The main characteristic of the Argentine hydrocarbons regime is that the state (the federal government or the provinces, as applicable) owns the hydrocarbons in the subsoil, and that the rights the state grants for the exploration and exploitation of hydrocarbon reserves are separate from surface ownership. Once extracted, the hydrocarbons belong to the entity/ies holding the relevant E&P rights.
The National Constitution, as amended in 1984, provides in Article 124 that “the eminent domain of the natural resources existing in their respective territories belongs to the provinces.” The provision became effective when Law No 26,197, which was enacted in 2006, amended Law No 17,319 (the “Hydrocarbons Law”), in accordance with Article 124. Therefore, as per the current Hydrocarbons Law, hydrocarbons belong to the provinces where they are located, or to the nation if the resources are located in federal territory. As a result, the nation owns only the hydrocarbons in offshore blocks in the continental shelf located more than 12 nautical miles away from the shore, while each province owns the hydrocarbons located in its territory, including those within 12 nautical miles of the shore.
This means that the relevant state (nation or province) owning the resources has full authority to award E&P rights for the exploration, development and exploitation of such resources (exploration permits, exploitation concessions and association agreements with state-owned companies) and is the enforcement authority regarding such awards and contracts.
At a national level, the State Secretariat of Energy is the main governmental body involved in energy regulation. The Undersecretariat of Hydrocarbons and Fuels is the secretariat’s subdivision specifically devoted to oil and gas and has five national directorates: Hydrocarbons Economy, Exploration and Production, Transportation and Measurement of Hydrocarbons, Refining and Marketing and Liquid Gas. The federal regulator is governed by the Hydrocarbons Law (as amended) and by several executive orders issued by the national executive power. From an administrative organisational standpoint, the secretariat is regulated by the Ministries Law, as restated by Decree No 438/92, as amended, among other regulations, by Executive Orders No 802/18, No 958/18 and No 7/2019, which establishes the different ministries, secretariats and functions assigned to each of them (https://www.argentina.gob.ar/produccion/energia).
Each oil and gas-producing province has its own oil and gas regulators. Provincial regulators are governed by the federal Hydrocarbons Law and by provincial legislation and regulations. In some provinces, the local legislation includes provincial hydrocarbons laws that are mostly aligned with the provisions of the Hydrocarbons Law, which provides the basic principles and substantial rules governing petroleum activity.
The provincial hydrocarbons regulators are as follows:
Under the Hydrocarbons Law, the national policies in respect of the exploration, development, production, transportation and marketing of hydrocarbons shall be determined by the national executive branch. This means that, although the provinces own the hydrocarbons, have the power to grant permits and concessions and have regulatory powers as regards the way in which the federal hydrocarbons regime is applied in their territories, the power to establish the national hydrocarbons policy and to pass material legislation remains with the federal government and Congress (as provided by the National Constitution and several federal regulations, such as the Hydrocarbons Law, Law No 26,197 and Law No 26,741). The Hydrocarbons Law coexists with hydrocarbon laws and regulations passed by certain oil and gas-producing provinces, like the Province of Neuquén Hydrocarbons Law No 2,453, Province of Mendoza Hydrocarbons Law No 7,526, Province of La Pampa Hydrocarbons Law No 2,675, or Province of Chubut Hydrocarbons Law No XVII No 102, which, in general, are substantially aligned with the provisions of the Hydrocarbons Law.
The Ente Nacional Regulador del Gas (Enargas) is the regulator with respect to most aspects relating to the transportation, distribution and marketing of natural gas.
The only oil and gas company controlled by the nation is YPF SA, which is a sociedad anónima (stock company) governed by General Companies Law No 19,550 and is therefore subject to the general legislation applicable to private companies. As per Law No 26,741 (passed in 2012), whereby the controlling shares of YPF were expropriated from Repsol, the national government and petroleum-producing companies own 51% of the shares, of which 51% are owned by the federal government and 49% by the provinces (each province owning a number of shares in proportion with their respective production and reserves). The provinces and the national government act jointly as if they were one shareholder, following the leading role of the national government. The remaining 49% of the shares are listed in the Buenos Aires Stock Exchange and also traded in international stock exchanges, like New York, and privately owned.
The scope of YPF's investment and activity has not changed since the 2012 expropriation. The company’s activity covers the whole range of upstream and downstream operations, as well as the operation of petrochemical industries, either directly or through ownership of – or participation in – other companies.
Being a sociedad anónima formed under the General Companies Law, YPF is subject to the regulations generally applicable to any other stock company, except for its control structure.
