(Adds well drilling data, macroeconomic and policy context)
By Hugh Bronstein and Eliana Raszewski
EZEIZA, Argentina, April 16 (Reuters) - The cost of drilling in Argentina's vast but barely tapped Vaca Muerta shale formation will fall at least 10 percent by the end of 2016, state energy company YPF said on Thursday, part of an efficiency effort aimed at attracting much-needed investment.
The cost drop is expected to start in August when Argentina starts using its own sand in fracking, the process by which shale oil is extracted, rather than more expensive imported sand, YPF's Chief Executive Officer Miguel Galuccio said.
This may help Latin America's No. 3 economy attract the investment it needs to erase an energy deficit that costs billions of dollars per year in already low cash reserves.
YPF has already cut the cost of drilling a vertical well in Vaca Muerta to $6.9 million from a previous $11 million, Galuccio told reporters gathered on the outskirts of Buenos Aires for a demonstration of how YPF is refining fracking sand.
By the end of 2016, Galuccio said Argentina will produce all sand it needs for shale drilling.
"We are continually looking for ways to reduce well drilling costs. The sand is one form, which in itself will allow us to save 10 percent," Galuccio told Reuters.
"And there are other things we are doing which lead us to think we are going to save not only 10 percent. Our target will be much more than 10 percent."
That would come to a relief to international investors who have so far shied away from Vaca Muerta due to high costs as well as heavy trade and currency controls.
Galuccio said it currently costs $13 million to $14 million to drill horizontal wells in Vaca Muerta, located in Patagonia.
YPF is building a plant near Vaca Muerta that is set to start refining raw yellowish sand mined from the southern province of Chubut into the fine gray sand used in fracking.
YPF says it has about 300 wells producing up to 45,000 barrels per day of oil and gas equivalent, a fraction of Vaca Muerta's potential.
President Cristina Fernandez's interventionist policies have scared the most risk-hungry companies out of making anything but foothold investments in what is viewed as one of the biggest shale reserves in the Western Hemisphere.
She is barred from running for a third term in the October general election. The three leading candidates to succeed her say they are more in favor of free markets. (Reporting by Hugh Bronstein and Eliana Raszewski; Editing by Chris Reese, Ted Botha and Andrew Hay)