By James Stafford for Oilprice.com

Russia is making a play for shale gas – in Argentina.

Russian state-owned natural gas giant Gazprom signed a memorandum of cooperation with Argentina’s YPF at a ceremony in Moscow on April 23. Argentina’s President Cristina Fernandez de Kirchner was on hand as was Russian President Vladimir Putin. The move deepens an agreement that the two sides reached after a visit by Putin to Argentina last year.

The deal calls for the joint exploration and development of shale gas in Argentina’s Neuquén province. Located in west central Argentina, the province is home to the vast Vaca Muerta, a formation that is a big reason why Argentina ranks second behind only China in total shale gas reserves. Argentina is thought to hold more than 800 trillion cubic feet of technically recoverable shale gas, and the Vaca Muerta is the most sought after formation in all of South America. Other oil majors have a presence there, including ExxonMobil (XOM) and Chevron (CVX).

Argentina and Russia see a mutually beneficial political alliance: Argentina has supported Russia in its annexation of Crimea, and Russia has backed Argentina’s complaints against the United Kingdom’s control over the Falkland Islands (known as Las Malvinas in Argentina). The Falklands are thought to hold large oil and gas reserves off their coast, but only a few British companies are exploring them.

Russia’s relations with Western Europe have been severely damaged over the conflict in Ukraine, and so it has sought allies elsewhere. The deal between Gazprom and YPF was hailed by Putin, who said the two countries are developing a “comprehensive and strategic partnership.” The two sides have even suggested they could use their own currencies (pesos or rubles) rather than U.S. dollars, due to both countries’ respective standoff with the United States.

Still, the real objective is (ostensibly) the Vaca Muerta.

YPF and Argentina lack the resources and expertise to go it alone in the Vaca Muerta. Due to an ongoing dispute with an American hedge fund over unpaid debt stemming from a 2001 default, Argentina has been largely locked out of international financial markets. Not only that, but Argentina’s declining oil production has opened up a $7 billion energy deficit, one that President Kirchner is keen to close. YPF estimates that closing that deficit will require $200 billion in investment over the next decade.

That is a tidy sum for the capital-deficient South American country. Russia could offer a financial lifeline to Argentina.

The Vaca Muerta will be expensive to develop and so far has been hardly picked over. The formation only produces about 45,000 barrels per day right now, a few orders of magnitude less than the most productive formations in the United States. A dearth of infrastructure, in addition to the fact that the industry has not yet reached scale, means that production costs are high. In an era of low oil prices, things will move along slowly.

YPF’s CEO said that drilling a horizontal well in the Vaca Muerta can cost $13 to $14 million. In the U.S., a similar well costs a fraction of that, somewhere in the neighborhood of $8 million or less. But even drillers in the U.S. are finding it difficult to be profitable with oil prices where they are now, so it is that much more difficult for Argentina. Still, YPF is reporting some progress. The company said that in 2016 it expects production costs to drop by at least 10 percent. It plans on producing its own frac sand to keep costs down.

Oil prices will not stay low forever. Indeed they have rallied quite a bit over the past month. If and when oil prices finally return to the highs seen before last year’s drop, Russia could provide the crucial missing link to help Argentina begin to scale-up drilling and production. That scenario is probably a long way off yet, but if it comes to pass, it would be very beneficial to both sides.

This article was originally published on Oilprice.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.