The Hydrocarbons Law as amended, among others, by Laws No 26,197 and No 27,007 contains the basic material legislation in relation to the exploration, development and production of hydrocarbons. Together with the Hydrocarbons Law, the Mining Code is applicable in connection with certain issues not included in the Hydrocarbons Law. The Hydrocarbons Law is supplemented by numerous executive orders and resolutions.
Law No 24,076 sets forth the basic regulations for the transportation, marketing and distribution of natural gas.
Other important laws are No 24,145 (federalisation of hydrocarbons), No 26,659 (restrictions in connection with the E&P of petroleum in the continental shelf) and No 26,741 (establishes the achievement of petroleum self-sufficiency as a matter of national strategic interest, and expropriates the controlling shares of YPF SA).
Surface Inspection Permits
Under a Surface Inspection Permit, the permit-holder is granted the right to conduct a surface survey on a certain area, including carrying out geologic and geophysical studies, and employing other methods, such as the drafting of plans or the performance of topographic and geodesic surveys.
Upon the expiry of the term of the permit, the primary data obtained from the surface inspection shall be delivered to the enforcement authority, which may process said data or have it processed by third parties, and may use it as it deems convenient for its own purposes. The information shall not be disclosed in the two years following such delivery without the express consent of the party that performed the surface inspection, except if permits or concessions are awarded in the prospected zone.
In 2018 the Ministry of Energy and Mining passed Resolution No 197/18, with a new set of regulations applicable to surface inspection permits on offshore areas (beyond 12 nautical miles from the coastline). This Resolution provides for a much longer term (eight years) than that applicable to onshore permits (12 months plus 12-month extension), and gives the permit-holder Commercial Exploitation Rights, whereby the permit -holder has the exclusive right to disclose (subject to a few exceptions) and commercialise the data obtained from the inspection activities, on a non-discriminatory basis, until two years after the expiry of the permit. Surface inspection permits that were already in force as of the issuance of Resolution No 197/18 could be converted into permits under this new Resolution, at the permit-holder’s request.
Onshore surface inspections are rarely used because no exclusivity is granted, no E&P rights derive therefrom for the person performing the work, and they create an obligation to deliver all the information obtained to the enforcement authority, which will be able to use it as it deems appropriate. Almost all the onshore exploration activity is held under exploration permits or association agreements with province-owned companies, which are described below. As an exception to the aforementioned, offshore surface inspection activity has been and is being conducted by a few international companies under permits issued under Resolution No 197/98 or by a pre-existing permit that was converted into a permit under the terms of Resolution No 197/18, as mentioned above.
Surface Inspection Permits are granted by the relevant executive branch (federal or provincial, depending on where the hydrocarbons are located). Permits under Resolution No 197/18 are granted by the federal government.
Exploration Permits are granted by the relevant executive branch (federal or provincial, depending on where the hydrocarbons are located).
The holder of an Exploration Permit has the exclusive right to perform exploratory activities within the permit area, and the exclusive right to obtain an exploitation concession if the holder discovers oil or gas in commercially exploitable quantities and conditions (commercial discovery) during the term of its permit.
Exploration Permits are awarded in bidding processes. As in many such processes, this involves the submission of two envelopes. Envelope A must contain evidence of the bidder’s experience and technical and financial qualifications. Envelope B is the economic offer itself, typically including (i) the work commitment, in excess of the minimum required in the bidding terms and conditions, which the bidder commits to perform during the first exploration period; (ii) the time established in the offer for the duration of the first exploration period; and (iii) a commitment to drill at least one well in the second and third periods, in case the bidder accesses such periods.
The criteria to award the blocks are based on the work units and time of exploration commitments made by the bidder, and, in some bids, on the entry fee offered by the bidder. The public tender will be awarded to the bidder proposing the highest offer, in accordance with a formula that considers the aspects mentioned above.
Exploitation Concessions grant the exclusive right to exploit the existing hydrocarbon fields located in the area of the concession, and are granted by the relevant executive branch (federal or provincial, depending on where the hydrocarbons are located).
The exploitation of a field involves the development of its potential. The Hydrocarbons Law requires concessionaires to produce as much hydrocarbon as possible, in accordance with rational and efficient techniques. By the same token, the exploitation concession implies that the concessionaire must have the ability to build and operate treatment plants as well as other facilities needed for the operations, including having the right to request a transportation concession for the transportation of the production out of the concession area.
The hydrocarbons shall belong to the concessionaire in accordance with its participating interest in the concession, and the concessionaire shall be able to dispose of its share of the production freely, subject to the general limitations contained in the Hydrocarbons Law and its supplementary regulations.
