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YPF to rebuild oil, gas production
with focus on Vaca Muerta

EnergiaOn

New partnerships, asset sales planned to fund Vaca Muerta projects

- Move comes as diesel, gasoline sales revive
- A second coronavirus wave could slow growth

By Charles Newberry/Platts

BUENOS AIRES
Petroleumworld 11 17 2020S

Argentina's state-backed YPF is starting to rebuild oil and natural gas production from a slump this year by targeting the Vaca Muerta shale play, which should grow to as much as 50% of its oil production by 2023 to help offset natural declines in conventional reserves, company executives said Nov. 11.

The company is on track for a 10% year-on-year decline in total production this year, CEO Sergio Affronti said on a conference call with investors.

The slump, he said, is largely a response to a March 20-Nov. 8 lockdown of the economy for the coronavirus pandemic, which slashed oil demand and forced the company to shut in wells as it could not sell all of the production.

With the lockdown largely lifted restrictions are still in place in some parts of the country diesel and gasoline demand is recovering, allowing YPF to reopen wells and redeploy rigs for production growth.

"We have seen a gradual recovery in volumes as the lockdown has been flexibilized," Affronti said of diesel and gasoline sales. "The worst seems to be behind us."

To be sure, rising diesel and gasoline sales allowed YPF to increase its refinery utilization rate to 73% in the third quarter from 60% in Q2.

Gasoline consumption dropped about 25% year on year in the first two weeks of November, compared with 30% down in October, CFO Alejandro Lew said on the call. Over the same period, diesel demand recovered to 15% lower from 18% lower.

"We expect to end the year roughly around these levels or even better," Lew said.

In 2021, Lew said demand should recover by the end of the year to 5%-10% below pre-pandemic levels unless a second wave of the virus restricts consumption again.

Even so, Affronti said oil and gas production in Q4 will see little growth, as the company performs preventive shutdowns of wells near fracking activity in Vaca Muerta and carries out programmed pipeline maintenance.

YPF's oil production fell 10.9% to 202,400 b/d of oil in Q3 from 227,000 b/d year on year, while gas output dropped 19.4% to 35.2 million cubic meters/day from 43.6 million cu m/d over the same period. This took its total hydrocarbon production, including natural gas liquids, to 468,500 barrels of oil equivalent a day, 11.6% below 530,000 boe/d in the year-earlier period, according to company data.

From Vaca Muerta, the country's biggest shale play, YPF produced 40,800 b/d of oil in Q3, up 11% year on year.

Focusing on shale

Affronti said YPF will continue to focus on shale oil in the near and long term, but will also expand gas output to take advantage of new incentives, he said.

In October, the government launched a three-year program aimed at reviving gas drilling and production with higher prices and long-term supply contracts. YPF has since said it will invest $1.8 billion over the next three years in gas projects.

In 2021, Affronti said the company will be more "ambitious" in its investment, with a view to returning to production growth, without providing an estimate on how much. He did say, however, that the growth will come from Vaca Muerta, which is now providing 20% of its oil.

"We do see that number going closer to 25% or a little more in 2021," Affronti said. "And we do expect that to go closer to 45% or 50% in 2022 or 2023."

This growth will be driven by the ramp-up in shale drilling and the natural decline in maturing conventional reserves, he added.

Seeking partners

To develop its large acreage in Vaca Muerta, YPF is seeking to build on a roster of partners that already includes Chevron, Equinor, Petronas, and Shell.

"We are maintaining an open dialogue with key international players for the possibility of entering into farm-in agreements in Vaca Muerta," Affronti said.

YPF entered into talks with India's state-owned ONGC Nov. 3 on potentially working together to develop projects in Vaca Muerta

Affronti added that the company is also seeking to sell non-core assets, mostly maturing conventional blocks, to help raise cash for stepping up production in Vaca Muerta. It also plans to sell non-operating office buildings and other non-strategic assets for cash for the same purpose.

Cutting costs

As part of the production ramp-up, YPF is taking steps to cut operating and financing costs so that it can produce at lower breakevens, reducing its reliance on high oil and gas prices to run a profit.

"We don't want to bet our future on prices," Lew said. "That's why all our efforts are going into efficiency and we believe that through that we can be much more efficient in reverting the production decline with much less [capital expenditure] than this company used to use up until last year."

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