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Views & Strategies

for Long-Term Development of

Unconventional Resources in Argentina

Mauro G. Soares

Unconventional E&P Resources Manager

Tecpetrol S.A.

Buenos Aires – July 18, 2013

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Talk Points

1. Playing the Unconventional “Game”

2. Vaca Muerta Activity & Equipement Snapshot

3. Well Costs & Economics

4. Final Thoughts

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THE UNCONVENTIONAL GAME What it Takes to Play…

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Unconventional projects are “unconventional”

Transitions are less discrete. De-risking is slower, more gradual.

Geological risk is far from zero. Only 1 in 3 plays explored in North America has

been proved commercial.

“Pilot” = optimization & standarization thru heavy investment and technical work

Finally, no more than 30-70% of total area is economically developable

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Where is Argentina playing?

Vaca Muerta

D-129

A central areas of the Vaca Muerta play is entering the

“Pilot” stage requiring heavy investments to move

forward.

Other areas are still in “Concept” stage

Niobara

What is expected short-term:

Well performance increase

Improvement of D&C times and costs

Optimization of well and stimulation designs

Identificaciton of “sweet spots”

Barnett

Eagleford

Marcellus

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Not all acreage is equal…

Extremely High Variability

Only 20-30% of total play area ultimately IS economic

Ba

rne

tt

Is your project in a Sweet Spot? At least in a Core Area?

Ea

gle

ford

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EUR calculated with limited production history may have too much error…

Source: Assessment of Vaca Muerta Formation Shale Oil by Nicolás Gutierrez Schmidt et al. (April 2013)

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Poor wells cannot be avoided…

However operators can learn.

But it´s not cheap!

5700 wells drilled in the Eagleford play between 2007 and early 2013

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ACTIVITY & EQUIPEMENT SNAPSHOT

Vaca Muerta Shale Play in Argentina

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Very early stage despite media hype…

~150 wells drilled by 2Q 2013

85% Vertical / 15% Horizontal

90% Oil / 10% Natural Gas

2/3 YPF

Wells Drilled to Vaca Muerta 2009-2013 (All Operators)

Loma

La Lata

Aguada

Pichana

Aguada

San

Roque

Sierra

Chata

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1.000

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6.000

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bbl/d

Producción de Petróleo No Convencional en Cca. NeuquinaEvolución Mensual

Subtotal Quintuco

Subtotal Vaca Muerta

YPF

Oil production growth could be speeding up…

Source: Secretaría de Energía (Cap. IV). 72 active wells @ April 2013

Average Monthly Shale Oil Production (All Operators)

Total VM

production

reaching

10,000

boed by

mid-year

2013

when

counting

also for

associated

natural gas

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Active drilling rig count in Argentina has increased 25% ...

…all growth has happened in Neuquen,

to a large extent explained by YPF´s unconventional activity.

However further growth is limited based on existing inactive rigs and new

imports of equipment will be required if activity continues to pick up.

DRILLING RIGS

(# count)YE 2011 YE 2012 2Q 2013

2Q 2013 vs.

YE 2011

Country Total 79 95 100 + 21

Neuqén Basin Total 32 50 54 + 22

YPF Nuequén 12 23 25 + 13

YPF Unconventional 6 10 14 + 8

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There has been a significant increase in fracking services capacity…

…especially in Neuquen where capacity more than

doubled over the last year and a half.

FRACKING HORSE POWER

(in '000 HHP)YE 2011 YE 2012 2Q 2013

2Q 2013 vs.

YE 2011

Country Total 140 165 310 + 170

Neuqén Basin Total 110 125 250 + 140

However additional frac spreads will need to be imported and/or built

locally (at least partially) in order to accommodate further activity growth.

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What is needed to drill and complete 1000 wells every year?

2013E

Wells Drilled 150 x7 1,000 12,0001 year worth

of wells

Drilling Rigs (# count) 20 x5 100 2,400new

equipement

Fracking Capacity (´000 HHP) 250 x4 890 500new

equipement

Frac Spreads (# count) 8 x3 22

Proppant (´000 tons/yr) 204 x9 1,879 8501 year worth

of supply

Water for Fracking (million m3/yr) 1 x10 10

in m/s 0.03 0.3

Capex

(million US$)1000

wells/yr

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WELL COSTS & ECONOMICS

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Unconventional D&C costs are currently substantially higher in Vaca Muerta

This will certainly change as:

–The Play leaves its early stage of “Concept” proof and enters

into pilots and development stage.

