine Tax and Customs can be paid based only on audited financial statements, Authority (AFIP) must first certify though flow of foreign currency has been restricted due to that the importer has paid its taxes pressure of balance of payments on Central Bank reserves. and has the means to pay for the im- To ask for the authorization to repatriate profits, the com- ported goods. The third veto player is pany must present a good business case and show how the Central Bank that, depending on they generate resources for the country. Making a case is the state of its foreign reserves, must lengthy and costly, and it does depend on the state of re- release the funds to the importer for serves. These restrictions might be eliminated, however, by payment. the incoming government, since the two main presidential Import restrictions have had a candidates support eliminating those restrictions,” detailed mixed effect on the oil and gas indus- Maxwell and Ruiz of Deloitte LATCO. try in Argentina, depending on wheth- Certainly, Argentina’s fiscal regime has room for im- er the importer is a foreign oilfield provement, which prompts investors to wonder whether service company or a local supplier. P-6 December 2015 - OilandGasInvestor.com December 2015 - OilandGasInvestor.com P-7 Whether foreign or local, companies ing certain technologies given the ARGENTINA OIL AND GAS must wisely pick their battles when it impact that a shortage of Sandvik’s comes to what goods they import giv- products would have on the produc- en the Central Bank’s ever-dwindling tion capacity of local manufacturers supply of dollars. Since companies and their own export aspirations.” The Role of the Government can only import a limited amount of Operating in Argentina comes Indispensable, if Unavoidable, Partners goods, they naturally opt to import the down to a game of survival of the most vital, high-tech goods. most adaptable. Iron Group, Argen- National erage, and electricity prices are around Foreign oilfield service companies tina’s largest crane importer, had to With so much oil and gas waiting to 22% to 23%. Subsidies make relatively go to great lengths to comply with the adapt its business model when Argen- be extracted, Argentina has the po- lower energy prices possible, especially import restrictions. EcoStim is one tina began restricting imports. “When tential to not only supply its own en- subsidies for natural gas consumption. company that has successfully import- the Argentine government began re- ergy needs, but also export energy to Energy subsidies cost around $15 bil- ed vital equipment, as Di Vincenzo stricting importations, Iron Group de- its neighbors and the world. What is lion per year and thus represent around recounted: “Importing equipment cided to rent rather than sell the im- stopping Argentina from becoming 3% of GDP. Phasing subsidies out will into Argentina is always difficult, ports the company managed to have the Saudi Arabia of South America? be a serious challenge for Argentina, but EcoStim has a firm commitment authorized. The rental-based model It’s the politics, stupid. “In the last but they also affect investment in the to supporting local industry and job depends much more on capital, but decade, the energy sector has faced po- oil and gas industry. Low electricity creation. To this end, we worked the model is also more stable and less litical pressure, price controls and ener- and natural gas prices stimulate energy closely with several government agen- subject to import restrictions,” ex- gy consumption subsidies that increase demand, but the problem is that cur- cies and local vendors, including plained Gabriel Tomas, Iron Group’s demand but do not incentivize invest- rent prices are not covering production QM Equipment, to make sure that director. ment. As a result of these shortsighted Juan José Aranguren, former president, costs. New price signals must attract we meticulously followed all the im- Duralitte Group, a manufacturer policies, Argentina has lost energy self- Shell Argentina more investment. Without new price portation laws while simultaneously of manifolds and tread accessories, sufficiency,” explained former secre- signals, the only investment will be making a substantial commitment to also adapted to import restrictions, tary of energy of Argentina and former head of YPF, Daniel government investment with public funds.” building additional equipment locally according to Gustavo Rossi, the Montamat. One of the public policies that Montamat argues As Juan José Aranguren, recently retired president of in Argentina. This process took sev- company’s general manager: “Du- has negatively impacted the oil and gas industry is the gov- Shell Argentina, explained: “Oil and gas regulations are eral months to accomplish but once it ralitte diversified its product offering ernment’s implementation of energy subsidies: “In Argen- merely words on paper. Government interventionism and a was complete, the importation went in response to import restrictions. tina, you usually have to make a correction of relative prices. lack of respect for the rule of law make Argentina’s regula- smoothly. In fact, we received our Duralitte focuses on manufacturing The average price of gas is around 25% of the regional av- tory framework weak.” first set of equipment in Buenos Aires products that are necessary for the in September 2014 and executed our manufacturing processes of other sup- first job in December of the same year pliers but that cannot be imported to with excellent results.” Argentina.” Gaining the approval of the Sec- It is tempting to say that the policy retariat of Commerce can be a time- decision to protect Argentina’s local consuming task that requires more industry with import restrictions has attention than the mere submission created both winners and losers. The of a DJAI. Companies must also con- most likely candidates for the winners vince the Secretariat to allow imports are local suppliers who manufacture of a particular good. Importers cannot and distribute commodity goods that simply argue that this good would re- are not worth fighting for with the duce their capital expenditures or ef- Secretariat of Commerce. Though il- ficiency. They must often show that liberal policies like the implementa- local industry cannot manufacture it tion of import restrictions may create and, in fact, needs it. Sergio Mon- individual winners, they create a loser terotti, Sandvik Coromant’s director out of industry as a whole, as Pablo of South and Central America, and Puerino, Valvtronic’s director and Camilo Cuevas, Sandvik Argentina’s general manager explained: “Import group company manager, shared its restrictions benefit a set of Argentine experience: “Import restrictions in manufacturers but hurt the industry. Argentina have been a problem for Valvtronic has benefitted from import Sandvik and its customers. The com- restrictions. Yet the company believes pany has had several meetings with that if Argentina is to become a global the Secretary of Commerce during oil and gas player, the government will which Sandvik has explained the im- have to redefine the way the domestic possibility of manufacturing most of industry is protected. If not, the dam- the company’s products with local age to the supply chain caused by a technology. After several presenta- shortage of certain vital technologies tions, the Secretariat of Commerce will hold back the development of Ar- and Sandvik have agreed on import- gentina’s oil and gas industry.” P-8 December 2015 - OilandGasInvestor.com December 2015 - OilandGasInvestor.com P-9 When Argentina abandoned the peso’s peg to the dollar, the Argentine Congress passed the 2002 Public Emergency Law, which gave the executive branch the authority to sig- nificantly alter economic regulations. If the law is allowed to expire at the end of 2015, Argentina’s 13-year-long state of emergency will finally end. Meanwhile, President Cris- tina Fernández de Kirchner has not been shy to manage the economy with a heavy hand, especially regarding the energy sector. In 2012, President Fernández’s government spooked international investors when it re-nationalized YPF, Argen- tina’s state oil firm that was previously owned by Spain’s Repsol. As Aranguren explained: “The Argentine govern- ment poorly managed the expropriation of Repsol’s inter- ests in YPF. It failed to pay Repsol for its YPF assets prior Natalio Saborido Battaglia, country manager, to seizing them. Thus, the re-nationalization of YPF was, in Pluspetrol effect, a confiscation that later became an expropriation. It was only after negotiations and an agreement between the Constantly changing rules concerning government and Repsol that the re-nationalization of YPF rent distribution will cause companies became a constitutionally legal expropriation. Prior to the to overproduce and limit new invest- expropriation, Repsol was considered a close ally of the gov- ment in developing new reserves,” ar- ernment. That the government could so quickly turn against gued Montamat. Repsol sent a very bad message to the business community.” In 2014, the Argentine Congress But not all of the Argentine government’s actions have amended the law that governs the oil sent oil companies running to safer investment environ- and gas industry known as the Hy- ments. Through executive decree 929/13, President Fernan- drocarbons Law. The amended law dez controversially let oil companies export 20% of their extends concession periods from 25 production abroad at world prices and exempted them from to 35 years, incentivizes investments export taxes and requirements to repatriate profits if they of over $250 million, and standard- invested over $1 billion. As a Harvard paper noted: “The izes the regulation of hydrocarbons day after the incentives were announced, Chevron signed across provinces, among other provi- to make an initial $1.24 billion investment with YPF in the sions. Alberto Saggese, CEO of GyP, Vaca Muerta fields, and subsequently Wintershall entered conceded: “The amended law is a step a joint venture with Gas y Petróleo de Neuquén to explore in the right direction, but it does not and produce in a field taken back from a previous investor address awarding new concessions. by the Neuquén provincial government for lack of invest- Newcomers will have to partner with ment. Dow Chemical Co. agreed two days later to invest the current players as most blocks are $120 million in a joint pilot project with YPF in the El Ore- already contracted out in Neuquén.” jano block of Vaca Muerta.” Moreover, the national government has incentivized oil Neuquén and gas production by setting the price of crude oil at up to As the owners of hydrocarbon resourc- $77 per barrel and, through the Gas Plus program, $7.5 per es in Argentina, the provinces share a million Btu for new natural gas production. Natalio Sabo- significant portion of the responsibil- rido Battaglia, general manager of Pluspetrol, praised the ity to regulate the oil and gas indus- program: “The Gas Plus program has allowed Pluspetrol to try with the national government. continue