Argentina's President Cristina Fernández de Kirchner returned from a three-week medical leave at the end of January ready to fume against the oil industry. If oil companies had maintained or increased investment, the country could have had a bigger trade surplus in 2011, she said. "We had to import US$9 billion of fuel, an increase of 110% from 2010."

Ten blocks away, 300oil executives and engineers, mostly from the U.S. and Canada, talked excitedly about how to get investment in the country going again. The reason why the Patagonian country has become the center of their attention was clear: its promising prospects for oil and natural gas from shale.

Just over a decade ago, it was barely feasible to unlock the oil and gas in shale rocks. Today, with new technologies in wide use in the U.S. and Canada, oil companies are staring hungrily at other countries like Argentina.

According to a U.S. Geologic Survey study published in April last year, 774 trillion cubic feet of natural gas may be embedded in shale in Argentina, or 300 years of its current consumption. If that estimate is correct, Argentina has the third-largest shale gas resources worldwide, after China and the U.S. And in November, YPF, the local unit of Spain's Repsol, announced that it had used vertical wells to prove 927 million barrels of oil and natural gas reserves from shale in Argentina's oil-producing province of Neuquén.

"In my opinion,that's why this room is filled," said Laurance Narbut, a U.S.-based portfolio managerattending the "Shale Gas & Tight Oil 2012" conference in Buenos Aires."Argentina had dramatic results. Infrastructure is in place in Neuquén. With declining production, there is excess capacity. There's a bit of a land rush."

Attendees at the conference appeared ready for the land rush, checkbooks in hand. The roster included delegates from ExxonMobil, Total and Statoil as well as Citi and Bank of America. Other companies already securing acreage in Argentina's shale oil regions include Shell and EOG. The reason for their enthusiasm is simple: While North American shale development has been a tremendous success, Argentina may offer even better prospects, at least geologically. But fiscal, environmental and social issues will have to be resolved before opportunities turn into new oil and gas production in Argentina.

New Rock Stars

Starting in the early 2000s, exploitation of shale for oil and natural gas in the U.S. and Canada has gone from a marginal technology to the fastest-growing part of their energy systems. That growth is projected to continue. The U.S. Department of Energy predicts that shale will supply 45% of U.S. natural gas in 2035, up from 14% in 2009. The resulting supply has driven down natural gas prices. Oil futures climbed to US$102.96 a barrel, or 26%, between the beginning of 2010 and the first trading day of this year. Natural gas, which historically has moved in tandem with oil, fell 49% to US$2.88 per million BTU (or British thermal unit) in the same period. The U.S., which was supposed to be an ever-hungrier customer of liquefied natural gas imports, is now deciding whether to export the fuel.

As Argentina aims to replicate the North American shale boom, most eyes are on the Neuquén basin, a region at the foot of the Andes, 700 kilometers west of Buenos Aires. Its two layers of oil-bearing shale, known as Vaca Muerta and Los Molles, are thicker than the U.S. shale beds that are now being exploited. To extract hydrocarbons from U.S. and Canadian shale, oil companies drill relatively expensive horizontal wells and then fracture, or "frac," the rocks by injecting millions of gallons of chemical-laden water and several thousand tons of sand so oil and gas can escape.

The Neuquén shale beds are so thick in many areas that engineers say cheaper vertical wells may be usable. YPF said its 15 vertical wells produced a combined 5,000 barrels a day of oil.

But Argentina is no place to get rich quick. Among the risks yet to be addressed: No one knows how consistent the shale will be. It is possible that YPF got lucky. There are few rigs available for drilling and almost no pumps available for fracking.

Also, the public has already started to voice concerns about the environment, and the water supply is already limited in Neuquén. An indigenous group is demanding to be included in the planning process, with the right to prior consultation. If the companies manage to get through these issues, they still have to deal with Argentine taxes, which limit how much income producers can receive from selling fossil fuels.

High Costs, Low Prices

Of all of the issues, the country's fiscal environment is the most worrisome for industry leaders. Simply proving reserves and starting development is a multi-billion dollar investment, and a traditionally populist government means that a big discovery may not make an oil company rich.

"I see Argentina as a very high-risk country," says David R. Mares, a political science professor of Latin American Energy Studies at Rice University's Institute for Public Policy in Texas. In terms of how the country's leaders can cause trouble for oil company investors, he cites how Argentina forced gas producers to first pay higher taxes and then halt exports to their more lucrative Chilean customers. If the government suddenly "needs more money, or another issue comes up, they can say, 'The environmental issue isn't what we expected.'" The government has public support for such actions, he adds.

Americas Petrogas, a Canada-based company with blocks in Neuquén's shale-bearing region, has a joint venture with ExxonMobil that has started to drill for shale oil and gas. The venture expects to spend between US$1.5 billion and US$2 billion over the next five years, according to Güimar Vaca Coca, the Canadian company's managing director. Longer term, developing a single project into a full-scale shale oil operation may require US$17 billion over 10 years, he says.

