Argentina's state-controlled YPF SA has reached an agreement valued at $550 million with Malaysia's national oil and gas company, Petronas, for the development of shale oil and gas resources in the Vaca Muerta formation, in Argentina's Neuquen province, YPF said Thursday.

YPF said Petronas CEO Tan Sri Dato 'Shamsul Azhar Abbas and YPF CEO Miguel Galuccio signed the agreement Thursday in Kuala Lumpur, the Malaysian capital. Before the signing, Argentine President Cristina Fernandez de Kirchner held a phone conversation with Malaysian Prime Minister Najib Tun Razak to discuss the agreement.

The first phase of the project calls for the drilling of more than 30 pilot wells, both vertical and horizontal, targeting oil in the formation's La Amarga Chica block, an area that covers 187 square kilometers (72.2 square miles). Petronas will contribute $475 million to construction of the pilot wells, which will cost $550 million.

In a translated statement, YPF said the companies hope to launch the pilot program in 1Q2015, after final documents are initialed and certain conditions over ownership of the area, concession terms and the tax framework for the project are fulfilled. YPF will serve as operator and hold a 50% concession stake in the block.

Depending on the results of the pilot stage, YPF and Petronas could continue the project. Additional investment in the second stage could total more than $1 billion in the first five years. At the same time, both companies will consider expanding their partnership by evaluating other unconventional areas for possible exploration and development.

Last year, YPF and a unit of Chevron Corp. signed a $1.24 billion agreement to develop shale oil and gas resources in the Vaca Muerta formation (see Shale Daily, July 19, 2013). Under that agreement, Chevron Argentina was to drill 100 wells in a 5,000-acre tract, part of a 96,000-acre concession, in the Loma La Lata Norte and Loma Campana areas of the formation.

YPF said it owns more than 245 drilled wells targeting the formation, and has 21 active rigs deployed there, up from just four rigs in April 2012. The company said its current production is more than 25,000 boe/d, but within the next five years it hopes to produce 100,000 b/d of oil and 13 million cubic meters (459.1 MMcf/d) of natural gas from shale resources.

In 2013, analysts with Raymond James said the Neuquen Basin, which includes the liquids-rich Vaca Muerta, could hold 407 Tcf (see Shale Daily, May 7, 2013). They added that Argentina’s overall shale gas resource could be 774 Tcf, which would be the world’s third-largest.

YPF had been owned 50% by Spanish oil company Repsol until the Argentine government seized Repsol’s share in 2012. In a settlement earlier this year that ended litigation over the seizure the Argentine government agreed to pay $5 billion, about half of what Repsol claimed its share was worth.