Argentina: YPF Seeks Partners to Explore “New Vaca Muerta” in Southern Patagonia

Economy Minister Sergio Massa and YPF Chairman Pablo Gonzalez said that YPF is looking for partners to explore Palermo Aike, an area in southern Patagonia that is seen as a smaller version of Vaca Muerta. They issued these remarks at an event commemorating the 30th anniversary of YPF being listed on the New York Stock Exchange (NYSE). Massa said that this unconventional reservoir in the Austral Basin in Santa Cruz province amounts to a third of Vaca Muerta’s potential and could solidify the hopes for Argentina to become a major international player in oil and gas exports.

Local company CGC (Compania General de Combustibles) has pioneered the exploration in Palermo Aike, targeting the Paso Fuhr area near the touristy town of El Calafate in Santa Cruz. CGC, chaired by Hugo Eurnekian (see our Personality of the Week), has been studying and exploring the area over the last two years and has said that it found good prospects for large-scale development. In 2022, the company conducted the first shale fracture in the area, and it is planning to carry out the first horizontal well this year. YPF now wants to take this incipient development to a larger scale.

The government of Santa Cruz has been promoting Palermo Aike for several years. In 2019, a provincial delegation made a presentation in Houston to try to create interest but then the pandemic froze progress. According to a 2015 report by the US Energy Information Administration, the play’s resources are estimated at 130 tcf of shale gas and 6.6bn barrels of shale oil. These figures were ratified by Massa and Gonzalez during the 10 March event.

The focus on Palermo Aike is part of a nearly $5bn investment announced by Gonzalez and YPF CEO Pablo Iuliano during the event, as the NYSE building featured a banner reading “YPF, unlocking Argentina’s energy potential.” Gonzalez and Iuliano explained that of those investments, $2.3bn will go to unconventionals, $1.3bn to conventional hydrocarbons and $1.1bn to the refining business. While most of the investment in unconventionals will keep being channeled to Vaca Muerta, company management said that they hope to have drilled the first wells in Palermo Aike before the end of the year. Massa and Gonzalez also said that the company will distribute dividends for the first time since 2019.

On Palermo Aike, Iuliano said he was confident that the company can profit from the Vaca Muerta learning curve. He also noted that the play has a competitive advantage from Vaca Muerta because it has enough infrastructure to transport gas north to the country’s urban heartland via the San Martin pipeline, which has spare capacity due to the decline of conventional production in the region. Palermo Aike can also take advantage of the smaller oil pipelines connecting to the port of Punta Loyola near the provincial capital, Rio Gallegos.

In our assessment, Palermo Aike has genuine potential but the timing of YPF’s announcement is also associated with the short-term political interests of both Massa and Gonzalez. The economy minister wants to consolidate his reputation as an FDI champion, opening new opportunities to foreign capital – even though he has not been able to resolve some of the hottest issues that most concern investors, including free access to the forex market to send earning back home or import goods. Indeed, Massa will probably not be able to resolve these issues in the remainder of his tenure.

Gonzalez, in turn, is hoping to get a shot at the Peronist nomination for governor of Santa Cruz, where the party has been in charge for over 30 years. He devotes an important part of his time as YPF CEO to his home province. Kicking off the development of Palermo Aike, which has the potential of changing the provincial energy profile, would be instrumental for his political ambitions. Gonzalez is very close to Vice President Cristina Kirchner and her son, Deputy Maximo Kirchner. Incumbent Governor Alicia Kirchner, the vice president’s sister-in-law, has not said yet whether she will run for a third term in this year’s elections, which the province has set for 22 October, along with the presidential election.

We believe that investors should keep Palermo Aike on the radar, as YPF will likely lead its development but seek partnerships with international players to do so. The project’s progress might suffer a setback if the opposition wins at the national level and the province remains in Peronist hands. Based on the current electoral picture, there is around a 50% chance of that scenario materializing. In that event, the development of Palermo Aike would depend on the type of relationship that the new YPF management establishes with the provincial government, as it would not be among the company’s highest immediate priorities.