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Argentina lifts gas prices for new projects

Argentina has agreed to a significant increase in price for natural gas produced at new projects in a boost for recently nationalised YPF and the prospects for development of the Vaca Muerta shale play

The government has signed an agreement with state-run YPF to sell gas from new projects for $7.50 per million cubic feet (cf), Argentine president Cristina Fernandez said at an industrial forum in Buenos Aires on 28 November. "We've decided to give incentives for gas production," Fernandez said.

The deal is a major boost for YPF, which has struggled since it was nationalised in April. The company’s New York-listed shares surged by more than 4.5% on the news, rising from $10.31 a share to $10.82 a share at closing. The company’s share price is down nearly 70% from the start of the year.

“The announcement opens a new perspective on the development of gas in Argentina,” YPF chief executive Miguel Galuccio said in a statement.

The announcement addresses an issue that foreign operators in the country have long argued is an impediment to new investment, though it is not clear yet how the deal will work with other companies.

Gas from conventional projects typically sells at government-fixed prices of around $2 per million cf. The subsidy was put in place following the country’s sovereign debt default in 2002 to keep a lid on inflation.

The Argentine government had offered some concessions in the past. In an effort to encourage more domestic production, particularly in the Vaca Muerta shale, the government started the Gas Plus programme that allowed gas from some projects to be sold for as much as $5 per million cf. Companies, though, complained that new projects were still not economic even with the Gas Plus concessions.

And as Argentina’s fuel deficit has mounted in recent years, the low fixed domestic prices have made little sense. The country pays around $10 per million cf for pipeline imports from Bolivia and around $12 per million cf for liquefied natural gas imports. Increasing domestic gas prices to a level closer to import prices in order to encourage development in Argentina, particularly in the vast Vaca Muerta shale play, was a logical step that has been, many argue, too slow to come.

“Between paying $3.5 billion for gas imports and paying $3.5 billion for gas to be produced here, where we are producing more services and jobs... it is a question of intelligence,” Fernandez said.

Galuccio hinted in September that a deal to raise gas prices was in the works. “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 said at the time, arguing that the expropriation of Repsol’s stake in YPF had accelerated the government’s decision to raise gas prices.

If the government is able to strike similar deals with other foreign operators it would provide a major boost to the outlook for development at the Vaca Muerta shale play. Analysts have said that a price in the range of $6 to $8 per million cf would be sufficient to make Vaca Muerta shale development economic for foreign operators.

The Vaca Muerta shale is thought to be one of the largest discovered outside of North America. The US Energy Information Administration ranked Argentina’s shale gas reserves third in the world at 774 trillion cf, behind China and the US. A host of international majors including Chevron, ExxonMobil, Total and Shell as well as independents such as Apache and Americas Petrogas have piled into the shale play.

YPF, though, holds by far the largest acreage position in the shale play. And since its nationalisation in April this year, the company has been actively courting potential foreign partners to help it carry out an ambitious $40 billion investment programme. YPF signed a memorandum of understanding (MoU) with Chevron to develop Vaca Muerta, but others have shied away from investing in YPF.

Increasing gas prices will go some way towards making YPF a more attractive investment proposition for foreign companies. But companies are likely to remain cautious about investing with YPF until the government strikes a deal with Repsol to compensate it for the nationalisation of YPF. Repsol has sued Chevron over its MoU and has threatened to do the same if other companies seek to form partnerships with YPF for assets that it still considers its own.

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