– Operators and service companies optimize scale and

utilization of equipement

–Operators improve drilling efficiencies and well designs,

especilly in the drilling of the overpressured Quintuco formation

–Operators find the optimum “recipe” to stimulate wells

(type and amount of fluids and proppants, pumping rates)

–Supply chains gain scale and infractructure improves

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D&C costs and operating efficiency improvements have been dramatic in the US

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Well economics depend on many variables…

- Production volumes (initial and rate of decline over time)

- Hydrocarbon mix (oil/condensate, natural gas and NGLs)

- Cost of drilling and completing the well (D&C)

- Current and expected prices

- Cost of capital (own and borrowed, i.e equity and debt)

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For this analysis we have used the following asumptions:

- Given the limited number of shale gas wells drilled in VM, we will assume

a production profile calculted from a large set of producing wells in the

best areas of the Haynesville Shale in Texas ans Louisiana. We use the

full number and a more probably 70% sensitivity (given different geology)

- For shale oil there are more data point however early estimated can have

too much error as mentioned… Anyway, we will use an estimation done

by the Sec. of Hydrocarbons of Neuquén published recently.

- Our base case for prices is 7.50 US$/MMBTU for gas and 75 US$/bbl

for crude oil.

- Return on capital was set at 15% before tax, unlevered.

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Economics of Shale Dry Gas Wells

0

2

4

6

8

10

12

14

10 11 12 13 14 15 16 17 18 19B

reak

Eve

n P

rice

fo

r 15

% b

tax

IRR

in

US$

/MM

BTU

Total Well D&C Cost (million US$)

Average of Top Counties in Haynesville Shale (100%)

Average of Top Counties in Haynesville Shale (70%)

Current Price in Argentina

20Y EUR = 4.6 BCF

Production Profile*

* Average of wells in Haynesville top producing counties.

Break-even Prices vs. D&C Costs

Haynesville

Current

VM

current

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Economics of Shale Oil Wells

0

20

40

60

80

100

120

140

160

7 8 9 10 11 12 13 14 15 16 17 18 19B

reak

Eve

n P

rice

fo

r 1

5%

bta

x IR

R

inU

S$/b

bl

Total Well D&C Cost (million US$)

VM Shale Oil Type Well *

Current Price in Argentina

Production Profile*

* Assessment of Vaca Muerta Formation Shale Oil by Nicolás Gutierrez Schmidt et al. (April 2013)

Eagleford

Current

VM

current

Break-even Prices vs. D&C Costs

20Y EUR = 390 kbbl

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Costs should fall by 25% in Drilling and 40% in Completion in order to improve well economics

Million US$ EaglefordVaca Muerta

(Current Estimate)

Vaca Muerta (Target)

Drilling 4.2 8.5 6.5

Completion 5.3 9.8 5.9

Total Well Cost 9.5 18.3 12.5

Eagleford vs. Vaca Muerta 1.0x 1.9x 1.3x

Drilling (US$/ft) 271 632 484 (-23%)

Completion (US$/stage) 319 654 396 (-39%)

TMD (ft) 15,600 13,500 13,500

CLL (ft) 4,200 4,000 4,000

Drilling Time (days) 44 60 37

# frac stages 17 15 15

Proppant (Tn) 2,000 3,400 3,400

Water (m3) 29,100 15,500 15,500

Million US$ EaglefordVaca Muerta

(Current Estimate)

Vaca Muerta (Target)

Drilling 4.2 8.5 6.5

Completion 5.3 9.8 5.9

Total Well Cost 9.5 18.3 12.5

Eagleford vs. Vaca Muerta 1.0x 1.9x 1.3x

Drilling (US$/ft) 271 632 484 (-23%)

Completion (US$/stage) 319 654 396 (-39%)

TMD (ft) 15,600 13,500 13,500

CLL (ft) 4,200 4,000 4,000

Drilling Time (days) 44 60 37

# frac stages 17 15 15

Proppant (Tn) 2,000 3,400 3,400

Water (m3) 29,100 15,500 15,500

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These savings will be possible only if…

_ Operators can visualise long-term exploration, pilots and development

plans given the prevailing fiscal, economic and financlal evironment

_Those long-term plans pull the full supply-chain where more

equipement, competition and innovation should foster.

_Operators are successful in finding better, cheaper and equally or better

performing ways of drilling and completing the wells.

_Economic market conditions allow proper financing and attractive

returns for operators as well as companies along the supply chain.

_Main saving targets are: lower drilling times, using less and/or cheaper

proppants and fluids,optimizing fracking equipement usage, optimizing

labor relations and efficiency.

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SOME FINAL THOUGHTS

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What can operators do to improve economics and optimize their supply-chain management?

_Mind processes and logistics. Innovate internally. Think unconventionally.

_Communicate. With peers, with government, with suppliers, with academia,

with the local stakeholders.

_Share information, ideas, results, plans.

_Cooperate. Get together to contract services, develop solutions, to movilize

new infrastrure.

_Help innovators and start-ups by demanding their products and services,

even financing them thru the early stages

_Maybe integrate vertically . “Rent or Own?” should be a recurring question

for operators.

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THANK YOU