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Emboldened YPF’s $21.5bn plan rides shale wave

25 Oct 2017, 8.43 pm GMT

Emboldened YPF's $21.5bn plan rides shale wave

Buenos Aires, 25 October (Argus) — Argentina's state-controlled YPF will invest $21.5bn over the next five years to increase annual hydrocarbons production by 5pc, with a target of 700,000 b/d of oil equivalent (boe/d) in 2022.

YPF's partner companies will invest an additional $8.5bn during the 2018-22 period, reaching $30bn in total investment, the company said today as it unveiled an unprecedented five-year plan.

The company said that in the five-year period it will be able to boost production by an accumulated 25pc while decreasing annual capital expenditures by 13pc.

The main growth driver for YPF is unconventional production, which is expected to jump by 150pc in the five years.

By 2022, half of YPF's total hydrocarbons production will come from shale and tight oil and gas.

In conventional production, YPF plans to drill 1,600 wells as part of a broad effort to increase its overall hydrocarbon reserves by 50pc.

YPF executives traveled to New York to present the five-year plan in an effort to woo investors, touting the success of market-oriented president Mauricio Macri's coalition in 22 October mid-term elections as a positive sign for the company.

"The political and economic environment is now conducive to doing business in Argentina," said YPF chairman Miguel Gutierrez. "The midterm elections have been a very important endorsement for the reform agenda of president Macri."

Since taking office in December 2015, Macri has moved to decrease government control over the energy sector while aligning domestic crude prices with the international market.

YPF says its production costs will continue to decline as it expands unconventional development, focusing on the Vaca Muerta shale formation mostly located in Neuquen province.

In Loma Campana, where YPF has a joint venture with Chevron to develop shale oil, costs fell from $25.4/boe in 2015 to $13.4/boe this year. YPF expects that number to reach $10/boe by the end of 2022.

YPF plans to develop a total of 22 unconventional projects through 2022, of which 17 are currently in pilot mode.

The transition from pilot phase to development has been accelerated. "What used to take three years, you can now do in six months," said upstream executive vice president Pablo Bizzotto.

In conventional production, the company says it will work to increase the recovery factor from 20pc to 23pc.

The increased unconventional production will also usher in new petrochemical opportunities.

"We have seen a US chemical renaissance supported by unconventional resources. Argentina is facing the same opportunity right now," said downstream executive vice president Santiago Martinez Tanoira.

YPF aims to boost petrochemical and fertilizer output in a region that is a net importer. The firm plans to set up one or two additional methanol and ethylene plants and two to three urea plants.

By the end of 2022, YPF expects that 70pc of the fuel it sells in its more than 200 domestic retail outlets will be low sulfur.

The company expects Argentina's natural gas prices to remain relatively steady even as Macri's government moves to undo a broad system of energy subsidies.

By the end of 2022, wellhead gas prices should be $4.8-$5.5/mn Btu, according to YPF's estimates, compared to $4.9/mn Btu this year.

In the same period, a subsidy program that will grant producers of approved tight and shale gas projects $7.50/mn Btu next year, with the price diminishing gradually to $6/mn Btu in 2021, will end, likely in favor of market-based prices.

"Nothing has changed so much over the past years as the recovery of our prices in Argentina," said Marcos Browne, YPF's executive vice president in charge of gas and energy, noting that the company received an average of $2.3/mn Btu in 2012.

YPF also seeks to increase its presence in the power sector, doubling installed capacity from a current 1,300MW through renewable and thermal energy projects.

The company also plans to resume paying dividends to shareholders by 2019 with a goal of reaching payments of around 3pc/yr by the end of 2022. YPF stopped paying dividends after Argentina nationalized a majority stake in the company in 2012, edging out Spain's Repsol.

YPF currently has net debt to earnings before interest, tax and depreciation of 2pc, which it aims to decrease to 1.5pc by the end of 2022.

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