Presented at Water Management and Proppant Supply Conference (American Business Conferences), Buenos Aires, July 17-18, 2013.

1. Buenos Aires – July 18, 2013
Views & Strategies
for Long-Term Development of
Unconventional Resources in Argentina
Mauro G. Soares
Unconventional E&P Resources Manager
Tecpetrol S.A.
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2. Talk Points
1. Playing the Unconventional “Game”
2. Vaca Muerta Activity & Equipement Snapshot
3. Well Costs & Economics
4. Final Thoughts
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3. What it Takes to Play…
THE UNCONVENTIONAL GAME
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4. Unconventional projects are “unconventional”
 Transitions are less discrete. De-risking is slower, more gradual.
 Geological risk is far from zero. Only 1 in 3 plays explored in North America has
been proved commercial.
 “Pilot” = optimization & standarization thru heavy investment and technical work
 Finally, no more than 30-70% of total area is economically developable
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5. Where is Argentina playing?
Barnett
Vaca Muerta
D-129
Niobara
Eagleford
Marcellus
A central areas of the Vaca Muerta play is entering the
“Pilot” stage requiring heavy investments to move
forward.
Other areas are still in “Concept” stage
What is expected short-term:
 Well performance increase
 Improvement of D&C times and costs
 Optimization of well and stimulation designs
 Identificaciton of “sweet spots”
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6. Not all acreage is equal…
Eagleford
Barnett
Is your project in a Sweet Spot? At least in a Core Area?
Extremely High Variability
Only 20-30% of total play area ultimately IS economic
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7. EUR calculated with limited production history
may have too much error…
Source: Assessment of Vaca Muerta Formation Shale Oil by Nicolás Gutierrez Schmidt et al. (April 2013)
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8. Poor wells cannot be avoided…
However operators can learn.
But it´s not cheap!
5700 wells drilled in the Eagleford play between 2007 and early 2013
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9. Vaca Muerta Shale Play in Argentina
ACTIVITY & EQUIPEMENT
SNAPSHOT
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10. Very early stage despite media hype…
Wells Drilled to Vaca Muerta 2009-2013 (All Operators)
 ~150 wells drilled by 2Q 2013
 85% Vertical / 15% Horizontal
Aguada
San
Roque
 90% Oil / 10% Natural Gas
 2/3 YPF
Sierra
Chata
Aguada
Pichana
Loma
La Lata
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11. Oil production growth could be speeding up…
Producción de Petróleo No Convencional en Cca. Neuquina
Average Monthly Shale Oil Production (All Operators)
Evolución Mensual
Total VM
production
reaching
10,000
boed by
mid-year
2013
when
counting
also for
associated
natural gas
bbl/d
6.000
Subtotal Quintuco
Subtotal Vaca Muerta
YPF
5.000
4.000
3.000
2.000
1.000
abr-13
mar-13
feb-13
ene-13
dic-12
nov-12
oct-12
sep-12
ago-12
jul-12
jun-12
may-12
abr-12
mar-12
feb-12
ene-12
dic-11
nov-11
oct-11
sep-11
ago-11
jul-11
jun-11
may-11
abr-11
mar-11
feb-11
ene-11
dic-10
nov-10
oct-10
-
Source: Secretaría de Energía (Cap. IV). 72 active wells @ April 2013
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12. Active drilling rig count in Argentina has
increased 25% ...
…all growth has happened in Neuquen,
to a large extent explained by YPF´s unconventional activity.
DRILLING RIGS
(# count)
YE 2011
YE 2012
2Q 2013
2Q 2013 vs.
YE 2011
Country Total
79
95
100
+ 21
Neuqén Basin Total
YPF Nuequén
YPF Unconventional
32
12
6
50
23
10
54
25
14
+ 22
+ 13
+8
However further growth is limited based on existing inactive rigs and new
imports of equipment will be required if activity continues to pick up.
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13. There has been a significant increase in fracking
services capacity…
…especially in Neuquen where capacity more than
doubled over the last year and a half.
FRACKING HORSE POWER
(in '000 HHP)
YE 2011
YE 2012
2Q 2013
2Q 2013 vs.
YE 2011
Country Total
140
165
310
+ 170
Neuqén Basin Total
110
125
250
+ 140
However additional frac spreads will need to be imported and/or built
locally (at least partially) in order to accommodate further activity growth.
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14. What is needed to drill and complete 1000 wells
every year?
1000
wells/yr
2013E
Capex
(million US$)
Wells Drilled
150
x7
1,000
12,000
1 year worth
of wells
Drilling Rigs (# count)
20
x5
100
2,400
new
equipement
Fracking Capacity (´000 HHP)
250
x4
890
500
new
equipement
8
x3
22
204
x9
1,879
850
1 year worth
of supply
1
x10
10
Frac Spreads (# count)
Proppant (´000 tons/yr)
Water for Fracking (million m3/yr)
in m/s
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0.03
0.3
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15. WELL COSTS & ECONOMICS
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16. Unconventional D&C costs are currently
substantially higher in Vaca Muerta
This will certainly change as:
– The Play leaves its early stage of “Concept” proof and enters
into pilots and development stage.
