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Chevron Corporation (CVX), YPF SA (ADR) (YPF): This Dead Cow Has Caught Big Oil’s Attention

Photo Credit: Flickr/Paul Lowry

After lots of speculation, oil and gas giant Chevron Corporation (NYSE:CVX) has finally come to terms on a joint development agreement with Argentine national oil company YPF SA (ADR) (NYSE: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 a lot of hope for both Chevron Corporation (NYSE:CVX) and Argentina 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 Corporation (NYSE:CVX)’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 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 a billion dollars to eventually be allowed to sell 20% of the oil production abroad without paying export taxes. This would enable the companies to keep the related profits, which enhances the economics for investors.

That bodes well for Chevron Corporation (NYSE:CVX), as well as other U.S. oil and gas producers looking to profit from the massive oil and gas reserves in the country. This includes EOG Resources Inc (NYSE:EOG) which has already signed two exploration contracts and one farm-in agreement with YPF SA (ADR) (NYSE: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.

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