its gas-related drilling activity. Without the Gas Yet provinces have not always played Plus plan, certain natural gas projects would not be eco- a role in the regulation of the indus- nomically viable.” try. The 1996 Short Law gave prov- Jean-Marc Hosanski, managing director of Total Aus- inces a greater role in the industry’s tral, said: “The Plan Gas established by the authorities in regulation, which came with certain 2013 has given gas investors visibility at least until 2017 and challenges, as Martín Pérez de Solay, it has paved the way to a series of investments in the sector, president of Petróleos Sudamericanos both in conventional and unconventional areas. It allowed Energy, explained: “The passage of us to launch several projects which had been on the starting the Ley Corta (Short Law) transferred blocks for years.” control of oil and gas fields from the Though hydrocarbon-producing provinces and YPF national government to the provinces. support the continuation of fixed internal prices aimed at The provinces’ power and control ca- incentivizing production, some critics argue that the inter- pabilities toward companies grew sig- nal prices decoupled from international ones creates uncer- nificantly. Companies had to get used tainty and distorts investment. “Investors need predictable to this change, with provincial govern- signals of how the rules of the game are going to evolve. ments, not the national government, P-10 December 2015 - OilandGasInvestor.com December 2015 - OilandGasInvestor.com P-11 Governor Sapag’s family has been highly influential in the politics of Neuquén. His uncle, Elías Sapag, was a national senator and the first presi- dent of the party to which he belongs, the Movimiento Popular Neuquino (MPN). Governor Sapag explained: “MPN has always promoted federal- ism and provincial ownership of hy- drocarbon resources as enshrined by the constitutional reform of 1994.” Though Governor Sapag’s man- date ends in December 2015, Omar Gutiérrez, also of the MPN, will take Jorge Sapag, governor, Province of Neuquén Photo courtesy of SIMA. control of the governorship. Never- theless, Governor Sapag outlined the MPN’s strategy to attract oil and gas investment to Neu- “After years of declining oil production quén: “Attracting investment to Argentina and Neuquén due to maturing fields, the development of requires the involvement of all three levels of government: Neuquén’s unconventional resources is turning national, provincial, and municipal. Nevertheless, MPN’s a new page in Neuquén’s hydrocarbon story.” strategy has been to knock on doors. For example, the gov- ernment of Neuquén was able to woo Wintershall when it – Jorge Sapag, Governor, Neuquén Province went to Germany, and to woo ExxonMobil when it went to Houston. The government aims to attract investors not just as their new regulators during a time of contract extension with the province’s favorable geology, but also with clear negotiations. Companies entered into 25-year contracts rules of the game, transparency, and the certainty that in- between 1990 and 1993, so all contracts matured between vestors can enjoy their fairly earned profits.” 2015 and 2017. Provincial governments were not prepared MPN’s strategy has yielded results, as Governor Sapag’s to negotiate extensions, apart from Neuquén, a province numbers show: “My government has succeeded in attract- with a background in oil and government offices that knew ing a significant amount of investment to unconventional and understood the industry. Negotiating with a province activities. From 2009 to 2015, investment has increased with a background in oil makes the process easier. Provinces from $1 billion to $5 billion, drilling rigs from 50 to 150, with less background have a harder time understanding the drilling teams from 26 to 56, and drilled wells from 260 to needs and issues of the industry, so it took more time to 500 (60% of which are unconventional).” educate and learn along with them. For example, Petróleos Part of Governor Sapag’s strategy to develop the oil and Sudamericanos has been trying to renegotiate terms with gas industry in his province has also been the creation of the provinces of Neuquén and Rio Negro, and the com- GyP. “The province of Neuquén founded GyP in 2008 with pany’s negotiations with Rio Negro took longer than in the mission to supply Argentina’s energy needs by devel- Neuquén. As a result of the extended negotiations with Rio oping Neuquén’s hydrocarbon resources. The government Negro, Petróleos Sudamericanos has focused on maintain- of Neuquén created the company at a time when oil prices ing its environmental liabilities rather than investing in the were at $32 per barrel, causing E&P companies to relin- operational quality of the field there.” quish their areas. Left with blocks and no contractors, Neu- Provincial governments, particularly the government quén created GyP to woo E&P companies back,” recounted of Neuquén, have played an important role in attracting Saggese, president of GyP. “Nevertheless, GyP’s strategy foreign oil companies to Argentina. Saggese related: “Gov- is not to be an operator itself. GyP hires qualified person- ernor Sapag of Neuquén has been very important in the nel who manage the company’s relationship with its E&P creation of GyP and convincing companies like ExxonMobil partners. Though GyP generally has about a 10% interest in to come to Argentina. From 2008 to 2010, it was difficult joint ventures, GyP wields a rarely used veto right over all to convince companies to invest in exploring the blocks that project decisions.” they had already relinquished. The first bidding round only Neuquén also has a plan to develop the infrastructure yielded about $180 million. However, Governor Sapag suc- that the province will need to support the growth of the oil cessfully wooed ExxonMobil and XTO Energy during his and gas industry. Neuquén has created the following pro- trip to Houston.” vincial companies to support three specific kinds of infra- Jorge Sapag, governor of the Province of Neuquén, pro- structure projects: the Ente Provincial de Energía del Neuquén vided some background about Neuquén’s history with oil for electricity distribution, the Ente Provincial de Agua y Sa- and gas: “Neuquén has been exploring and producing oil neamiento for water treatment and sewage, and the Direc- and gas since 1919. After years of declining oil production ción Provincial de Vialidad for roadways. These three state- due to maturing fields, the development of Neuquén’s un- owned companies will act as the province’s tools to develop conventional resources is turning a new page in Neuquén’s the basic infrastructure needed to support hydrocarbon hydrocarbon story.” E&P in Neuquén. P-12 December 2015 - OilandGasInvestor.com December 2015 - OilandGasInvestor.com P-13 ARGENTINA OIL AND GAS members of SUPeH strongly relate to YPF, which makes negotiations with it easier. The challenge in working with SUPeH and other unions is to communicate where YPF wants to go and that some of the tasks that lie ahead are “YPF recognizes its importance in easy, while others are difficult.

YPF has implemented SUSTENTA, which aims to supplying Argentina’s energy needs” improve the productivity, competitiveness, and Interview with Miguel Galuccio, president and CEO, YPF quality of goods and service providers for YPF and the Argentine oil and gas industry. Why is it im- How has YPF’s corporate culture YPF’s business strategy would not dif- portant for YPF to promote Argentine industry? changed under your leadership? fer much were it to lack a national sense YPF prioritizes developing Argentina’s national industry YPF was one of the first state-owned since YPF’s commitment to Argentina because developing the country’s unconventional resources oil companies in the world, along with also makes business sense. How could will require services that are close to the operations. SUS- Gazprom, and has sought to build its YPF not be committed to the country TENTA does not promote an absolutist, nationalistic indus- own company culture that focuses on when almost 80% of the company’s trial policy; instead, it promotes the substitution of imports operational and technical excellence. revenue comes from Argentina? Setting where it makes sense. YPF’s core business is the production It has world-class geophysicists and aside feelings, Repsol’s management of oil and gas, not the manufacturing of pipes, valves, etc. geologists that other national oil com- of YPF did not make business sense. Nevertheless, YPF has a stake in seeing the national indus- panies rarely have. In the last three Though most of Repsol’s revenue came try improve since YPF needs these products. years, YPF has focused on improving from its activities in Argentina, it was Photo courtesy of YPF. the quality of its management and investing most of that cash in its inter- You have stressed the importance of YPF as a hy- leadership. For example, it is putting national portfolio to secure short-term brid organization, that is, majority-owned by the search and development centers (R&D) dedicated to the together a management school to in- profits rather than future reserves. This state but with a strong private sector culture. At creation of new technology. Following this premise, we cre- still common values among all of its business strategy was doomed to fail. the same time, the United States fostered its shale ated Y-TEC, a technology company composed of scientists managers. These values will reflect YPF now has a tangible commitment to revolution without a state-owned or hybrid com- and technicians from CONICET (the National Council of YPF’s company culture, which differs from the culture of Argentina, but this does not mean that the company’s deci- pany. Why do you think some countries benefit Scientific and Technical Research) and YPF. Y-TEC is com- YPF under Repsol in several ways. sions do not also make business sense. from state-owned or hybrid energy companies and mitted to scientific and technological development applied Under Repsol, YPF was more centralized around Buenos YPF’s commitment to the country has motivated it to other countries do not? to the oil and gas industry in Argentina. Aires and Madrid but today it is decentralized. For example, undertake risky yet forward-looking projects like develop- Countries, like people, have a fundamental nature. The YPF made an enormous technological leap in 2015 with regional managers are fully empowered to independently ing Vaca Muerta. Commercializing the vast hydrocarbon re- recipe that worked in the United States to develop its hy- the start of the production of the best unconventional well take decisions and risks. Taking risks is extremely impor- sources of Vaca Muerta and developing Loma Campana—the drocarbon resources will not necessarily work elsewhere. in the Neuquén basin, which has a production level of 1,600 tant, and I encourage managers to go above and beyond my second most important productive field in Argentina and the Every country has to find their own way of doing things, and boe/d. In the oil business