By Jinjoo Lee

America's prolific shale basins are running out of their best wells, but Argentina's Vaca Muerta is just getting started. Will pro-business regulation be enough to start a shale boom there?

Horizontal drilling in the basin took off around a decade ago, but unfavorable regulation -- including capital and currency controls, import-export taxes and oil-price interventions, among other things -- has hamstrung its growth. High inflation and a wobbly economy were also barriers to attracting capital to the shale patch. Exxon Mobil, for example, agreed to sell its Argentina business last year. Shell and Chevron still retain interests in the basin.

The shale basin -- whose name is translated as "dead cow" -- has seen more signs of life in recent years. The question is whether the pro-business changes of Javier Milei, who became Argentina's president more than a year ago, will be enough to speed up growth.

Oil production there has reached about 440,000 barrels a day, and research firms estimate that it could hit a million barrels a day by 2030. That is still a relatively small number, representing about 15% of what the Permian Basin produced in the last quarter of 2024. But the U.S. Energy Information Administration estimates that there is about 16 billion barrels of technically recoverable shale oil and condensate in Vaca Muerta. Argentina ranks among the world's top five holders of shale oil and natural gas, according to EIA estimates.

If Vaca Muerta's growth stays at the rate seen over the past few years, the basin's actual daily production should easily exceed the 1 million barrel threshold, said Patrick Rutty, director of global intelligence at Enverus. The basin also produces natural gas, which the country hopes to export in liquefied form.

Shares of the top two producers in the basin are reflecting the optimism. The stock of the majority-state-owned Argentine oil company YPF has doubled since Milei took office. Shares of Vista Energy, an independent producer founded by a former chief executive officer of YPF, have surged about 50% during the same period.

Milei's changes have so far made the country more investor-friendly. Hyperinflation has halted, and Argentina's country risk index, according to JPMorgan, has been halved since he took office. The government has removed oil-price caps and introduced an incentive plan that provides favorable terms for big investments such as those required on expensive pipeline projects. Milei has also promised to end capital and currency controls.

Argentine energy companies are returning to international debt markets "after years of isolation," S&P Global said in a report earlier this year. YPF was able to sell $1.1 billion in bonds to international investors in a January sale, while Vista Energy raised $750 million in the sale of dollar-denominated bonds late last year. Foreign capital should help the companies fund hefty projects, such as pipelines that help get oil to markets.

Many industry analysts agree that Vaca Muerta's shale is, in many ways, superior to that in the U.S. Averaged over the 12-month period through February, Vaca Muerta's wells had an estimated ultimate recovery -- a metric that captures the total amount of oil expected to be recovered by the end of its producing life -- of about 86 barrels per lateral foot drilled, according to data from Enverus. U.S. basins, by contrast, had productivity ranging from 43 to 72 barrels per foot. Even when U.S. shale basins were at their early stages of production, their well productivity never came close to Vaca Muerta's.

The cost to drill a well is more expensive in Argentina, which lacks the extensive infrastructure and oil-field service presence that the U.S. has. But higher productivity means Vaca Muerta's oil can make a profit on a lower oil price compared with U.S. shale basins, said Andres Villarroel, shale analyst at Rystad Energy.

Of course, there are reasons to be skeptical. Argentina's history is full of dramatic policy shifts, according to a December blog post from the Atlantic Council, a think tank. "Many investors are likely waiting to see how well the Milei administration's stabilization plan fares and, perhaps even more importantly, concrete evidence that the country has truly changed," Ignacio Albe and William Tobin said in the post.

As long as economic conditions stay somewhat stable, though, Vaca Muerta's production growth should appeal to American producers, who are running out of good locations to drill. Vaca Muerta is "one of the very few shale-oil regions" with big production growth expectations, said Andy McConn, commercial-research director at Enverus. U.S. shale oil production growth has flattened over the past year, according to EIA data.

Bill Von Gonten, chief executive of the petroleum engineering consulting firm W.D. Von Gonten Engineering, said he has been getting calls from U.S. energy companies interested in the basin since he appeared on a podcast last year to talk about Vaca Muerta. "I get about one call a week," he said. The firm has been working on Vaca Muerta since 2012, and its customers include Vista Energy. Von Gonten said U.S. companies are initially looking to join with local energy companies rather than setting up their own operations.

Rystad's Villarroel thinks U.S. companies need to see currency controls end before feeling confident enough to invest substantially in the basin. Milei has said he plans to eliminate those controls in 2026, but that step might be contingent on the country's getting a loan from the International Monetary Fund.

Major oil companies with stakes in Vaca Muerta have recently sounded optimistic about the country's prospects. Shell CEO Wael Sawan said on an earnings call in January that the company is "encouraged by what we're seeing from the new government." Chevron CEO Mike Wirth said on an earnings call earlier this year that he is "really pleased to see the situation of the country improving." Milei is "a reformer, and he's got a serious agenda that would make the country more investible for foreign investors," Wirth said.

Shell was the third-largest oil producer in the basin in 2024, based on operatorship, according to Rystad. Chevron operates a smaller portion, but has stakes in joint ventures that are operated by YPF. Both major oil companies agreed to invest in a key oil pipeline known as Vaca Muerta Sur. Argentina could become a more important part of Chevron's South American business: The Trump administration on Tuesday revoked its license to pump Venezuelan oil. And its planned purchase of Guyana assets -- through an acquisition of Hess -- is still up in the air because of a spat with Exxon Mobil.

If more enterprising independent American producers do venture into Vaca Muerta, they are unlikely to behave like wildcatters again -- largely because their investors won't tolerate unbridled spending. Von Gonten estimates that more than 90% of oil is being left behind in the Permian because producers initially were focused on short-term profits targeting the most productive wells, not long-term oil recovery.

A shale boom is possible in Argentina, but it probably won't look like the American one. That could be a good thing.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

(END) Dow Jones Newswires

March 06, 2025 05:30 ET (10:30 GMT)

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