Six years ago, Miguel Galuccio first brought Chevron Corp. to Argentina’s Vaca Muerta, or “Dead Cow”, rock formation.

Now, as CEO of independent producer Vista Oil & Gas SAB de CV, the 51-year-old is blazing a trail for rivals and still pushing Argentina to replicate the success of the U.S. shale boom.

Vista last month raised $100 million on the New York Stock Exchange, weeks after becoming the first company to export shale oil from Vaca Muerta, billed as the most promising shale oil and gas basin outside the U.S.

“Investors move in packs, and packs always have a leader,” said the petroleum engineer who used to run state-controlled energy company YPF SA.

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“We are leading the way [for Argentina] to tap into a new kind of money which was really what created the shale boom in the U.S.,” he added, referring to the key role of independent companies. Moreover, Argentina has the advantage of “permanently benefiting from lessons learnt in the U.S.”

Argentina has a long way to go before reaching US levels of crude oil production, which recently hit 12 million barrels per day having more than doubled in the past decade. However, with about 2 billion barrels of oil reserves—and some 27 billion barrels of potential resources in Vaca Muerta—and confidence that Argentina’s shale fields are comparable to formations such as Eagle Ford or Bakken in the U.S., the government aims to double oil production from 500,000 to 1 million barrels per day (bbl/d) and natural gas from 1.4 trillion to 3.5 trillion cubic feet by 2023.

“There is a stealth productivity revolution taking hold in Vaca Muerta that could set the course for a major burst in hydrocarbon production in the next five years,” said Walter Stoeppelwerth, the chief investment officer at Portfolio Personal Inversiones in Buenos Aires. He added that this could “revolutionize Argentina’s debt dynamics, balance of payments and fiscal performance”.

Indeed, Vaca Muerta is one of the few bright spots in an economy that was hit by a crippling currency crisis in 2018. Argentina’s production of shale gas jumped by as much as 90% over the past year—even if prospects for further expansion of gas production is limited by a lack of pipelines and liquefaction plants that would make exporting over long distances possible.

Meanwhile, production of shale oil, whose continued growth does not suffer from the same limitations, has risen by around 55% over the past year and is expected to reach 100,000 bbl/d by the end of 2019. Any further increases in production of shale oil could almost entirely be for export, and set Argentina on course to rival oil production in neighboring Brazil that is currently about four times greater.

Investors also remain sanguine over the outcome of presidential elections in October, given a cross-party consensus as to the importance of eliminating Argentina’s energy deficit after a series of populist policies in the 2000s starved the industry of investment.

“Investment in Vaca Muerta could go parabolic” after the elections, argued David Tawil, president of Maglan Capital, a hedge fund that owns Madalena Energy, which operates in Vaca Muerta.

He said a better analogy than the U.S. for Argentina was Colombia, which doubled its oil production from 2004 to 2014. “Over a similar period, Vaca Muerta is likely to triple its [Argentina’s] production.”

Vista’s listing in New York—together with recent debt issues by YPF and Pampa Energía for $500 million and $300 million respectively—may mark a turning point for companies in Argentina that have shied away from the markets since last year’s currency crisis.

“Something is happening [in Vaca Muerta], and it’s going to play out. In 2012, it wasn’t possible—it wasn’t mature. But today we are in a different place.”  —Miguel Galuccio

However, former energy secretary, Jorge Lapeña, warns against excessive optimism. “There is a lot of enthusiasm, but Argentina needs to pass several tests to confirm that it can become a major player in shale,” said Lapeña, now president of the General Mosconi energy institute, a non-profit independent think-tank.

“Technically, it may well be feasible to emulate the U.S. shale boom,” he added, pointing to the world-class quality of Argentina’s shale resources. “But you have to bear in mind that the conditions are not the same. You can copy some things, but others are more complicated.”

Despite the presence of several oil majors in Vaca Muerta—such as Exxon Mobil Corp., BP Plc, Royal Dutch Shell Plc and Total SA—Lapeña said the main differences with the U.S. included financing constraints, lack of infrastructure and higher production costs.

But the majors are pushing ahead. Shell and Exxon Mobil have announced their intention to ramp up operations in Vaca Muerta and last week, ConocoPhillips bought 45% and 50% stakes in two Vaca Muerta blocks operated by Wintershall. The German group earlier this year announced it would be investing $600 million in those blocks over the next three years.

IHS Markit forecasts that capital investment in Vaca Muerta will increase by around 10%-15% year on year over the next decade, rising from about $1.5 billion this year to more than $8 billion in 2029.

For Daniel Gerold, at G&G Energy Consultants in Buenos Aires, the biggest problem is simply that more companies need to be present in Vaca Muerta.

He believes the investment case is persuasive: the “very attractive” productivity of the rock in Vaca Muerta and cheaper access to land in Argentina outweigh the disadvantages of a higher tax burden.

Even so, in order to maximise Argentina’s potential, he said a tax reform would be essential in order to enable Argentina to compete with the U.S., as well as the removal of export restrictions.

But for Argentina to attract more companies, the barrier presented by limited access to capital—with a tiny local capital market and many international investors still wary of Argentina—remains insurmountable for many, especially smaller companies.

“It’s difficult to raise capital for Argentina,” said Maglan Capital’s Tawil, pointing to high corporate borrowing rates.

“The first issue is Repsol, which takes up the first 30 minutes of any conversation—it’s a hard story to tell,” he added, referring to the 2012 nationalization of assets belonging to Spain’s Repsol that scarred many investors.

“In Argentina you need to be more creative raising capital, but that could change quickly if the euphoria evolves,” he said.

Daniel Montamat, a former chairman of YPF and a consultant, warns that Argentina must seize the opportunity to develop Vaca Muerta now, given concerns in the sector that the world will depend less on hydrocarbons and more on renewable sources for energy in the coming decades. “It has to be done before it is too late,” he said.

Galuccio Focused On Innovation

Little makes Miguel Galuccio prouder than his focus on innovation and technology in his quest to promote the development of Argentina’s giant shale resources in Vaca Muerta.

The latest achievement of Vista Oil & Gas, the independent oil company he runs, is to adjust the model of the silo bag used for storing grains—which revolutionized the efficiency of Argentina’s powerful farming sector—so that it can be utilized instead for storing sand used for “fracking.”

“It’s super innovative,” said Galuccio. The former Schlumberger Ltd. executive believes that technology is a critical factor in unconventional energy and he invested heavily in the area while he was in charge of the state-run oil company YPF from 2012 to 2016.

Hired by Argentina’s former president Cristina Fernández de Kirchner to run YPF shortly after expropriating a 51% stake owned by Spain’s Repsol SA, Galuccio succeeded in persuading oil groups such as Chevron and Petronas Gas Bhd to put aside fears of state interventionism and invest in Vaca Muerta.

Having started his career at YPF before becoming a “global nomad” during 14 years at Schlumberger, his return to the renationalized company in 2012 saw him pioneer the development of Vaca Muerta after the first shale gas well was completed in 2010 by Repsol YPF.

After Vista sent the first shipment of shale oil from Vaca Muerta earlier this year, he is hoping the independent will become to Argentina what companies like Chesapeake Energy Corp. are to the US shale revolution.

“Something is happening [in Vaca Muerta], and it’s going to play out,” he said. “In 2012, it wasn’t possible—it wasn’t mature. But today we are in a different place.”

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