we called this type of asset “super preliminary instructions. largest unconventional field outside of the United States— particularly the way to best extract value from its resources. oil well”. The drilling of the well reached 5,350 meters of Also, YPF is now a more open company and is devoted requires taking risks. Sure, YPF could invest in, for example, Given Argentina’s complexity, I communicated my view to depth and its horizontal extension was 2,000 meters long. to diversity. My management team is very diverse. The chief the Niger Delta, where investments might yield a 2% return. the government that shaping YPF into a hybrid organization This well had a successful hybrid completion of plug and financial officer, Daniel González, was new to oil and gas Yet it does not make sense for YPF’s long-term profitability made the most sense. The United States, for example, has perf and sliding sleeves. It required 28 fracture stages in 17 when he started; he was a mergers and acquisitions (M&A) to convert foreign resources into foreign reserves. Once YPF different laws that make landowners not only the owners of days and it cost USD $19 million. Today it is the most ef- expert previously. In the last few years, YPF has acquired secures local reserves, YPF’s long-term business strategy will the land but also of the hydrocarbon resources under the ficient well in Argentina, achieving a USD $600 thousand Apache and interests in local petrochemical companies transcend Argentina. YPF has already begun operations in land. The United States also has legal and tax regimes that cost per fracture stage. such as Petroken Petroquímica Ensenada and Petroquími- Bolivia and Ecuador and is considering Mexico. facilitate commercial transactions. Argentina lacks this kind ca Cuyo. YPF has also entered into deals with Petronas, of transaction-friendly system. Do you have a final message to international oil Chevron, and Dow Chemicals. Daniel’s expertise has been You have talked about how you do not delegate Yet YPF’s hybrid model works for Argentina. If YPF and gas investors? vital to the success of YPF’s M&A success over the last few YPF’s relationship with unions. Can you talk about were 100% state-owned, it would have difficulty accessing YPF must think about regionalization in light of the op- years. YPF currently lags behind peers in gender diversity, the importance of personally managing YPF’s rela- international capital. If it were 100% private-owned, it would portunities that Latin American energy companies have but is convinced that such diversity will improve the com- tionship with union leaders? have difficulty having the kind of symbiotic relationship that to exchange know-how. For example, there are interesting pany’s work environment and decision-making. I do not and cannot delegate my relationship with the pres- it needs to have with the national government as the chief offshore resources, but YPF does not have the know-how Another important change in YPF is its focus on fos- ident when the national government owns 51% of YPF’s regulator. Thanks to its hybrid nature, YPF has been able to to develop them like Petrobras does. Moreover, YPF could tering a national sense, which was one of three points of shares. Moreover, YPF’s relationship with unions is fun- secure a minimum price of $7.5 per million British thermal pursue opportunities with Bolivia, Chile, and Uruguay, to my plan for my first 100 days as CEO. This does not mean damental given that improving the productivity of labor in units (Btu) for local gas producers. The government used to name only a few of the countries that represent potential that YPF’s employees gather every morning to hoist the Argentina will take YPF to the next level. Argentina cannot import liquefied natural gas at prices up to $13 per million members of a regional energy market. Argentine flag before entering Torre YPF; rather, it means quibble about whether the international price of oil will go Btu, but realized that a domestic price of $7.5 saved foreign If you ask me to sell Argentina to oil and gas investors, that YPF recognizes its importance in supplying Argen- up or down; it must focus on making its labor force as com- reserves and created jobs. By communicating with YPF, the Argentina cannot be sold with a slogan. Argentina has at- tina’s energy needs and helping the country regain energy petitive as possible. Doing so will require cooperating with government can set policies that simultaneously foment in- tracted and will continue to attract investment by delivering self-sufficiency. union leaders, which is a task I personally manage that takes vestment and help it reduce its fiscal deficit. on its promises. Certainly Argentina needs more investors, about an hour of my time per day. and YPF has had the good fortune of partnering with top- You define ‘national sense’ as YPF’s commitment There is actually a union within YPF called SUPeH that How important is technological innovation to YPF? notch players like Chevron, Dow Chemicals, Petronas, and to helping the country become energy self-suffi- is historically important to the company. My relationship Technology has been always a key factor in this industry Gazprom. The next step for Argentina will be to outline rules cient. How would YPF’s business strategy differ with its leader, Antonio Cassia, is one of trust and friend- and in my professional career. For YPF, this matter is top of the game that will allow the country to develop its resourc- were it to lack a ‘national sense’? ship. When he has a problem, we talk over coffee. The priority and I strongly believe in the relevance of the re- es regardless of what happens in the rest of the world. P-14 December 2015 - OilandGasInvestor.com December 2015 - OilandGasInvestor.com P-15 ARGENTINA OIL AND GAS ARGENTINA OIL AND GAS YPF Vaca Muerta and Unconventionals The Leader of an Industry The Future of an Industry

fter the first oil well was drilled in Comodoro blessing for certain manufacturers. S.A. Lito Gonella e Hijo Overview and Analysis fracturing more efficient,” said Santiago Sacerdote of Y- Rivadavia in 1907, a national decree under President I.C.F.I. (Gonella) benefitted from YPF’s general increase Vaca Muerta is home to most of Argentina’s 27 billion bar- TEC, YPF’s R&D branch. AHipólito Yrigoyen created YPF on June 3, 1922, mak- in demand for equipment, but Gonella also began to face rels of unconventional oil and 802 Tcf of unconventional A 2014 YPF update on Vaca Muerta laid out the in- ing it one of the oldest national oil companies in the world new competition from low-technology manufacturers who natural gas. When asked whether Vaca Muerta’s develop- dustry’s goals: To increase productivity, companies in Ar- at 93 years old. Since its birth, YPF’s ownership has passed received designs through channels like YPF’s SUSTENTA ment will come at the expense of other unconventional plays gentina will need to improve their understanding of the from the hands of the national government, to international program. “Nevertheless, competition prompted Gonella to in Argentina, López Anadón of the IAPG responded: “Yes. subsurface, identify the sweet spots, optimize completions, investors’ hands, to Spanish hands, and finally back to the internally restructure and become even more competitive Except for a couple of wells that have been drilled in the San and master horizontal drilling. To reduce well construction hands of mostly Argentines. Today, the Argentine national without sacrificing the company’s technological advantage,” Jorge basin in the D-129 formation, the bulk of shale explo- costs, companies will need to improve case drilling tech- government and hydrocarbon-producing provinces own 51% clarified Carlos Gonella, Gonella’s president. ration and development has been in the Neuquén basin, niques, look to local sand, increase operational efficiencies, of YPF’s shares, and major institutional stockholders include Argentina’s nationalizations in recent years and other specifically in the Vaca Muerta formation. Other areas pres- and renegotiate labor contracts. Lazard, Soros Fund Management, and Goldman Sachs. initiatives reflect the current Argentine government’s stat- ent challenges and difficulties that make them less attractive YPF has made progress in reducing well construction An analysis of data provided by Argentina’s Secretary ist economic strategy. Whether Argentina would be better as an investment for the time being. Oil and gas companies costs. In 2011, it cost about $11 million to drill and com- of Energy indicates that the re-nationalization of YPF in off with another economic strategy is an important debate will begin developing unconventional resources in the rest plete a well with 3.1 stages in about 43 days; in 2014, it cost 2012 was a turning point for the oil and gas industry in Ar- to have. Yet the reality is that the presidency has become of Argentina’s basins only after they overcome the learning about $7.6 million with five stages in about 25 days. About gentina. Comparing the production rates before and after so powerful in Argentina that a company of YPF’s size and curve at Vaca Muerta.” 46% of the total cost now relates to drilling and 35% to 2012 highlights the impact of YPF’s re-nationalization on importance could not have remained independent from the A comparison with other unconventional resource plays completion. Yet some critics, like Daniel Gerold, argue that Argentina’s total oil production and on the company’s own national government for long. When Galuccio talks about explains why Vaca Muerta has so much potential. Like YPF could have done better, and references the develop- production. In 2010 and 2011, year-on-year Argentine oil the fundamental nature of countries, it is difficult to avoid the Marcellus shale in the U.S., which has a total organic ment of Loma Campana Field: “YPF and Chevron started production fell by an average of about 4% as international the thought that he was referring to Argentina’s exception- content (TOC) of 2% to 12%, Vaca Muerta has a TOC of to develop an unconventional play in 2012. They selected oil prices rose; from 2012 to 2014, oil production fell by 1%, ally powerful presidency. Given that a strong presidency will 3% to 10%; like the Wolfcamp play whose thickness ranges a strategy to develop the play in the black shale oil window or three percentage points lower. In 2010 and 2011, YPF’s likely remain a feature of Argentina’s political and econom- from 200 to 300 meters, Vaca Muerta’s thickness ranges through vertical wells. However, they would have been bet- oil production fell by an average of 4%; from 2012 to 2014, ic landscape, a national oil company with a direct link to the from 30 to 450 meters; like the Eagle Ford whose reservoir ter off by drilling horizontal wells with more fracking stages, the company’s oil production increased by 5%, which repre- government seems pragmatic, if not inevitable. pressure ranges from 4,500 to 8,500 psi, Vaca Muerta’s res- sents a positive difference of about nine percentage points. Despite the credit downgrade, YPF’s stock price