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Argentina’s hydrocarbon commission to take on Gas Plus

The Argentine government has launched its powerful new hydrocarbons commission, which will be tasked with regulating investment and setting prices in the energy sector

Near the top of the new commission’s agenda will be reform of the Gas Plus programme that would allow state-run YPF and others to increase the price of natural gas sold in the country and investment in the country’s huge Vaca Muerta shale gas play more attractive.

“We have entered into discussions with the government entities that regulate the market to redesign the Gas Plus programme so that it fits our portfolio of investment. We are working as we speak on that programme and it is something that we think should be completed (by 30 September),” Miguel Galuccio, the new head of YPF, told investors at a recent presentation.

Natural gas prices are tightly controlled by the Argentine government to keep prices low for consumers. While politically popular, the industry has long argued that these prices have been set too low to encourage investment in new gas projects. In response, the government set up the Gas Plus programme to increase the attractiveness of certain projects by allowing companies to sell gas from some fields at a higher price.

Under the scheme, YPF has said that it is able to sell some gas for between $4 to $7 per million cubic feet (cf). Other foreign investors have signed contracts to sell gas for as much $5/m cf. But again, the industry has argued that, while an improvement, Gas Plus has still not gone far enough to increase prices, especially if the country hopes to attract investment to help it develop its shale gas resources, which could be some of the largest outside North America.

US independent Apache, for instance, reported that its average natural gas sales price in Argentina for the first half of 2012 was $2.87/m cf, higher than the $2.47 earned the year before, but still significantly lower than prices the company saw in North America, Europe and North Africa.

Galuccio argued that the nationalisation of YPF made a price increase more likely as it brought the interests of the government and the country’s leading energy company into line. “Today you have a government that is aligned with the purpose of YPF. And the purpose of YPF is to grow and to grow, YPF needs cash. The government, which is a 51% owner of YPF, understands this very well,” Galuccio assured investors.

The task of aligning those interests will fall largely to Axel Kicillof, a key player in the nationalisation of YPF who will serve as both the head of the new hydrocarbon commission and a director at YPF. But Kicillof is likely to find that the priorities of the government and YPF are not always in harmony. While both are clearly focused on increasing domestic production and restoring Argentina’s energy self sufficiency, getting there will pose Kicillof with a difficult balancing act.

YPF needs higher prices to fund it ambitious five-year $37.5 billion investment programme and meets its production growth targets, but the government risks exacerbating the country’s double digit inflation, further slowing growth and potentially stoking domestic protests if it raises prices too high.

How far Kicillof will go remains to be seen. Argentina is currently paying around $10/m cf for gas imported from Bolivia under an oil-linked long-term deal and around $12/m cf for imported liquefied natural gas (LNG). Analysts have said that prices in the range of $6 to $8/m cf would provide a high enough return to encourage investment in Argentine shale gas.

As well as helping YPF fund its own investment programme, higher gas prices would also help as the company searches for international partners to help it develop shale gas in the country. On 4 September, YPF said that it had held talks in Moscow over developing unconventional resources with Russia’s Gazprom. The company’s also discussed developing conventional gas resources and supplying Argentina with LNG.

YPF has also held talks with Chevron and Venezuela’s PdVSA over possible joint shale development. The company has also said that it plans to hold talks with ExxonMobil and Apache and is reportedly planning a trip to China in September to court investors there after prime minister Wen Jiabao visited Buenos Aires in June.

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