– Operators and service companies optimize scale and
utilization of equipement
– Operators improve drilling efficiencies and well designs,
especilly in the drilling of the overpressured Quintuco formation
– Operators find the optimum “recipe” to stimulate wells
(type and amount of fluids and proppants, pumping rates)
– Supply chains gain scale and infractructure improves
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17. D&C costs and operating efficiency
improvements have been dramatic in the US
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18. Well economics depend on many variables…
- Production volumes (initial and rate of decline over time)
- Hydrocarbon mix (oil/condensate, natural gas and NGLs)
- Cost of drilling and completing the well (D&C)
- Current and expected prices
- Cost of capital (own and borrowed, i.e equity and debt)
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19. For this analysis we have used the following
asumptions:
- Given the limited number of shale gas wells drilled in VM, we will assume
a production profile calculted from a large set of producing wells in the
best areas of the Haynesville Shale in Texas ans Louisiana. We use the
full number and a more probably 70% sensitivity (given different geology)
- For shale oil there are more data point however early estimated can have
too much error as mentioned… Anyway, we will use an estimation done
by the Sec. of Hydrocarbons of Neuquén published recently.
- Our base case for prices is 7.50 US$/MMBTU for gas and 75 US$/bbl
for crude oil.
- Return on capital was set at 15% before tax, unlevered.
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20. Economics of Shale Dry Gas Wells
20Y EUR = 4.6 BCF
Break-even Prices vs. D&C Costs
Break Even Price for 15% btax IRR inUS$/MMBTU
Production Profile*
14
12
VM
current
10
8
6
Haynesville
Current
4
2
0
10
11
12
13
14
15
16
17
18
19
Total Well D&C Cost (million US$)
* Average of wells in Haynesville top producing counties.
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Average of Top Counties in Haynesville Shale (100%)
Average of Top Counties in Haynesville Shale (70%)
Current Price in Argentina
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21. Economics of Shale Oil Wells
Production Profile*
Break-even Prices vs. D&C Costs
20Y EUR = 390 kbbl
Break Even Price for 15% btax IRR inUS$/bbl
160
140
120
VM
current
100
80
60
40
Eagleford
Current
20
0
7 8 9 10 11 12 13 14 15 16 17 18 19
Total Well D&C Cost (million US$)
VM Shale Oil Type Well *
Current Price in Argentina
* Assessment of Vaca Muerta Formation Shale Oil by Nicolás Gutierrez Schmidt et al. (April 2013)
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22. Costs should fall by 25% in Drilling and 40% in
Completion in order to improve well economics
Million US$
Million US$
Eagleford
Eagleford
Vaca Muerta
Vaca Muerta
Vaca Muerta
Vaca Muerta
(Current Estimate)
(Current Estimate)
(Target)
(Target)
Drilling
Drilling
4.2
4.2
8.5
8.5
6.5
6.5
Completion
Completion
5.3
5.3
9.8
9.8
5.9
5.9
Total Well Cost
Total Well Cost
9.5
9.5
18.3
18.3
12.5
12.5
Eagleford vs. Vaca Muerta
Eagleford vs. Vaca Muerta
1.0x
1.0x
1.9x
1.9x
1.3x
1.3x
Drilling (US$/ft)
Drilling (US$/ft)
Completion (US$/stage)
Completion (US$/stage)
271
271
319
319
632
632
654
654
484 (-23%)
484 (-23%)
396 (-39%)
396 (-39%)
TMD (ft)(ft)
TMD
15,600
15,600
13,500
13,500
13,500
13,500
CLL (ft)(ft)
CLL
4,200
4,200
4,000
4,000
4,000
4,000
Drilling Time (days)
Drilling Time (days)
4444
6060
3737
# frac stages
# frac stages
1717
1515
1515
Proppant (Tn)
Proppant (Tn)
2,000
2,000
3,400
3,400
3,400
3,400
29,100
29,100
15,500
15,500
15,500
15,500
Water (m3)
Water (m3)
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23. These savings will be possible only if…
_ Operators can visualise long-term exploration, pilots and development
plans given the prevailing fiscal, economic and financlal evironment
_ Those long-term plans pull the full supply-chain where more
equipement, competition and innovation should foster.
_ Operators are successful in finding better, cheaper and equally or better
performing ways of drilling and completing the wells.
_ Economic market conditions allow proper financing and attractive
returns for operators as well as companies along the supply chain.
_ Main saving targets are: lower drilling times, using less and/or cheaper
proppants and fluids,optimizing fracking equipement usage, optimizing
labor relations and efficiency.
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24. SOME FINAL THOUGHTS
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25. What can operators do to improve economics
and optimize their supply-chain management?
_ Mind processes and logistics. Innovate internally. Think unconventionally.
_ Communicate. With peers, with government, with suppliers, with academia,
with the local stakeholders.
_ Share information, ideas, results, plans.
_ Cooperate. Get together to contract services, develop solutions, to movilize
new infrastrure.
_ Help innovators and start-ups by demanding their products and services,
even financing them thru the early stages
_ Maybe integrate vertically . “Rent or Own?” should be a recurring question
for operators.
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26. THANK YOU
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