re- ervoir pressure ranges from 4,500 to 9,500 psi. Yet YPF’s re-nationalization has not been associated mained relatively stable after the re-nationalization and Despite the technical specifications in Vaca Muerta’s with similar changes in Argentina’s gas production. In 2010 increased after the U.S. EIA’s announcement about Vaca favor, among the many challenges stopping Argentina from and 2011, year-on-year gas production fell by an average of Muerta. That YPF’s stock continued to rise after the an- fomenting its own shale revolution are E&P costs. “The 3%, and continued to fall at the same average rate from nouncement indicates that investors have approved of challenge with developing unconventional resources is find- 2012 to 2014. The continued decline in gas production YPF’s management and the country’s ability to attract the ing ways of making production more economic. You cannot stands in contrast to YPF’s own gas production. In 2010 kinds of foreign investors that Argentina will need to de- achieve this with a single technology; rather you need to and 2011, YPF’s gas production fell by an average of 7%, but velop its vast unconventional resources. Since YPF’s re-na- find the right combination. We need to have a better un- it increased its gas production to an average of 3% per year tionalization, the company has signed agreements with the derstanding of the geological characteristics of basins and from 2012 to 2014. likes of Chevron (2013), Dow (2013), Petronas (2014), and the hydraulic stimulation process. To that effect, Y-TEC Some use these production figures to argue that YPF’s most recently, Gazprom (2015). works on, for example, reservoir characterization, the de- re-nationalization was positive, but the move was not with- As Argentines elect a new president, Galuccio might yet velopment of fracture stimulators, or the development of out consequences and critics. After the re-nationalization, be replaced as the leader of YPF, either out of the belief that different types of proppants and fluids to make hydraulic Moody’s downgraded YPF from B3 to Caa1, or high long- someone else could do a better job or to grant someone a term credit risk, which it has maintained for most of the political favor. “Yet replacing Miguel Galuccio would be a time since then. mistake,” affirmed Roberto Monti, who presided over YPF If YPF’s re-nationalization sent a bad message to the before Repsol took over. Monti argued: “The leader of YPF international business community, the event meant some- must fulfill the following four equally important criteria: (1) thing totally different to Argentina’s local industry. Local be able to understand and balance the interests of all the manufacturers and EPC companies have benefitted signifi- company’s stakeholders, (2) be a good manager capable of cantly from YPF’s commitment to develop and prioritize leading a complex company, (3) have a solid technical un- local industry, as well as from the national government’s derstanding of the oil and gas industry, (4) be known and trade protection. Fabian Mamia, president of Flowserve’s trusted in the international oil and gas industry.” Latin America operations, explained: “The re-nationaliza- Monti believes that Galuccio has excelled at meeting all tion of YPF was an inflection point for Flowserve’s business four of these criteria, saying: “I am sure that 90% of Petro- in Argentina, but the company succeeded in finding the nas’ decision to explore the Amarga Chica block with YPF right balance between its focus on local and foreign mar- was related to Miguel’s personal relationship with the lead- kets. YPF under Repsol invested little in the country and ership of Petronas. When Miguel worked in the Far East, he Flowserve’s revenue from the local market was not as high developed relationships with several Asian oil companies, as it is now.” But the re-nationalization came as a mixed among them Petronas.” Photo courtesy of AESA. P-16 December 2015 - OilandGasInvestor.com December 2015 - OilandGasInvestor.com P-17 “In order to attract the investment needed in Argentina, the country needs a minimum critical mass of volume and new services in the country.” – Carlos Ormachea, CEO, Tecpetrol

But developing Vaca Muerta poses Gustavo Albrecht, managing director, Oscar Anibal Vicente, executive vice- several challenges. Carlos Ormachea, Wintershall Energía Carlos Ormachea, CEO, Tecpetrol president, Petrolera Entre Lomas CEO of Tecpetrol, outlines those that stand out to him: “Three stand out at especially in the shale gas, wet shale gas, and volatile oil increase of a country’s risk profile. The re-nationalization of Vaca Muerta. First, Argentina needs a window to where they are now shifting. Despite the large YPF was one such event, which forced international players stable financial situation in order to fa- investments that companies have made, it has been difficult to decide whether they would remain in Argentina, lest they cilitate the financing of the anticipated to increase production.” be next. For several E&P companies, the benefits associated projects. The development of these re- Drawing from the lessons learned in other shale plays with the successful development of Vaca Muerta outweigh sources will require between $10 billion will help operators overcome the learning curve associated the risks. and $15 billion dollars per year. This is with developing Vaca Muerta. Yet López Anadón of IAPG Days prior to his departure from Shell Argentina as difficult to finance from existing opera- added: “Regarding operational efficiency, it would be dif- president, Aranguren talked about why the Anglo-Dutch tions without fresh money to supple- ficult to directly apply the lessons learned in the United major has remained in Argentina after over a century, even ment it. The second challenge is to im- States to Argentine shale fields. Oil and gas companies after YPF’s re-nationalization: “The main objective of an oil prove cost efficiency. In order to attract in the United States have access to 12 million horsepower company is to convert resources into reserves. Shell entered the investment needed in Argentina, of fracking equipment, whereas companies in Argentina into Vaca Muerta in 2012 because it would help the country the country needs a minimum critical have access to only about 200,000 horsepower. Oil and to develop its resources and the company to produce the oil mass of volume and new services in the gas companies will have to overcome the learning curve and natural gas that it needed to remain profitable.” country. Third, companies need a more associated with understanding Vaca Muerta as a forma- Gustavo Albrecht, managing director of Wintershall En- precise understanding of the opportu- tion. However, lessons related to well completion and the ergía, said: “Wintershall has decided to continue investing nities in Vaca Muerta. Vaca Muerta development of drilling and working rigs can be applied in in Argentina’s oil and gas industry for three main reasons. is undoubtedly a substantial asset, but Argentina.” First, Wintershall is convinced about the potential of the companies must identify the sweet oil and gas sector in the country. Secondly, Wintershall has spots, identify whether these are gas E&P Perspective chosen Argentina to develop its center of excellence for un- or liquids, and determine how best to E&P companies, especially the majors, are known for their conventional operations, which in the future such expertise extract the hydrocarbons. The learning willingness to operate in difficult and risky business envi- could be used in other regions in the world where Winter- process is costly both in terms of mon- ronments. Yet international players must decide whether shall is active. The third factor is the massive amount of ey and time. Overcoming the learning they are willing to remain in a country after each marginal contingent resources in Vaca Muerta.” curve will be a great challenge.” Much relies on YPF’s own success, according to Oscar Anibal Vicente, ex- ecutive vice-president of Petrolera En- tre Lomas: “Whether the Argentine oil and gas industry manages to take advantage of the country’s unconven- tional resources depends on whether YPF manages to pave the way.” Another challenge will be attract- ing more small and medium-sized players, like those that helped foster the United States’ own shale revolu- tion. Saggese of GyP advised: “With- out reform, the second largest reserve of shale gas in the world will be in the hands of a dozen companies instead of the hundreds of companies that are needed…Developing Vaca Muerta will require allowing more players to enter the game.” P-18 December 2015 - OilandGasInvestor.com December 2015 - OilandGasInvestor.com P-19 A significant barrier to entry for independents is financing. Majors willing to take the risk can draw from stockholders and capital markets. In- dependents must often rely on their own cash flow, especially in Argen- tina, as Alejandro Jotayan, CEO of Andes Energía explained: “In the United States, mid-sized companies financed a significant portion of their unconventional activities with local bank loans. However, Argentina’s banks lack sufficient capital and in- dustry knowledge to fully finance nec- essary investments in unconventional Alejandro Jotayan, CEO, Andes Energía Diego Manfio, CEO, Ingeniería SIMA Photo courtesy of Bolland y Cía. Adolfo Sánchez Zinny, president, Bolland y Cía plays, and Argentina’s current country risk bars local E&P companies from international capital at companies. As Grotz of EY put it: “Service companies of and gas development, there was a well-educated workforce, gas fields pose, as Carlos Etcheverry, the company’s presi- a reasonable cost. E&P companies interested in unconven- all kinds—drilling, pulling, food, maintenance, logistics and the pace of activity for oilfield services was fairly high, and dent of land drilling, recounted: “There are different chal- tional activities must find alternative financing strategies transport—especially stand to benefit because regardless of we had executives on our senior management team with lenges associated with different parts of Argentina, depend- like financing through not only debt, but also equity and which E&P companies become operators, service compa- many years of experience building companies in Argentina ing on the area and geography. In the south, wells are not their own cash flow. Holding producing conventional assets nies will have a job to do in Argentina.” and more broadly throughout Latin America. After evaluat- very deep and have to be drilled very fast in order to guar- can provide the cash flow that E&P companies in Argentina Diego Manfio, CEO of Ingeniería SIMA, added: “Op- ing shale resources, and in some cases conducting reservoir antee high production and decent returns. Fluid loss and need to finance unconventional activities.” portunities for service companies like SIMA abound. As characterization studies in places such as the United King- rig stability are also challenges associated with the south. Madalena Energy is another independent that