Association Agreements with Province-Owned Companies
In these agreements, the province-owned company is typically the owner of the E&P rights and irrevocably makes such rights available to the joint venture with the private party/ies. During the exploration stage, the provincial company makes available its exploration rights over the area. Upon the occurrence of a commercial discovery, the provincial company will have to request an Exploitation Concession from the province and, once granted, the Exploitation Concession will be made available by the province-owned company to the joint venture.
Typically, the province-owned company holds a 10% participating interest.
The private parties assume all the exploratory risk on an exclusive basis, as the province-owned company does not assume any investments, costs and expenses during the exploration stage. In some agreements, the private parties are allowed to recover such costs from the province-owned company upon a commercial discovery and the entering into the exploitation stage, by applying a certain percentage (usually 50%) of the provincial company’s entitlement to the production to such end. In other agreements, costs and expenses incurred during the exploration stage cannot be recovered. The latter approach is currently being taken by the province of Neuquén in its last bidding rounds launched for the association with Gas y Petróleo del Neuquén SA.
Upon the occurrence of a commercial discovery and the subsequent grant of an Exploitation Concession on the block, the province-owned company must pay its share of capital and operating expenditures (CAPEX and OPEX). The terms and conditions of the aforementioned Neuquén bidding round provide that, upon the grant of an Exploitation Concession, the provincial company may opt between keeping its participating interest in the production and CAPEX and OPEX expenditures, or assigning such participating interest to the private parties and receiving an overriding royalty on the production from the concession area, to be agreed with the private parties (such overriding royalty is estimated at around 2.5%).
The hydrocarbons shall belong to each party in accordance with its participating interest in the contract, and each party shall be able to dispose of its share of the production freely, subject to the general limitations contained in the Hydrocarbons Law and its supplementary regulations.
The private party (or one of the private parties if there is more than one) shall be the operator.
Generally, the Association Agreement contains rights and obligations that are in line with the joint operating agreements normally used in the industry, with the exception that the province-owned company’s consent is required for most decisions within the Operating Committee. Basically, the decisions that do not require such consent are those related to operational matters. However, the last association agreements entered into by Gas y Petróleo del Neuquén S.A. and private companies do not contain joint operating provisions for the exploration stage and provide that a joint operating agreement shall be executed if a commercial discovery takes place and the province-owned company decides to keep its 10% participating interest, based on the Association of International Petroleum Negotiators (AIPN) model form of Unconventional Resources Operating Agreement.
The Association Agreements are awarded – within the framework of a public bidding process called by the executive branch of the relevant province – by the province-owned company, and the award requires the approval of the province (typically by way of an executive order).
Surface Inspection Permits are granted by the relevant governmental authority upon a request made by a company that is willing to conduct such surface inspection.
Exploration Permits are granted through public bidding rounds.
Exploitation Concessions can be obtained (i) by the holder of an Exploration Permit, upon the occurrence of a commercial discovery, over all or a portion of the exploration area; (ii) through a public bid in connection with "proved" blocks (blocks where exploration activities are deemed unnecessary); or (iii) in the case of Unconventional Exploitation Concessions, by the holder of an Exploitation Concession that, based on the unconventional potential of the block, asks for a subdivision of the concession area and for the grant of an Unconventional Concession on the subdivided area with unconventional potential.
Association Agreements with state-owned companies are granted through public bidding rounds called by the relevant provinces.
The requirements or qualifications for the granting of an upstream licence in a public bid include the following.
Royalty on the production of hydrocarbons must be paid on a monthly basis to the relevant province or national government (in accordance with the location of the hydrocarbons field). Royalty is regulated by Sections 59 through 65 of the Hydrocarbons Law, and by National Decree No 1,671/1969.
Royalties are a percentage of the hydrocarbons produced at wellhead (Section 59, Hydrocarbons Law). The Hydrocarbons Law provides for a 12% royalty on hydrocarbons produced under exploitation concessions, and for a 15% royalty on hydrocarbons produced under an exploration permit.
Article 27 ter of the Hydrocarbons Law, introduced by Law No 27,007, provides that the royalty can be reduced by up to 50% in tertiary production (enhanced oil recovery and improved oil recovery), and in extra heavy oil and offshore projects that, due to their particular productivity issues and location, present particularly unfavourable technical and economic characteristics.
Royalty shall be paid in cash, unless the relevant province or national state requests to be paid in kind, and provided the producer is ensured that hydrocarbons will be received on a reasonably permanent basis. Therefore, royalty is calculated on the net price obtained for the production.
