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Argentina’s price controls keep oil 37% above global price

The Argentinian restrictions on oil prices have shielded the country from lowering global prices, though it won't last forever

The Argentine government’s heavy hand in the energy sector has been a constant source of irritation and protest for the industry, most recently for those companies looking to tap into the potentially huge Vaca Muerta shale play. But lately that heavy hand has been shielding oil and gas producers from the freefall in international oil prices.

Argentina has long kept tight control over the domestic oil price, in a bid to keep inflation in check and voters happy. Last year, when prices on the international market topped $100 a barrel (b), producers in Argentina received only around $83/b for Medanito light grade crude sold into the domestic market.

The policy has been heavily criticised by the industry. Export restrictions have historically given them little choice but to sell into the domestic market at the lower price, though that has changed with the recently passed hydrocarbons law that allows around 20% of production to be sold abroad once certain investment conditions have been met.

Producers have long pinned the blame for Argentina’s growing energy deficit on these and other restrictions. With price controls capping how much producers can earn, it makes more sense, they argue, to invest elsewhere. It has made it difficult for the country to attract the billions of dollars of new investment that will be needed to develop the Vaca Muerta shale, the country’s best hope for regaining its energy independence.

But as Brent crude has plunged to less than $50/b, the policy is starting to look more like a gift from the Cristina Fernandez administration to the country’s oil producers.

It has been a swift reversal of fortune for the industry. Even after the government lowered the fixed price to $77/b in December, producers in Argentina are probably seeing the highest oil price in the world right now. By contrast, Venezuela’s oil price has fallen to around $40/b.

“The $77/b posted Medanito crude oil price in Argentina for January 2015 is approximately 37% higher than the comparative period Brent price,” independent producer Madalena Energy said in a recent statement.

While companies in other parts of the world are being forced to slash their investment plans, Madalena and other companies say the price controls will help provide a buffer that will allow them to continue with most of their planned expenditure.

“With approximately 90% of the company’s oil production priced relative to Argentina’s regulated oil prices, the company continues to be well positioned and expects to fully fund the 2015 capital programme with funds generated from operations and existing working capital,” Madalena said.

Last month, Andes Energia, another independent working in the Vaca Muerta shale, said that its realised oil price in Argentina had not been affected by falling international oil prices. It added that it expects the government to maintain a relatively high price to provide an incentive for more domestic production, which the government needs to help close a $7bn energy trade gap.

More than just staying the course, Argentina’s Vaca Muerta shale play has seen pledges of new investment in recent weeks. Neuquén province’s oil and gas company Gas y Petroleo has announced $550m in new shale projects with Shell and Total in recent months.

Governors from oil-producing provinces, which exercise a large degree of influence over energy policy, have strongly backed the high-price policy. They argue the higher oil price is needed to keep investment, jobs and tax receipts flowing into their provinces.

The policy may be difficult to maintain if international oil prices remain depressed, though. For one, the central government will face increasingly intense public pressure to reduce prices at the pump ahead of December’s elections. Cristina Fernandez de Kirchner is not running for re-election in 2015, but she will not want to jeopardise her Peronista party’s chances at the polls. The government is reportedly considering reducing taxes at the pump to pass on lower prices to consumers, but it’s not clear that will be enough to stave off public pressure.

Moreover, an extended disconnect between domestic and international oil prices could see the country’s refiners to look to import more crude from abroad, which could see demand for domestic crude decline without a more competitive price.

Regardless, some analysts argue that Vaca Muerta investment will be relatively resilient in a low international oil price environment because price controls had conditioned companies to expect prices well below $100/b.

“The Argentine government has imposed a price ceiling of $70/b on oil export realisations, so investors in Vaca Muerta have hardly ever expected to be paid more. The export netback is below $70/b today, but the difference is not material enough to halt investments,” Alexander Bugansky, an analyst at Deutsche Bank, told Petroleum Economist.

Still, the next 12 months will be a difficult test for Argentina’s shale oil business. “There’s a storm coming from abroad and we will have to deal with it,” Miguel Galuccio, the head of national oil company YPF, told state media. “But our objectives remain the same and nothing has changed. We want to win back energy independence and we can’t lose sight of that.”

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