is fo- E&P companies continue to develop Argentina’s shale dom, Australia, Mexico and Colombia, we concluded that In Neuquén, you need bigger rigs with between 1,000 and cused on delineating unconventional shales and tight sand plays, they will need the support of companies that pro- Argentina was the only country outside North America at 2,000 horsepower, where the main issue then becomes how plays in the Neuquén basin, especially the Vaca Muerta vide services related to infrastructure and logistics. Ser- this time with the right balance of risk and reward.” to reduce the cost of drills. The operation differs by the type and Lower Agrio Shales. Kevin Shaw, Madalena’s presi- vice companies will need to build new facilities, and to Though opportunities for OFS companies abound, that of well, its depth, and the type of reservoir. In Chubut, un- dent and CEO, highlighted currency controls and the in- create new solutions as the industry learns more about does not mean that setting up shop in Argentina is a no- conventional activity has not taken off, but technology is ability to repatriate profits as a major barrier to entry for Vaca Muerta and the Neuquén Basin.” brainer. Adolfo Sánchez Zinny, president of Bolland y Cía, changing constantly. In Neuquén the challenge is to suf- his company’s peers: “Madalena has been in Argentina for Like E&P companies, OFS companies must also under- detailed some of the challenges that foreign OFS companies ficiently hire and train personnel with the technical know- a number of years and is well versed in operating in Argen- take their own risk-benefit analysis in a world where other interested in coming to Argentina face: “Bolland believes how to operate the complex operations demanded in uncon- tina. In the future, positive reforms that would ease some shale plays exist. Di Vincenzo of EcoStim explained the pro- that the oilfield service market has natural barriers for new- ventional fields.” of the currency control restrictions and open up Argentina cess by which his company decided to enter Argentina: “We comers—not only because of the needed investments and Yet taking part in the opportunities generated by Vaca further to the rest of the international business commu- started our first operation in Argentina after thoroughly structure, but also due to the country’s volatile regulatory Muerta does not mean that foreign OFS companies must nity would diminish the barriers of entry for smaller and evaluating each international shale market. In 2012, when framework. Bolland has shown its ability to face and solve take an all-or-nothing approach. They can share the risk medium-sized independents. we started evaluating opportunities to expand our opera- unusual situations, even accepting to replace competitors and the benefits by partnering with local companies. Di- tions to other unconventional markets, it was clear to us who were unable to solve complex cases.” ego Manfio, CEO of Ingeniería SIMA, explained: “SIMA OFS Perspective that Argentina had all the elements for a successful shale DLS Archer is another foreign OFS company that has has become a very reliable partner for American companies The development of Vaca Muerta will depend on the avail- play. In particular, the geology was world-class, the infra- decided to enter Argentina, and has learned about the dis- looking to get involved in Neuquén and ideally our partner- ability and quality of oilfield service (OFS) and other service structure was in place from nearly one hundred years of oil trict technical challenges that Argentina’s various oil and ships will continue to grow. There have been a number of

P-20 December 2015 - OilandGasInvestor.com December 2015 - OilandGasInvestor.com P-21 companies, like Thru Tubing Solutions (TTS), that have each prediction using proprietary diagnostic tools and then activities did not fit the needs of local refineries: “This oil warehouses across the country in order to be as near as pos- hesitated when operators in Argentina like YPF and Shell a means of calibrating the predictive model based on real- could be exiting the system through Oiltanking’s terminals sible to our clients. Argentina’s oil and gas industry is full ask them to come to Argentina due to the challenges associ- time observations from the wells’ stimulation, flow back and and the compensation for that should be entering into our of opportunities, but distribution companies must profes- ated with import restrictions and the repatriation of profits. ultimate production. This methodology has the potential to operation. If this happens, maritime operations will signifi- sionalize their operations by improving their logistics strate- In the case of TTS, SIMA entered into a partnership with significantly reduce the stimulation of non-productive zones cantly increase.” gies and educating clients about their products,” detailed the company by which SIMA imports products from TTS in order to focus on those zones with the highest probability Nevertheless, increasing unconventional activities will Marcelo Saldías, the distributor’s president. and receives TTS experts. In return, TTS receives a cut of of success.” prompt most suppliers to alter their products or production The pressure to look for cheaper supplies has naturally the profits.” processes in some way. Monterotti and Cuevas of Sandvik led companies to look to Asian, especially Chinese prod- One of the most salient issues that OFS companies must Supplier Perspective elaborated: “Increased unconventional activity has also ucts. “In Argentina melting processes are three times more address is how they will help operators reduce costs. Of Four factors have affected suppliers in Argentina: YPF’s prompted Sandvik Coromant to work closely with clients expensive than in China. Casting valves costs about $6.50 course OFS companies everywhere must bear efficiency in re-nationalization, increasing unconventional activity, in- to meet their increasingly complex needs. For example, un- per kilogram in Argentina, while it costs about $3.50 in mind with the current low oil price environment, but it is frastructure, and import restrictions. Like OFS companies, conventional activity has increased the complexity of fitting China. As a result, many South American countries buy especially important in Argentina where labor unions have suppliers, both foreign and local, have benefitted from the in- certain equipment. The company often works with clients Chinese valves and other products,” explained Pablo Ruf- driven up labor costs. Esteban Nuñez, director of Inno- crease in local oil and gas projects since YPF’s re-nationaliza- through a process called integrated engineering by which fino, president of Thorsa, a valve manufacturer. visión, presented his company’s approach: “The main chal- tion and still have much to gain. YPF’s re-nationalization and Sandvik develops the metal cutting tools that clients need The Grupo Argentino de Proveedores Petroleros, a group lenge with unconventional resources is not finding them, investment in Vaca Muerta have increased the demand for to manufacture their own products according to specific re- that represents Argentina oil and gas suppliers, has lately but rather making this kind of production profitable. In- products and services, which often have to adapt to uncon- quirements. For example, Sandvik works with Tenaris to discussed issues related to Asian suppliers. According to novisión has focused initially on a solution that improves ventional exploration and production processes. Monterotti develop the cutting tools they need to manufacture products Leonardo J. Brkusic, the group’s executive director: “Ar- logistics to decrease costs and allows operators to identify and Cuevas of Sandvik said: “Sandvik’s involvement in the with the kind of fitting that will prevent leaks.” gentine companies must think about how they will compete sweet spots, and have on time and in place all the equip- oil and gas industry has increased significantly in recent Air Liquide Argentina & Uruguay is looking to its and/or cooperate with Chinese production.” ment, infrastructure and services needed. With this infor- years, especially after YPF was re-nationalized and led invest- American team members who have had more experience Taval is an Argentine valve supplier that has already mation in real-time, every sector in the company, and also ment in unconventional areas. Sandvik Coromant benefitted with adapting to unconventional activity. “Though uncon- partnered with a Chinese valve manufacturer; Taval pro- every supplier, is efficiently communicated with and can from an increase in demand of not just more valves and com- ventional activities like fracking have only begun in Argen- vides the designs, and Dervos Valves Industry (Dervos) focus on each business objective.” ponents, but for more complex valves and components as a tina in the last few years, Air Liquide has been providing manufactures the valves. “Taval’s partnership with Dervos Di Vincenzo highlighted the importance of predictive result of increased unconventional activity.” related services in other countries for years. The team of gives Taval a competitive edge over its local competitors and modeling in reducing costs: “We are offering our customers Yet increasing unconventional activity affects compa- Air Liquide in Argentina works together with the teams in has allowed the company to grow exponentially,” said Julio a methodology that allows them to high-grade their acre- nies in different ways. Rolando Balsamello, general manager Canada and the United States to discuss new opportuni- Girón, Taval’s president. age without drilling thousands of wells, to predict sweet of Oiltanking, hypothesized how his company would react ties and new ways of serving the needs of the company’s oil Import restrictions have especially opened doors for lo- spots along each horizontal well, to confirm the accuracy of if the crude oil produced in Neuquén from unconventional and gas clients,” explained Gonzalo Ramón, the company’s cal suppliers. “Restrictions make it difficult to import certain managing director. kinds of valves, which is where Válvulas Worcester often As this report’s discussion about the state of infrastruc- comes in. Válvulas Worcester manufactures valves that might ture in Argentina showed, E&P and OFS companies rely otherwise be imported. For example, Schlumberger plans to on local suppliers and their proximity to fields to deliver locally manufacture some products that they cannot import. their goods on time. MS Representaciones is one distributor Sometimes the company works along with them to supply spe- that has developed its own system to ensure that it makes cial valves,” explained Gil Prado, CEO of Válvulas Worcester deliveries on time. “Argentina is huge and the distances de Argentina, Argentina’s main ball valve producer. traveled are long. The strategy of MS Representaciones is Ruffino of Thorsa is convinced of the necessity of import to combine transportation services of our own with other restrictions: “Thanks to import restrictions in Argentina, companies. MS Representaciones has over $10 million in the country continues to be an industrial country that pro- inventory, which is why the company owns 10 strategic duces valves and other industrial products. Latin American