During the extension periods of concessions, an additional royalty of up to 3% can be added, with a total cap of 18%.
The royalty provided in the law shall be the only government take calculated on the production.
However, in concessions that were extended before the enactment of Law No 27,007 (2014), extra payments on the production may apply, such as additional payments of up to 3% of the production, and certain windfall profit payments, which are triggered when the prices obtained for the hydrocarbons produced from the concession area exceed certain parameters.
The Hydrocarbons Law establishes that the holders of exploration permits and concessions must pay a fixed yearly fee (payable in advance in January), which is calculated by each square kilometre of the permit or concession area. These yearly fees vary during the exploration phase, depending on the exploration period, as explained below.
In a Basic Exploration Term, the fee is ARS250/km² for the first period and ARS1,000/km² for the second.
In an Extension Period of Exploration Permits, the fee is ARS17,500/km² during the first year, to be increased by 25% for each additional extension year.
The fee may be reduced by deducting the amount on the investment effectively made, provided the fee is not reduced below a floor determined by law (10% of the fee payable during the relevant period).
Under Exploitation Concessions, the fee to be paid is ARS4,500/km².
Law No 27,007 allows for an extension bonus to be charged when a concession extension is granted. The maximum bonus shall be equal to the figure resulting from multiplying the proved reserves remaining at the end of the term of the concession by 2% of the average price in the relevant basin for the two-year period prior to the granting of the extension.
Tender processes organised by the provinces for the grant of permits, concessions or Association Agreements with provincial state-owned companies usually include obligations to make social contributions, which range from an amount of money to be used by the province for certain purposes benefiting the local communities where the operations will be carried out, to the donation of vehicles or computers to be used in monitoring activities by the hydrocarbons and/or environmental authorities, or providing training, or paying for the training of certain public officials or employees of provincial state-owned companies, or contributions to provincial agencies or not-for-profit organisations (basically provincial or national universities). The amount of these social contributions has not been material vis-à-vis the amounts involved in the relevant E&P projects.
The terms and conditions applicable to the extension of existing concessions or to bidding rounds for the award of upstream licences may – and usually do – contain an obligation to make certain contributions to be used by the relevant province in the implementation of social or educational programmes.
Within the national jurisdiction, in accordance with the relevant provisions and as long as they are applicable, E&P companies will be liable for the payment of all federal taxes generally applicable in the country (income tax, value added tax, debits and credits in bank accounts tax) and any applicable customs duties.
E&P companies shall also be liable for the payment of all provincial (gross income tax and stamp tax) and municipal taxes in force as of the date of the award. During the term of duration of the permits and concessions, the provinces and municipalities shall not levy new taxes upon the holders thereof, nor increase the rate of pre-existent taxes, except for those rates paid in consideration for the performance of services and as contributions for improvements, or a general increase of taxes.
Pursuant to Law No 27,430, as amended by Law No 27,541, Argentine entities (either local companies or subsidiaries and branches belonging to foreign companies) are subject to federal income tax at a rate of 30% applied on the net income (gross income less deductions and amortisations). The rate will be reduced to 25% as from the fiscal period beginning on 1 January 2022. With a few exceptions, all expenses to obtain and maintain the income-producing source are deductible. Tax losses can be carried forward for five fiscal years. There is no carry-back. At present, the payment of dividends or profits to the shareholders or owners is subject to income tax withholding at a rate of 7%. The rate will be increased to 13% from 2022 onwards. The new scheme provided by Law 27,740 aims to promote the reinvestment of declared dividends.
Treaties for the avoidance of double taxation are in force with Canada, Australia, the UK, Sweden, Bolivia, Germany, Brazil, France, Austria, Chile, Italy, Spain, Finland, Denmark, Belgium, the Netherlands and Norway. Argentina and the United States of America signed a treaty for the avoidance of double taxation in 1981, but it has never entered into force.
Value added tax (VAT)
This federal tax is applied on the sale of goods, the rendering of services and the importation of goods, at 21%. When purchasing goods, obtaining services or importing goods, registered taxpayers must pay an additional 21% on the price to the individual or entity selling the goods, or rendering the services, with the amount of VAT paid constituting a VAT credit, and when selling goods or rendering services, the registered taxpayers must charge an additional 21% on their prices, with the amount so collected constituting a VAT debit.
The difference between VAT credits and VAT debits must be paid to the Federal Internal Revenue Agency from time to time. VAT credits may be carried forward without a time limit.
Joint ventures and other sorts of associations are considered VAT taxpayers. As regards VAT, such associations are deemed to be independent entities from their members.
