YPF: output will rise in 2014, costs to decline

Oil and natural gas production set to remain relatively steady

State-controlled energy company YPF plans to increase oil production by three percent and natural gas production six percent this year while reducing the cost of drilling in the promising Vaca Muerta shale oil and gas formation, CEO Miguel Galuccio said yesterday.

The increase in production will be in part due to US$5.5 billion in investment, most of which will be earmarked for exploration and production with only US$1 billion going to the retail refinery and retail sales sectors.

Even though the expected production growth sounds promising, the figures look flat when compared with the company’s production in the fourth quarter of 2013.

A three-percent increase in oil output from 2013 would see YPF boost production to around 239,300 barrels per day, practically the same as what the company reported in the last quarter of the year, when production had risen six percent. Meanwhile, if the company does manage to increase natural gas production by six percent as it had outlined, it would imply an average daily output of 35.9 million cubic metres, merely one percent higher from the 35.5 million cubic metres per day reported in the last three months of 2013.

Still, the company is likely to experience even higher production considering YPF estimated figures don’t take into account the company’s decision to purchase local operations of US oil and gas company Apache.

YPF paid US$800 for the US firm’s assets in the country that turned it into the most important gas-producing company in Argentina and increased its hydrocarbon reserves by 14 percent.

YPF said on Friday that its net profit for full-year 2013 was 5.079 billion pesos (US$779 million), an increase of 45.6 percent over the previous year. For the fourth quarter, YPF reported a net profit of 1.918 billion pesos, an increase of 88.2 percent over the same 2012 period.

The state-controlled company drilled more than 770 wells last year, a 52-percent increase compared to 2012. The company also drilled more than 100 unconventional wells in the Vaca Muerta formation, taking the number of shale wells in production to 150.

Crude output of YPF, which was nationalized by the Argentine government in 2012, grew 2.2 percent last year to 232,300 barrels per day. Its natural gas production grew 1.5 percent to 34 million cubic metres per day.

“We are consistently drilling and completing vertical wells for US$7.5 million,” the YPF chief executive said, adding that each well is taking about 18 days to complete.

The first well drilled at Vaca Muerta cost about US$10 million. The increase in efficiency remains far from what will be necessary to make Vaca Muerta profitable. Yet the figure still falls far short of similar wells in the United States that cost US$2 million to US$3 million per perforation.

Galuccio said YPF currently has 68 active drilling rigs, a 48-percent increase compared to the end of 2012.

“Our ultimate objective is much more aggressive than US$7.5 million per well,” Galuccio said.

A US Department of Energy report shows that Argentina has more natural gas trapped in shale rock than all of Europe, a 774-trillion-cubic-feet bounty that could transform the outlook for Western Hemisphere supply.

The country’s shale gas reserves trail only China and the United States.

In order to exploit Vaca Muerta resources, YPF signed two contracts last week for a total of about US$1.2 billion to lease 15 drilling rigs. The contracts have an option for a three-year extension and are part of YPF’s project to invest US$37 billion through 2018.

The first rig is expected to start operating during the fourth quarter of 2014, said Helmerich & Payne, the largest onshore drilling rig contractor in the US. The other nine rigs are expected to be deployed sequentially until reaching full capacity by the end of the second quarter of fiscal 2015, the company said.

Galuccio expressed optimism that the compensation deal the country reached with Repsol will lure more foreign investment.

The Spanish company reached an agreement with the federal government, thanks to which it will receive a package of three dollar-denominated Argentine sovereign bonds with a nominal value of US$5 billion as well as additional bonds — for a maximum face value of up to $1 billion — to compensate for the market discount on the first group of bonds.

Herald with Reuters