P-22 December 2015 - OilandGasInvestor.com December 2015 - OilandGasInvestor.com P-23 countries that choose to buy cheaper RECKONING WITH THE foreign products often lack a local IRON TRIANGLE: A manufacturing industry.” NEW ERA OF PROJECT Though import restrictions ulti- ENGINEERING mately hurt the quality of products in an industry, as this report notes, YPF By Miguel Wegner, CEO, Hytech implemented SUSTENTA, a program Ingeniería aimed at improving the quality of local industry. Baker Hughes has a similar In an ideal world, the entire project of program with local suppliers, and the a new plant or the revamping of an idea is to participate in suppliers’ de- existing one should be done to ensure sign processes. Puerino of Valvtronic that cost, schedule and performance described how SUSTENTA works are as planned. Yet this so called Iron Triangle normally forces project man- for his company: “Valvtronic’s par- Miguel Wegner, CEO, Hytech agers to decide between two of these ticipation in the program starts by first variables at the expense of the third making a proposal to YPF to supply a the company finished its last project and, sometimes, to choose only one product. Then, Valvtronic representa- abroad in early 2013 to focus on do- of them. After the crisis from 2008 to tives go to YPF’s operations to assess mestic upstream and downstream proj- 2009, companies around the world the needed product specification, and ects despite continuing demand for including Argentina began to demand YPF representatives go to Valvtronic’s more fast-track projects, making the production plants to jointly design the EPC projects outside Argentina.” management of the Iron Triangle more product. Finally, YPF places an order Yet as a subsidiary of YPF, AESA’s important than ever. if the production testing goes well.” increase in domestic projects comes as The life cycle of a standard engi- Puerino also opined on the pro- no surprise. Though AESA does not neering project typically follows three gram’s effects: “Valvtronic has a close receive preferential treatment in bid- sequential stages: conceptual or pre- relationship with its clients and has ding rounds where YPF is the client, FEED, basic engineering or FEED, and participated in YPF’s SUSTENTA projects sometimes go to AESA with- detailed engineering. Program. These programs have cer- out any bidding round at all. Pre-FEED and FEED are arguably tainly helped Argentina’s industry Though domestic demand for oil the single most important phases in a meet the increasingly complex needs and gas projects has increased, some facility project life cycle. Focusing on of unconventional exploration and EPC companies are decidedly inter- FEED, however, is not enough to cope production. SUSTENTA created a national. Hytech Ingeniería has pur- with the increasing demand for fast- channel of communication between sued an internationalization strategy track projects, which is the reason YPF and its suppliers that did not ex- to hedge against the volatility of Ar- that Hytech created extended Front- ist before its re-nationalization.” gentina’s domestic market, as Miguel End Engineering Design (eFEED). Wegner, Hytech’s CEO, shared: “Ar- eFEED is defined as a comprehensive EPC Perspective gentina’s complicated business envi- engineering package that includes Engineering, Procurement, and Con- ronment and Hytech’s experience in sufficient definition of deliverables struction (EPC) companies have also various industries motivated Hytech to provide secured value during any benefited from some of the same dy- to explore markets beyond Argentina.” project’s overall execution phase. namics as suppliers, especially YPF’s Wegner also touched upon an- Hytech’s experience shows that ac- increase in projects related to uncon- other trend affecting EPC companies: curate conceptual and extended ventional activity after re-nationaliza- “Argentina’s country risk makes it front-end engineering design leads tion. AESA is one such company, as expensive for companies to borrow in- to more predictable costs, decreases Adrián Mascheroni, the company’s ternationally. Oil and gas companies the overall project execution life cycle, general manager explained: “In the and refineries looking for new projects and ensures final plant performance last four years, YPF has pursued an ag- are no exception. Secure feedstock in Though eFEED initially takes more gressive investment strategy that did a declining oil and gas production sce- time than a traditional FEED phase, it not exist before its re-nationalization. nario is putting downward pressure saves money and time in the long run YPF has increased the company’s rig on revenues and thus the amount of and makes the Iron Triangle less rigid. count from 20 to 80 drilling rigs, which capital available for investment, requir- increased the need for production fa- ing also fast track projects and assured cilities. AESA began to participate in performance at startup. Clients are be- E&P projects after having for a long coming more knowledgeable and more time only focused on downstream proj- demanding. Moreover, clients usually ects. Since 2012, AESA’s projects port- want projects fast tracked. And the only folio share has moved to half upstream way to do fast track projects is to do en- and half downstream. Before YPF’s gineering at the same time the project is re-nationalization, AESA participated being done…this is part of what engi- in projects outside of Argentina, but neering firms call extended FEED.” P-24 December 2015 - OilandGasInvestor.com December 2015 - OilandGasInvestor.com P-25 ARGENTINA OIL AND GAS into the island of Tierra del Fuego, and has a similar acreage to the Neu- quén basin. Nearly the entire onshore part of the basin had been controlled Beyond Vaca Muerta by Petrobras for the last 15 years, but Remaining Conventional Opportunities it never was Petrobras’s main focus. At the time of the purchase, CGC E&P Perspective that there are still opportunities in was producing over 10,000 boe/d. Af- Despite the fixation on Argentina’s conventional fields and the company’s ter buying CGC, the next step was to shale gas and oil, investors should focus remains on mature fields. In the expand within the Austral basin and note the numerous opportunities sep- last few years, Central has sold assets to perform as operators in the areas arate from unconventional activities. in Chubut province to focus on fields where CGC had assets. We fulfilled Other opportunities include those re- in the Neuquén basin where other this goal on April 1, 2015, when we lated to tight gas, offshore, and matur- companies have not seen opportuni- started operating all the areas we pur- ing fields. ties. About four years ago, Central ac- chased from Petrobras in the Austral “Argentina will develop its tight quired some of Chevron’s fields in the basin, becoming the operator and gas assets before developing its shale provinces of Rio Negro and Neuquén owner of a large portion of a basin resources,” declared Hugo Eurnekian, with no or little production. Central with a huge potential. From that date president of CGC, and continued: put them back in production at rates on, CGC raised its production to al- “The government sets the price of nat- that make these fields economic for a most 25,000 boe/d.” ural gas at $7.50 per million Btu, which company with low overhead expendi- CGC’s president stressed the stra- makes investment in tight gas produc- Hugo Eurnekian, president, CGC tures like Central. In the first years of tegic importance of the potential of tion more profitable in the short-term activity in the new blocks, Central fo- gas: “We are convinced that the eco- when compared to long-term investments in shale.” cused on workovers and pulling activity to put the oil wells nomic scenario to invest in explora- Gerold of G&G Energy Consultants further delineated back in production. Then the company continued with tion and production of gas fields will the importance of tight gas: “There is significant short-term workovers to open new layers, and finally the company car- improve, being even more attractive in potential in tight gas, which some companies are already ried out new seismic acquisitions and drilled wells.” the future. Regarding the Austral ba- pursuing. The next step for the oil and gas industry will be As major oil and gas companies like YPF, Shell, and sin, it has larger gas reserves than oil the development of shallow gas plays, tight oil in conven- Chevron focus their attention on developing Argentina’s reserves (67% are gas, 33% oil)—a fact tional reservoirs in the Neuquén basin, and deeper natural unconventional resources, independents are taking advan- that was also decisive in CGC’s move gas in the San Jorge basin. At the same time, the consor- tage of the conventional assets that the majors are leaving towards consolidating its position tium among Total, Pan American Energy and Wintershall behind. Augusto Zubillaga, COO of GeoPark, detailed his there. The Austral basin is home to will continue to develop offshore assets that will come on- company’s strategy for conventional assets in Argentina: maturing fields, new discoveries, and stream by the beginning of 2016.” “Like in other countries in Latin America, NOCs like YPF a diverse geology that includes three Hosanski of Total Austral elaborated on his company’s have some of the best blocks available. Independents like regions known as Platform, Slope, and offshore gas assets: “Total has been and continues to be GeoPark can take advantages of opportunities of partnering Deep Areas, with five reservoirs of the most active player in the offshore of Argentina. Beyond with YPF to develop some of their non-core, often conven- proved hydrocarbon. Though oppor- Vega Pleyade, we have other offshore projects already on tional, blocks. Some E&P companies are divesting from as- tunities in the Austral basin abound, I the drawing board to extend the production of the CMA-1 sets in Argentina and are looking for independents to take would highlight it as a tight gas discov- block. But globally speaking, apart from the continental pla- over relinquished assets.” ery with the potential to produce up to teau of Tierra del Fuego, the Argentine offshore has been Carlos Grimaldi, vice president, and Mary Esterman, di- one Tcf of gas.” very little explored and a significant amount of acreage, in- rector, at Medanito, talked about the opportunities for the While opportunities, both conven- cluding deep-water, is totally unexplored. It is in that sense company as majors refocus their attention: “The focus of tional and unconventional, abound for almost a virgin frontier play.” large international, E&P companies on unconventional ac- E&P companies, they must also re- Argentina’s declining oil and gas production have made tivities has left a vacuum for smaller, local companies to fill member that their activities have