Tax on financial transactions
This tax applies on any debit from, or credit to, bank accounts. The applicable rate is 0.6% of the amount of the transactions. 0.3% of the amounts levied on credits can be taken as advanced payment of income tax.
Gross income tax
This tax is applied on the gross income derived by entities or individuals that carry out economic activities within the territory of a province. The tax rates vary depending on the activity and the province, but generally range from 1% for primary activities, to 3% for trading and 4% for financial activities or intermediation. If one activity is carried out in several provinces, the Multilateral Convention is applied, whereby the tax base is distributed among the provinces in order to prevent double taxation.
Stamp tax is applied to agreements that are executed within the territory of a province or that produce effects in it. The tax rates vary depending on the sort of agreement and the province, but the applicable general rate ranges from 1% or 1.5% to 3.5% to 4% in connection with certain transactions (like the transfer of vehicles and real estate). Most fiscal codes set forth that agreements will be levied with the tax when they are executed by the parties thereto or if the agreements will have effects on the province. Agreements entered by way of an exchange of letters are also affected (offer and acceptance) when the acceptance letter reproduces all of the offer, or at least the main provisions. Due to this, it became common practice to execute agreements by way of an offer letter accepted through an acceptance letter that does not reproduce the main provisions of the offer, or by way of performance of the transaction.
In accordance with executive Order 488/20, export duties shall be paid on any exports of hydrocarbons or hydrocarbon by-products, in accordance with a mobile rates scheme. Pursuant to this scheme, (i) the applicable rate will be 0% if the international reference price (Brent) is not higher than USD45, (ii) the applicable rate will be 8% when the international reference price is higher than USD60, and (iii) the applicable rate will be determined pursuant to a certain formula – which contemplates the value of the international reference price at any given time – when the international reference price is higher than USD45 but not higher than USD60.
No special rights for national oil companies are provided for in the applicable legislation. However, as mentioned in the discussion on Association Agreements with province-owned companies, in such agreements the provincial company is carried throughout the exploration stage. Also, the state-owned company’s consent is required in relation to most decisions taken by the Operating Committee, except for operational matters.
Section 71 of the Hydrocarbons Law provides that companies performing jobs regulated by such law shall prefer to hire nationals and, particularly, residents of the region where the works shall be performed, and that the proportion of nationals employed by each concessionaire or permit-holder shall not be less than 75%. A similar provision is included in Section 94 of Neuquén Hydrocarbons Law No 2453. In practice, exceptions to the above-mentioned rule are accepted in connection with specialised workers that are not available in Argentina or in the region where operations are conducted.
The Province of Neuquén has passed a regime concerning the acquisition of goods and services by E&P companies. Such legislation establishes an obligation to acquire a minimum of 60% of the contractual amount from companies based in Neuquén, which is calculated on an annual basis, in respect of each item or type of activity. This preference must be observed if the economic offer submitted by the Neuquén company is up to 7% greater than the best offer submitted by the other companies, provided that the Neuquén company accepts to reduce its prices to match the best offer received (Neuquén Law No 3032).
Holders of exploration permits must inform the relevant national or provincial authority about any petroleum discovery within 30 days of such discovery. Moreover, once the permit-holder determines the discovery is commercially exploitable, it has 30 days to request the grant of an exploitation concession, which must be granted within 60 days, provided that the permit-holder has submitted the delimitation of the area. The award of the concession does not affect the continuity of the exploration rights until the end of the relevant exploration periods on the portion of the exploration block that will not be subject to the Exploitation Concession.
If, upon the performance of exploration and/or evaluation works, the holder of an Exploitation Concession determines that all or part of the concession area has unconventional petroleum potential, they can request the grant of an Unconventional Exploitation Concession on the relevant area, which request shall be based on a pilot plan to be submitted together with the request. The authority must decide on the request within 60 days of the date the request is submitted, provided that the concessionaire has provided all the information needed to take such decision, at the authority's satisfaction.
There are no deemed approvals. A denial by the petroleum authority can be appealed through administrative recourse and eventually before a court of law. However, denials are very unusual, and there is no record of any denial having been appealed.
As per the Hydrocarbons Law, the exploration periods shall be set forth in the terms and conditions that apply to each public bid, within the following maximum terms.
For a permit with a conventional objective, there is a basic term of three years plus three years, plus an extension term of five years. In permits referring to offshore exploration, each of the periods of the basic term can be increased by one year.
For a permit with an unconventional objective, the basic term is four years plus four years, plus an extension term of five years.
