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Argentina offers new shale investment incentives

Cristina Fernández de Kirchner’s government has made a fresh bid to lure investment into its ailing oil and gas sector, writes Justin Jacobs

 The Argentine government has made a fresh bid to lure investment into its ailing oil and gas sector, offering several financial incentives for companies that commit to invest at least $1 billion over five years.

If the investors meet the spending requirement, after the fifth year they will be allowed to freely trade 20% of its production on international markets without having to pay export duties, according to a presidential decree published in the country’s daily official gazette. Moreover, the earnings from that international trade will be exempt from the strict foreign exchange controls that president Cristina Fernández de Kirchner’s government has put in place.

Companies are required to sell oil and gas on the domestic market under heavily regulated prices. The amount earned on domestic sales varies as different projects fall under different regulations and incentive schemes, such as the Gas Plus and Oil Plus programmes.

US independent Apache, one of Argentina’s most active foreign oil and gas investors, provides an example of the significant difference those regulations can have on investors’ bottom line. In 2012, the company earned an average sales price for oil produced in Argentina of $75.89 a barrel, compared with an average of $102.79/b from the rest of its portfolio. The company earned just $2.87 per million cubic feet (cf) for its Argentine gas production, a third of what it earns for gas produced in the North Sea.

Investors will welcome greater access to higher international prices. The Fernández government will hope that it is enough to get companies to step up spending on existing projects and sign on for new ones with state-owned YPF, especially in the Vaca Muerta shale play.

After years of decline in Argentina’s oil patch, deal-making and investment was on the rise over the course of much of 2011 as companies looked to grab their slice of Vaca Muerta, thought by many to be one of the most promising shale plays outside North America. But investment has dried up after the nationalisation of Repsol’s majority stake in YPF in May 2012 and following the government’s move to tighten its grip on the sector. Repsol has also threatened to sue anyone who works with YPF to develop assets it believes were illegally confiscated.

The government has eased domestic price controls, especially for new unconventional projects, over the past year, but it has not been enough to bring investors back into the fold. YPF has signed preliminary deals with a few companies, most notably Chevron, to develop the Vaca Muerta shale but none of those deals has been finalised. According to press reports, a final $1.5 deal with Chevron is imminent. Still, Argentina will need several similar deals to get close to the tens of billions of dollars of investment needed to develop its shale resources and return to energy self-sufficiency.

However, the latest measures are unlikely to be the answer. For one thing, five years is a long time to wait for the incentives to kick in. There are doubts, too, over whether they will ever come to pass. The country’s energy policy will almost certainly be under someone else’s watch in five years.

Argentina’s next presidential election is scheduled for October 2015. Fernández has served two consecutive terms and, unless there is a constitutional amendment, she will be ineligible to run for a third term. The future of Argentina’s energy policy will be hotly debated in that election. It will be a debate investors will be watching closely.

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