sig- the optimization of maturing wells particularly important. with their specialized skill sets, like Medanito’s combination nificant impacts on the communities Many independent E&P companies have found their niche of expertise in E&P and the midstream sector. Medanito near oil and gas fields. Ingeniería Alpa in exploiting maturing wells. Pablo A. Chebli, Argentina’s initially made a significant investment in unconventional is one company that has understood country manager and vice president at Central Resources, resources. However, Medanito’s strategy is now to move the symbiotic relationship that needs outlined the motivation behind his company’s focus on ma- away from unconventional activities and focus on conven- to exist between oil and gas companies ture fields: “Much has changed for Central since Argentina tional ones. Medanito’s plan is to be in a strong position and the communities that surround has become a country in which unconventional activities for when it makes more economic sense for medium-sized them, as Ricardo Andriano, the com- have increased their appeal. However, Central is convinced companies to enter unconventional activities.” pany’s president, elaborated: “Ingeni- CGC, bought by Corporación América, has its eyes set ería Alpa’s policy from the beginning on conventional exploration in the Austral basin. Hugo was to make sure that locals could “Argentina will develop its tight gas assets Eurnekian, president of CGC, recounted how the compa- share in the projects being developed before developing its shale resources.” ny’s presence in the basin has evolved: “Among all produc- on the land around them. In reality, ing basins in Argentina, we identified the Austral basin in operators often tend to run into com- – Hugo Eurnekian, President, CGC Santa Cruz as a great opportunity because it is underdevel- plications with landowners and farm- oped and underexplored. The basin extends into Chile and ers, and Ingeniería Alpa did not want P-26 December 2015 - OilandGasInvestor.com December 2015 - OilandGasInvestor.com P-27 Photo courtesy of YPF. Rodolfo Gayoso, president, Transeparation Photo courtesy of Transeparation. these kinds of issues. The best way to incorporate them into ones, as Sánchez Zinny of Bolland explained: “Conven- And just as important as innovative equipment, soft- oil and gas fields. Originally designed for marginal fields, projects was to get them involved. By giving locals an inter- tional operations must increase oil recovery rates and slow ware has the potential to optimize the logistics of opera- the application of the software to unconventional ones est in Ingeniería Alpa’s operation, the company provided decline rates of fields, improving efficiency and using mod- tions related to mature and marginal wells. As Nuñez of makes even more sense. Tightly integrated with corporate them with a means of income and a way to participate in the ern technology appropriate for mature fields. As mature oil Innovisión noted, his company develops software aimed at information, the software suite allows companies to moni- development of their land. This partnership was successful fields in Argentina become downright old, these fields will this kind of logistical optimization: “Innovisión designed tor projects in detail and consolidate them in the Cor- not only because of the income it provided local communi- require different solutions, products, and services to slow RMtools initially to track and manage marginal fields in porate Portfolio. Project leaders can effortlessly control ties, but also because of the sense of involvement they felt. decline rates. At the moment, Bolland is working with the the San Jorge basin. With this platform, YPF created As- their budget, production rates and economic indicators of It was one of a series of mutually beneficial relationships major oil companies to study new technologies. We are in set Management teams, which work as individual compa- all business units. RMtools combines the technical view that have worked to Ingeniería Alpa’s advantage.” charge of the first Single Well Test Tracer pilot test with nies inside the corporation. The software permits the set- of the operations, with the real-time economic impact of one of them.” ting of benchmarks and objectives for each business unit, each change over time. The reality of fields has a large OFS Perspective Y-TEC, and thus YPF, is also dedicating R&D resources but most importantly lets them track the performance in impact on original plans. The improvement is to track Optimizing the production of conventional and mature to tackle the challenges associated with mature fields: “Y- real-time. RMtools allow oil and gas companies to eas- changes over time, and easily evaluate each new scenario wells requires just as much innovation as unconventional TEC has created various technological programs to tackle the ily define and track their business plans for developing and alternative.” opportunities and needs of the development of mature fields. Some of these programs include the development of products and techniques for enhanced oil recovery, new materials to improve the technical integrity of on-field installations, and the development of remote measuring and monitoring tech- nologies to reduce operating costs,” said Sacerdote. Some technology requires addressing conditions par- ticular to certain basins. The San Jorge Gulf basin produces RMtools highly abrasive oil, which requires high efficiency pumps to be able to withstand harsh conditions. Mario R. Forchias- sin, general manager at Novomet in Argentina, talked about how his company’s imported pumps meet this challenge: “Metallurgical quality is fundamental when facing fluids that have a certain degree of abrasiveness or corrosiveness. Novomet has a manufacturing methodology called powder metallurgy that creates a smoother surface in pumps than Unconventional resources are there. those produced in a foundry, which increases efficiency, less wear, better balance and allows the pumps to spin faster. In Make them profitable. Argentina there are currently about 4,500 working pumps and they all are made in foundries and use asynchronous motors. When you combine our more efficient PMSMs with our pumps, we create a much needed cost advantage for producers.” Maturing fields also pose challenges unrelated to opti- mizing production, as Rodolfo Gayoso, president of Tran- separation explained: “Water management is one of the biggest issues that needs attention because 90% to 97% of the production from mature fields is water. So operators are www.innsa.com to a large extent water producers as well as oil producers. Water treatment and management is difficult, costly and requires very qualified operations to get the proper results.” P-28 December 2015 - OilandGasInvestor.com December 2015 - OilandGasInvestor.com P-29 ARGENTINA OIL AND GAS Sinopec began to lack cementing, fracking and other oilfield services. “The lack of services prompted Sinopec to bring services from China to Argentina. Nowadays, Sinopec has one Sinopec Services workover rig, one Sinopec Services ce- Productivity and Labor menting unit, and one Sinopec Services fracking unit work- A Surmountable Obstacle ing in Santa Cruz, mainly for Sinopec Argentina activities,” said Horacio Rossignoli, operations vice president of Sino- Unions people than is needed. However, productivity agreements pec Argentina exploration and production. Rossignoli added: “The fall in production in 2013 and Argentine oil executives put down their mate when they and increased employer-employee engagement is changing 2014 was mainly due to a complex union situation, and not talk about unions. Though improving logistics may be one the labor landscape in Argentina. the maturity of fields. Most of the union conflict related of the most important technical challenges, few other issues “The support of unions by the national government to drilling services, and oil production in the province fell incite as much concern among company heads as those re- is also changing. Government support of unions varies by mainly as a result of the inability to drill new wells. In 2013, lated to labor and productivity. province and by governor. All three main presidential can- Sinopec was able to drill 100 wells in Santa Cruz, but in Today, there are more than 3,000 unions in Argentina, didates promise change, saying that they will provide more 2014, the company was only able to drill 66 wells.” 30 of which pertain to the oil and gas industry, according institutional support for companies. New union leaders also An important feature of Argentina’s national labor Photo courtesy of GNC Galileo Technologies. to Leandro Lanfranco, a professor of human resources and understand the game. This change and support from the na- framework is the concept of obligatory conciliation, which labor relations at the Universidad Católica Argentina and tional government has allowed companies to begin working states that if two parties cannot solve a dispute, one or both fully convinced Argentina’s Supreme Court to overturn a an employees and labor relations manager of an oil and gas on reducing the number of employees by helping employees of the parties must seek the mediation of the administra- provincial court’s decision to sentence Total to take the re- service company: “For years, the national government has wishing to retire to do so and by terminating low perfor- tive authority to begin a 15-day conciliation period before sponsibility for the actions of an OFS company Total had strongly supported unions. Since the first years of President mance workers. In the first half of 2015, service companies taking any direct action like a strike. However, Ferreira de contracted. According to Ferreira de las Casas, the Supreme Néstor Kirchner’s presidency, he created a strong partner- and operators have been able to fire some personnel. Previ- Las Casas explained that provincial tribunals rarely enforce Court’s decision represented the first jurisprudence related ship with unions. The structure of unions has changed in ously, it seemed impossible to fire someone in Argentina— the compulsory period of conciliation or penalize unions for to the non-solidarity between E&P and OFS companies the last decade. A decade ago, there was one powerful union it is tough, but not impossible, and companies are trying to failing to observe it. whereby E&P companies cannot be held responsible for ac- leader, which made labor negotiations easier. As employ- increase their effectiveness.” When involved in legal disputes, most oil and gas com- tions of the OFS companies that they contract. ees and delegates became more involved in union affairs, According to Ignacio Ferreira de las Casas, a partner panies play the role of defendant, as Total Austral did in Ferreira de las Casas has successfully represented his oil they began to understand that they could make a career out at Estudio Jurídico Ferreira de las Casas, some of the most one of the landmark cases of Ferreira de las Casas’s firm. and gas clients as defendants, but he has also encouraged of