At the end of the first period of the basic term, the permit-holder shall be able to keep all the exploration area, while the exploration area shall be relinquished at the end of the second period of the basic term, unless an extension is requested, in which case at least 50% of the area shall be relinquished.
The term of Exploitation Concessions is 25 years (30 years for offshore concessions). The term of Unconventional Exploitation Concessions is 35 years.
Concessions can be renewed for ten-year periods and there is no limit on the number of renewals, which must be asked for no less than one year before the expiry of the current term and can be requested by concessionaires that are in compliance with their obligations under the relevant concession. Extensions are not granted automatically but require governmental approval so, in practice, some negotiation is required. As described above, the extension bonuses that the provinces or nation can apply are capped by the Hydrocarbons Law.
Concessionaires can relinquish the concession areas at any time, in which case they will have to comply with all accrued and pending obligations as of the relinquishment date, and with the abandonment procedures set forth in the applicable regulations.
As regards Association Agreements with province-owned companies, their most relevant terms and conditions have been discussed above.
Permit-holders, concessionaires and holders of participating interests in Association Agreements own and have the free availability of their share of the petroleum substances produced from the relevant area, subject to the general limitations established in the applicable regulations (secure adequate supply of the domestic market; Section 6 of the Hydrocarbons Law).
In line with the aforementioned, crude oil exports have to be offered to the domestic market first, while exports of gas require governmental approval, as described in further detail herein below.
According to Section 72 of the Hydrocarbons Law, Exploration Permits and Exploitation Concessions can be assigned, with the prior authorisation of the executive branch (federal or provincial, as applicable), in favour of those that fulfil the financial and technical conditions and requirements needed to be a permit-holder or concessionaire.
Under Section 73 of the Hydrocarbons Law, a concessionaire can assign its interest in an Exploitation Concession as a security interest in respect of loans obtained to finance the upstream operations in the relevant concession area.
Provincial hydrocarbon laws contain provisions in line with the ones described above.
The assignment of participating interests in joint venture agreements with provincial E&P companies usually has to be approved by the board of the relevant province-owned company, and that approval has to be ratified by the provincial executive branch.
Retained liabilities after a duly approved and consummated transfer of an upstream interest include any royalty and taxes accrued before the effective date of the transfer. As regards damage to property, individuals or the environment, retained liabilities towards third parties include those caused during the time in which the transferor held the upstream interest, notwithstanding the indemnity provisions that the transferor may have agreed upon vis-à-vis the transferee.
The transfer of any upstream licence is subject to the rules of Argentine antitrust law, so approval from the antitrust regulator might be required, depending on the specific circumstances of each transaction.
No legal or regulatory restrictions apply.
There are no national monopolies (or near-monopolies) in downstream operations in Argentina.
Private producers of petroleum – either liquid or gaseous – have a right, under the Hydrocarbons Law, to build transportation facilities to transport the production from the producing fields to the trunk pipelines transportation system and to obtain transportation concessions granted by the federal or provincial states, as applicable.
The system of transportation through the trunk pipelines can also be operated by private companies under transportation concessions for liquid hydrocarbons, and under transportation licences for gaseous hydrocarbons, for terms of between 25 and 35 years, which can be extended.
The transportation of natural gas from the trunk pipelines to consumers is carried out by certain private companies that have been granted distribution licences by the federal government, and each of these companies has a monopoly within the area of its licence.
No specific restrictions apply to the construction of new facilities or the acquisition of participating interests in companies that refine, store and market fuels and other petroleum by-products. Decree No 1212/89 set the basis of a system that, unlike previous regulations, provides for the free construction of refineries and service stations by the private sector, subject to the technical and safety regulations applicable to such facilities.
As mentioned above, there are no national monopolies (or near-monopolies) in downstream operations in Argentina.
Transportation concessions granted after the privatisation of companies that provided transportation services through the trunk pipelines system in the 1990s were awarded mostly to companies holding upstream licences. Such companies have a right to obtain transportation concessions directly to enable them to transport their production out of the production fields, without need of a public bidding process (Hydrocarbons Law). In order to obtain a transportation concession, the companies must comply with the applicable technical, environmental and safety requirements.
In other cases, the grant of a concession or licence to transport petroleum through new pipelines within the trunk system must be obtained through a public bidding process. Executive Order 115/19 (which amended Executive Order 44/91)empowered the Secretariat of Energy to launch public bidding processes for the grant of one or more liquid hydrocarbons transportation concessions. Such executive order also provides that, in order to facilitate the financing of new petroleum transportation projects, the developer of a new pipeline, as well as an existing concessionaire willing to expand its transportation facilities, may sell and reserve firm capacity in advance, at transportation tariffs to be freely negotiated with the transporters willing to secure transportation capacity in the new facilities.