Getting companies to invest such vast amounts in Argentina is going to be tricky. Argentina controls prices for natural gas. Because of how the country's tariffs and taxes are structured, companies with existing wells face a cap on the price they can charge for gas when prices are high. But when prices drop, there is no limit to how much their revenue can shrink. That means the average long-term price is going to be lower in Argentina than in other countries.

So when a well owner sells gas destined for residential service, the price is limited to about 60 cents per million BTUs. That is less than one-fifth the price that gas companies pay for gas that will be shipped to industrial users, Mauro Soares of Argentina-based Tecpetrol noted during a presentation at the Buenos Aires conference.

Gas exports can bring in more money. But because low prices have caused domestic demand to rise by one-third since the 1990s, to almost 1.6 trillion cubic feet a year, Argentina has exported little gas in recent years. Reviving exports may be politically sensitive. Natural gas liquids, a form of hydrocarbon also known as natural gasoline, are more profitable than natural gas, but can still be exported for no more than US$40 a barrel because of an export tax. The price that buyers pay at the port in Argentina was above US$60 a barrel for most of last year.

Oil, which made up a majority of the shale reserves that YPF proved last year, can bring in higher prices. But as with natural gas liquids, export prices are capped. Despite crude oil export prices rising to above US$100 a barrel paid at Argentina's ports,producers can receive no more than US$42 a barrel.

It's possible that Argentina will change some of these policies. The government has already implemented incentive programs called Gas Plus and Oil Plus, so producers earn more per unit of oil or gas if they invest in new production.

The pressure for additional reform is growing. Argentina has shifted from being a net oil and gas exporter to importing gas. It may soon become a net oil importer as well. Regardless of the impact on national pride, there is the unquestionable effect on the country's balance of trade, as President Fernandez noted in her speech in January.

It is hard to know how much terms need to change to attract and retain investors. For now, companies are rushing for land positions and seeking to start drilling, even under current fiscal rules. And onerous, unpredictable rules in Venezuela haven't eliminated oil company investment there. Perhaps the most nerve-wracking part of Argentina's fiscal situation is that current rules are never written in stone. Terms set to woo companies can be changed once investments are made, and an oil company can't take its well and go home.

Rice University's Mares says companies will likely seek to mitigate the risk by drawing up contracts that provide a rapid pay-off in the first few years of production, reducing the risk of sudden policy changes.

Environmental and Social Risks

In North America, shale drilling has become controversial because of possible environmental damage. The biggest concerns have related to groundwater — both depletion of water supply to feed the fracs and contamination from the hydrocarbon-laced water. People living near fracking sites have also complained of increased methane contamination in drinking water, creating a well-publicized concern that water can be ignited as it comes out of the tap.

The industry maintains that most of these concerns are overblown or manageable. John Hayne, a managing partner at ZaZa Energy, which produces shale gas from the Eagle Ford formation in Texas, points out that burning tap water has been an issue for years in hydrocarbon-bearing areas, long before fracking. He says that fracking can't contaminate groundwater, given that the injection is often miles below the surface water table, separated by layers of less permeable rock.

Unfortunately for the oil industry, Argentine environmentalists are famous for preferring an abundance of caution rather than relying on industry assurances. For example, its green movement has won a series of provincial bans on the use of cyanide in mining operations, despite a strong industry safety record in cyanide handling. Virgilio Bressanelli, The bishop of Neuquén, told the local press recently that while unconventional oil and gas exploitation may be acceptable, it had to be done in a way that doesn't pollute groundwater or cause earthquakes.

The industry has learned lessons from the U.S. and Canada, and appears eager to avoid the bad reputation that fracking has in North America. While it doesn't have one yet, many industry leaders see the merits of crafting a communications strategy sooner rather than later to give their side of the story.

An additional risk comes from relations with indigenous groups in the shale-bed areas. Mapuche natives from the Gelay Ko community have demanded that Apache Energy halt drilling in Barda Negra, Neuquén province. They say the company risks polluting drinking water and failed to consult with the community, according to local press reports.

When asked about such concerns at the Buenos Aires conference, Vaca Coca of Americas Petrogas said indigenous people had not been living in the area decades ago, but that some people have set up settlements since the area started producing oil. He called the issue "manageable." In any case, companies have to include consultations with indigenous groups as one of the potential risks of doing business in these provinces.

Boom Times Coming

Neuquén currently has excess pipeline capacity, so that the first oil companies to produce from the shale won't have to make room in pipelines. However, those pipelines are the exception to the rule. Overall, scarcity reigns. The region lacks service machinery, personnel and other necessities. The bustling trade fair stands at the conference suggest that there is no shortage of companies seeking to fill the gap. Companies offering environmental compliance services, aerial surveys, explosives for fracturing shale and wastewater management are all seeking to enter Argentina to take advantage of the needs that will arise from an increase in shale oil exploitation.

Among the biggest needs will be pumping services and trucking to haul sand, water and chemicals. Water management is a major task at any fracking site, as service companies need to treat the contaminated water that is produced from a well. Even road paving and civil construction companies will likely gain from a shale oil boom.

For all these risks, it's likely that sooner or later, Argentina will increase its exploitation of shale to produce oil and gas. "If you can absorb the risk," Mares says, "the resource is attractive."