their participation in union politics. The ambition and important union leaders in Argentina include Jorge Ávila, His firm represented Total in a 1999 labor dispute that ar- his clients to be more aggressive and proactive in their re- political aspirations of union officials motivated them to the secretary-general of the Sindicato del Petróleo y Gas rived before Argentina’s Supreme Court. The firm success- lationships with unions. He believes that E&P companies secede from federations, which caused the proliferation of Privado of Chubut Province; Claudio Vidal, the secretary- unions and union leaders. Now, for example, the oil and gas general of the Sindicato Petrolero y Gas Privado of Santa industry has to negotiate with more than 30 leaders. Each Cruz Province; and José Llugdar, the secretary-general union has their own expectations and comes from differ- of the Sindicato del Personal Jerárquico y Profesional del ent provinces, which also influences reaching agreements. Petróleo y Gas Privado de la Patagonia Austral. Small companies, preferring to avoid conflict, have often Santa Cruz is one province where union actions have given into union demands that have included increases in affected the availability of oilfield services and consequently pay or personnel. Through incremental rises in pay and production. Sinopec took control of Occidental Argentina’s personnel, unions have become bigger and more power- conventional assets in Santa Cruz province in 2011, and in ful in the last 10 to 12 years. Outsiders might perceive that the same year, a strike hit the province. As American OFS Argentine companies pay higher salaries and employ more companies began to flee from union-related complications,

P-30 December 2015 - OilandGasInvestor.com December 2015 - OilandGasInvestor.com P-31 should assume the role of plaintiff D&C cost in the United States with more often. Though he realizes that Argentina, there is still a long way to E&P companies avoid litigation to go. Materializing the massive poten- avoid prolonged labor strikes, he is tial of Vaca Muerta will require an confident that the Argentine legal sys- effort from all stakeholders (service tem can yield favorable results for oil companies, government, unions, op- and gas clients. “The only way of de- erators, etc.) to dramatically reduce finitively ending disputes with unions the current cost structure and to gain is to appeal to the law. Judges have efficiencies,” declared Albrecht of the power to rein in the influence of Wintershall. unions, but it is up to the business Cooperation among E&P and community to take cases before them. OFS companies during a time of low Businessmen in Argentina must be- international oil prices is especially come more litigious.” important, argued Sánchez Zinny of Carlos Etcheverry, president, land drilling Nevertheless, the success of an ag- Bolland: “This kind of cooperation division, DLS Archer gressive litigation strategy depends on is particularly important at a time the degree to which unions are subject when E&P companies are seeking to is the most efficient and productive for to the rule of law, which can vary by reduce costs due to low international all parties involved, and helps to re- province. Industry leaders recognize oil prices. To that effect, E&P and oil- duce cost while increasing efficiency.” Neuquén as a province where gov- field service companies must also work Moreover, cost-saving technology ernment maintains a good relation- together to reduce costs in a way that can only be useful if the industry al- ship with the oil and gas industry. Yet generates a win-win approach to both. lows for its implementation. Thank- Santa Cruz stands out as a particularly Some oil companies pressure service fully, YPF, as the industry leader, challenging province, as Ricardo Cha- companies to reduce prices without has been highly receptive to the cra, president of Roch related: “Su- engaging in a discussion about pro- implementation of new technology, ing unions as oil and gas companies ductivity. When oil companies ask as Kuracz of Calfrac illustrates with is a good strategy in theory. Yet Roch service companies to reduce their pric- a comparison to Mexico and Pemex: has sued labor unions on various oc- es without an accompanying increase “The relationship between OFS com- casions. The problem is that labor in productivity, they are in effect ask- panies and a fully state-owned, na- unions often violate regulations and ing service companies to reduce their tional oil company (NOC) like Pemex other governmental mandates with profits or their service level. Pursuing tends to be more rigid, and the NOC impunity. For example, the Ministry cost reductions through increases in might resist change related to, for ex- of Labor requires a process known as productivity would increase mutual ample, the implementation of cost-re- obligatory conciliation, which unions benefits and establish a professional ducing innovations. Calfrac has seen often ignore. And when unions in and sustainable relationship between that in Argentina, the relationship be- Santa Cruz do go to the negotiating E&P and OFS companies.” tween OFS and YPF and other E&P table, they often ignore parts of the Etcheverry of DLS Archer echoed companies has been flexible enough to agreements with no repercussions.” a similar sentiment about the re- optimize costs and change plans when Ferreira de Las Casas recognizes lationship between OFS and E&P necessary.” that the close relationship between companies: “Although cost reduction Argentina’s oil and gas industry unions and provincial governments is important, DLS Archer will never must find a way to raise productivity makes litigation in provincial courts a compromise on safety or performance. in a way that benefits all of the par- risky endeavor for companies. For that Currently DLS Archer is working with ties involved, which includes national reason, he stresses that an aggressive Pan American Energy in the south and provincial governments, E&P litigation strategy is best played out in doing all of the drilling for their rigs companies, OFS companies, workers, national courts. under a contract. This allows them to and unions. Doing so will require all focus on leading projects while DLS parties involved to debate the issues at Companies Archer provides all drilling services, hand. On August 20, 2015, the meet- “Specifically in the case of Vaca Muer- creating a closer connection and more ing between Governor Martín Buzzi ta, one of the main drivers to achieve consistent collaboration on develop- of Chubut and the Cámara de Empre- profitability in this new emerging play ing the highest standards of technol- sas de Operaciones Petroleras Especiales is related to costs. When comparing ogy. Working together in this manner (CEOPE), the body that represents OFS companies in Argentina, contrib- uted to that debate. Continuing the “Pursuing cost reductions through increases in productivity debate on productivity is especially important at a time when interna- would increase mutual benefits and establish a professional and tional oil prices may remain low for sustainable relationship between E&P and OFS companies.” the short- to medium-term, and when – Adolfo Sánchez Zinny, President, Bolland Argentina’s elevated oil price may dis- appear on a political whim. P-32 December 2015 - OilandGasInvestor.com December 2015 - OilandGasInvestor.com P-33 ARGENTINA OIL AND GAS Conclusion New Opportunity at a Crossroad

nalysts of the oil and gas industry have expressed ful unions have already hurt production in the provinces high hopes for the potential of the future of Argen- of Chubut and Santa Cruz, where much of Argentina’s Atina’s oil and gas industry. “Today Argentina is a conventional resources remain. Some American E&P net importer of natural gas, though the resources are there and OFS companies have already fled Santa Cruz prov- to turn that around. If all technically recoverable shale oil ince, unable or unwilling to bear with the risk of further and gas resources were economically producible and turned disruptions initiated by the province’s oil and gas labor into proved reserves, the oil production horizon would ex- union. Regarding unconventionals, the industry’s greatest tend to more than 100 years and the natural gas production threat would be its inability to adapt to international oil horizon to more than 600 years. That said, Argentina is prices that are expected to remain around $50 per bar- the only country in Latin America whose rig count has not rel for years to come. The current international oil price decreased significantly over the last year, which is a positive environment makes optimizing costs and increasing pro- sign for the future,” stated Maxwell, and Ruiz of Deloitte ductivity paramount, but import restrictions and unions LATCO. stand in the way. Developing Argentina’s unconventional Exploiting Vaca Muerta and the rest of Argentina’s vast resources will also require more small and medium-sized hydrocarbon resources depends on reform, which, for many, independents, which are largely deterred by currency con- is inevitable. “Argentina will only develop its hydrocarbon trols and other fiscal and regulatory barriers. potential by adopting market-oriented reform focused on Successful reform, nevertheless, holds the promise making political institutions and rent regulations more pre- of a new, more dynamic Argentine economy. In 2013, dictable,” argued Montamat. YPF and Dow entered into a joint venture by which Dow Nevertheless, many oil and gas experts in Argentina will fund the development of El Orejano, a Vaca Muerta are convinced that if the pressure from the business com- gas field. The agreement—Dow’s first upstream invest- munity is not enough to force change, the need to supply ment— speaks to a larger vision about what Argentina Argentine households and firms with reliable energy will be. may become. Investors already recognize the possibility “Regardless of who wins Argentina’s 2015 presidential elec- that Argentina may be home to the world’s second shale tions, Argentina’s current macroeconomic conditions are so revolution. However, Miguel Galuccio, president and poor that the next president will have to keep incentives for CEO of YPF, goes further. If Argentina manages to fo- the production of oil and natural gas. It would not be the ment a shale revolution and thereby secure feedstock for business community that would motivate a government to refineries, Galuccio contends that Argentina may become enact reform; it will be the economy itself. Argentines will a regional and global center for petrochemical excellence. demand more economic growth, which can be achieved by And Gastón Remy, president of Dow Argentina, sec- increasing domestic oil and gas production,” said Gerold. onds the thought: “Dow wants to see the value created Yet it is difficult to understate the challenges that lie upstream reverberate throughout the entire energy value ahead for the industry. Regarding conventionals, power- chain and beyond.”

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