The construction by private companies of new refineries, storage plants and service stations does not require specific licences, provided that certain requirements are met before the start of operations, namely:
No public bids were conducted for a long time, until last year, when a public call for bids was made for the construction and the grant of a transportation licence between Neuquén and San Nicolas, in the north of the Province of Buenos Aires, with the purpose of facilitating the transportation of the increasing production from Vaca Muerta; however, no progress has been made yet due to lack of financing.
The income obtained by the operators of the petroleum trunk pipelines transportation system comes from the tariffs paid by the users of the transportation services, in accordance with the rules applicable to the relevant concessions or licences. The income does not generate any specific payment obligations towards the granting state, without prejudice to the obligation to comply with the general tax regime.
The same happens with the companies that operate refineries, storage plants and service stations, which are only subject to the applicable tax regime.
The same federal, provincial and municipal taxes mentioned in 2.4 Income or Profits Tax Regime Applicable to Upstream Operations apply to the income or profits generated by the operation of pipelines, plants and retail and wholesale marketing.
Tax on Fuels
In general terms, this tax is applied on the transfer (either for a consideration or not) and importation of gasoline, gas oil, diesel oil, kerosene, crude naphtha, turpentine and solvent.
Per Law No 27,430, effective from January 2018, this tax is no longer calculated as a percentage of sales, but as a fixed amount per the volume of products sold. Such fixed amounts are subject to periodical adjustments in accordance with any increase in the inflation rate.
The taxpayers are the refineries, traders (under certain conditions) and importers of the levied products. The transfer of levied products that are to be exported is exempted from the tax.
Tax on Carbon Dioxide
Law No 27,430 replaced the tax on diesel oil with a tax on carbon dioxide, which is applied to the transfer (either for a consideration or not) of the fuels mentioned above, and also to fuel oil, coke and mineral carbon.
This tax is also calculated by applying certain fixed amounts (adjusted periodically in accordance with inflation) for each product, per measurement unit sold.
Monitoring and Control Contributions
A monitoring and control contribution must be paid to the relevant government agency (Enargas) by the holders of gas transportation and distribution licences. The contribution is calculated in relation to the cost of rendering such services and the gross income obtained by the relevant licence-holder.
There are no national oil or gas companies holding special rights in connection with downstream licences.
Law No 27,437, passed in May 2018, established a new preference regime for the acquisition of goods and services originating in the country, which includes the following:
Services or goods shall be considered national when they have been produced in the country, and provided that the cost of their imported content does not exceed 40% of the gross production cost. The preference established by the law applies when, under similar conditions, the price of the relevant national goods is up to 8% higher than the price of a similar imported good. Such percentage is increased to 15% when the local supplier is a small or mid-size company, registered as such in the relevant register.
Similar requirements could be applied at a local level (provinces, municipalities).
The holders of petroleum transportation concessions under the Hydrocarbons Law must receive, transport and deliver the petroleum delivered to them in a diligent and timely manner. If the transportation capacity is insufficient, the same shall be prorated among the chargers in proportion to the volume that each charger intends to inject into the system. Transportation systems must operate in a continuous and uninterrupted manner. The operators are responsible for the loss or deterioration of the petroleum transported, except for events of force majeure.
A breach of the terms and conditions applicable to transportation services may result in the application of fines by the enforcement authority. A breach of the open access obligation may also lead to the termination of the transportation concession. Upon the end or termination of the concession for any reason, the facilities revert to the granting state, free of any encumbrances.
Holders of licences for transportation through the trunk pipelines system and distribution of natural gas are bound by duties and obligations similar to those mentioned above. The former can render firm transportation services, to which end they shall reserve certain capacity for the charger requiring such firm services, or they can render interruptible services, subject to the available capacity in the system. The tariffs to be paid by the users, in accordance with Law No 24,076, should allow them to bear their operational costs, taxes and amortisations, and to obtain a reasonable profit. In practice, the system has oscillated between periods of government intervention in the mechanisms applicable to establish tariffs and others in which a gradual return to market prices was favoured. Law No 27,541, passed in December 2019, froze tariffs as of such date, which was the beginning of a stage of increasing state intervention in tariff policies.
Lastly, as mentioned before, the carrying out of other downstream operations, including the operation of refineries and service stations, is deregulated and does not require any concessions or licences. However, (i) refineries must meet the domestic demand before being able to export any product and (ii) Decree No 488/20 established, until 31 December 2020, a prohibition to import petroleum and by-products, unless it can be evidenced that there is not sufficient availability of locally produced products, as well as a fixed reference price for the sale of petroleum in the domestic market.
