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Argentina tightens grip on energy sector

The Argentine government has further extended its control over the country’s energy sector with the creation of a powerful new national commission charged with overseeing and regulating investment and prices in the gas sector.

Under a new law which establishes the agency, published on 27 July in the country’s Official Bulletin, companies will be required to submit their exploration investment plans, as well as plans for “maintaining and increasing reserves” to the newly created commission by 30 September every year.

The commission has 60 days to review the plan. If it does not think the company’s plan is consistent with the Argentine government’s own goals for the industry, then it can “request the submission of a new annual investment plan that meets the requirements of the national hydrocarbon investment plan,” according to the Official Bulletin. In addition to oil explorers and producers, refiners and companies that transport and market oil and fuel products will face similar requirements.

The commission will also take over authority to set oil, gas and fuel prices in the domestic market. Many in the industry complain that low domestic prices have discouraged investment. However, the new legislation states prices should cover production costs and allow companies to obtain a “reasonable” profit margin. The commission has the authority to compel companies to open their books for auditing to help it determine “reasonable” profits.

Companies that fail to comply with the new legislation face fines and the termination of their concession agreements.

The move will confirm fears that the nationalisation of Repsol’s majority stake in YPF marked the beginning of deeper government involvement in the sector. The law appears to give the commission broad authority to intervene in company operations, and this, some observers believe, could essentially pave the way to nationalisation by stealth.

Foreign companies had sought to distance themselves from the government’s nationalisation of YPF, arguing that it was an isolated incident between Repsol and the Argentine government that would not have wider ramifications for the industry. “We don’t foresee a major impact on our operations because this is primarily a dispute between the government and Repsol,” a spokesperson from Apache Corporation, which has extensive holdings in the highly prospective Vaca Muerta shale play in southern Argentina, told Petroleum Economist in April this year.

Argentina’s planning minister Julio de Vido defended the new regulations. “There is no intervention here. It is planning, pure and simple, and in terms of the market it will give more predictability, which is what any market in the world needs to operate in an orderly form,” de Vido said in a statement.

But President Cristina Fernandez de Kirchner’s decision to put Axel Kicillof, her influential deputy economy minister, at the helm of the commission will cause much concern across the industry. Kicillof is widely thought to have been the architect behind the YPF nationalisation and has argued that Repsol should be paid little, if anything, for its stake in the business. And he has encouraged Fernandez to take a much more interventionist stance towards the country’s critical industries.

Declining oil production and rising demand has seen Argentina become a net oil and gas importer in recent years, leading to a fuel import bill of nearly $10 billion last year, a drain on the country’s limited foreign reserves. As a result, reversing this trend and ensuring Argentina’s energy self-sufficiency has moved to the top of the government’s agenda.

The Vaca Muerta shale, which covers around 30,000 square km of Neuquén and Mendoza provinces, could be the answer to Argentina’s energy woes. Repsol estimated that the formation held more than 20 billion barrels of oil equivalent, making it one of the largest shale plays discovered so far outside North America.

YPF plans to invest around $40 billion by 2017 in a bid to start producing from the Vaca Muerta shale and reverse Argentina’s fuel import dependence. The plan, though, depends on YPF’s ability to attract foreign investors with the deep pockets and shale expertise needed. The nationalisation of YPF and the latest measures make that look highly uncertain.

At least one company, Toronto-listed explorer Azabache Energy, has seen its prospects for a joint venture fall apart as a result of the new law. “The effects of this decree on the company's properties remain unclear, though as a result of the decree discussions and negotiations with a potential joint-venture partner in respect of its shale-oil play in Argentina have been put on hold,” the company said in a statement.

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