This Dead Cow Has Caught Big Oil's Attention

Photo Credit: Flickr/Paul Lowry.

After lots of speculation, oil and gas giant Chevron has finally come to terms on a joint development agreement with Argentine national oil company YPF . The $1.24 billion deal will help further the development of oil and gas at Argentina's Vaca Muerta formation. Vaca Muerta, which in Spanish means "dead cow," holds more hope for both Chevron and Argentina than that name might imply, as it's estimated to hold 27 billion barrels of technically recoverable oil.

That's a lot of oil. In fact, it's enough to place Argentina fourth in the world when it comes to recoverable shale oil. If the estimates prove true, it means Vaca Muerta could hold more than three times the amount of recoverable oil as the Bakken, which, according to the U.S. Geological Survey, holds about 7.4 billion recoverable barrels of oil.

The problem is that this oil is expensive to develop.That's why Chevron's funds will be crucial in bringing the Vaca Muerta field to life. The initial program will include the drilling of 100 wells as part of the first phase of the play's development. A second phase of development would then follow, with an additional 1,500 wells being drilled. The hope is the duo can grow oil production to 50,000 barrels of oil per day while also producing 4 million cubic meters of gas per day. That would be a huge jump from the current production of 10,000 barrels of oil per day.

What's interesting here is that the deal announcement comes right after Argentina announced a package of incentives geared toward luring foreign oil and gas investors to the country. The incentives allow companies investing at least $1 billion to eventually be allowed to sell 20% of the oil production abroad without paying export taxes. That would enable the companies to keep the related profits, which enhances the economics for investors.

That bodes well for Chevron, as well as other U.S. oil and gas producers looking to profit from the massive oil and gas reserves in the country -- including EOG Resources , which has already signed two exploration contracts and one farm-in agreement with YPF. The company is still in the very early stages of drilling in Vaca Muerta, so it remains to be seen how big its investment in the country will one day become. The company currently spends about $7 billion in capital each year; however, it has a 15-year drilling inventory just in its high-returning, liquids-rich U.S. onshore business. So a billion dollars in Argentina might be a bit of a stretch.

Another company to watch is Apache . The company has been operating in the country since 2001 and has interests in 3.7 million net acres, including 1.3 million net acres in the Vaca Muetra shale. Last quarter, the company participated in the drilling of four total wells in the Vaca Muerta, and it's currently working on a strategy to develop its acreage in the play. That means the company has a long way to go before its operations in the country really move the needle.

Source: Apache.

What's very clear is that despite the potential, investors have a long way to go until Vaca Muerta will begin to drive returns for U.S.-based producers. One reason is that Argentina will need a lot of capital to really bring the "dead cow" to life. The general consensus is the country will need about $7 billion per year to fully develop its shale oil and gas resources.

So, while an important first step, Chevron's $1.24 initial investment in the play is really just the tip of the iceberg.

The real driving force behind the move is that oil remains well above $100 a barrel, making places like Vaca Muerta a potentially lucrative venture. If you're on the lookout for some other currently intriguing energy plays to profit as oil stay high, you should check out The Motley Fool's "3 Stocks for $100 Oil." For free access to this special report, simply click here now.

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Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Chevron and owns shares of Apache. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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