Pursuant to the Hydrocarbons Law, transportation concessionaires can reach an agreement with the surface landowners to develop activities on their surface land by paying compensation to the landowners for damages caused to their properties by said transportation activities. The amount of the compensation can be determined by mutual agreement between the landowner and concessionaires, or by a local court.
If concessionaires cannot reach an agreement with the landowner, they are entitled to obtain an easement on the surface land from the competent enforcement entity, as hydrocarbons activities are considered to be of national interest according to the Hydrocarbons Law. In addition, the Argentine Mining Code, which is incorporated into the oil and gas legal framework by reference to the Hydrocarbons Law, gives the holders of transportation concessions the right to acquire the surface land compulsorily, subject to compensation.
Pursuant to Law No 24,076, natural gas transportation and distribution licensees have the same easement rights established in the Hydrocarbons Law. If they cannot reach an agreement with the landowners, they are entitled to obtain easements from Enargas.
Finally, those who operate oil refineries, oil storage plants or service stations outside the oilfield have no right to obtain an easement, nor to acquire the surface land compulsorily.
Regarding the transportation of petroleum substances through the trunk pipelines system, the Hydrocarbons Law and its supplementary regulations provide that the concessionaire must receive and transport petroleum substances from third parties on a non-discriminatory basis (including receiving a non-discriminatory price under the same circumstances), provided that there is still transportation capacity available in the pipeline after satisfying the concessionaire’s needs. The maximum tariff that the concessionaire may charge to third parties is established by the enforcement authority, in accordance with the terms of the concession. In cases of new pipelines, or expansion of existing ones, where firm capacity was sold in advance as a means to finance the project, the concessionaire’s open access obligation will be limited to the portion of the transportation capacity that has not been reserved on a firm basis or that, despite having been reserved, is not used. Also, in such cases the tariff can be freely negotiated with the transporters willing to secure firm transportation capacity in the new facilities.
In the same line, Law No 24,076 provides that holders of licences for the transportation and distribution of natural gas must guarantee third parties open access, on a non-discriminatory basis, to the remaining transportation capacity of the pipeline (the capacity that has not already been committed in relation to firm transportation agreements).
Producers, operators of storage facilities, distributors and users of the transportation system that purchase gas directly from the producers are banned from having a controlling interest in the holder of a gas transportation licence. Also, producers, operators of storage facilities and transporters that purchase gas directly from producers in the same geographic area where a distributor operates are banned from having a controlling interest in such specific distributor.
There are no restrictions on the sale of oil by-products into the local market, provided that such products comply with the regulations regarding technical specifications and general fair trade and antitrust provisions.
As regards the marketing of natural gas, holders of licences for the transportation of natural gas cannot purchase or sell natural gas, except for gas purchased for their own consumption and that is necessary to keep the transportation system operational. Consumers in general must acquire natural gas from the distributor or sub-distributor serving each area, but large industrial consumers must purchase the fluid directly from the producers.
Licence-holders own and have the free availability of their share of the hydrocarbons produced from the relevant area, subject to the general limitations established in the applicable regulations, basically to secure adequate supply of the domestic market.
In line with the aforementioned, crude oil exports have to be offered to the domestic market first in accordance with the procedure provided for in Decree No 645/2002 and Secretary of Ministry of Energy and Mining Resolution No 241/2017.
Exports of gas require governmental approval in accordance with Section 3 of Law No 24,076 and former Ministry of Energy Resolution No 104/18 (issued on 21 August 2018). The exports set forth in such resolution are (i) long-term firm exports, (ii) short-term firm exports, (iii) long-term interruptible exports, (iv) short-term interruptible exports, (v) warm season exports (October to April) and (vi) exports required to deal with emergency situations or operational issues, with a subsequent obligation to reimport the same volumes that have been exported.
Per Decree No 488/20, exports of by-products are subject to the same scheme of export duties applicable to petroleum; that is, a system of mobile rates pursuant to which the applicable rate will be 0% if the international reference price (Brent) does not exceed USD45, and will be determined by a formula set forth in the decree when the international reference price is higher than USD45 but not higher than USD60. If the international reference price is USD60 or more, the rate shall be 8%.
Transfers of transportation concessions under the Hydrocarbons Law are subject to the authorisation procedure already described in connection with transfers of upstream licences. Transfers of licences for transportation through the trunk pipelines system require the national executive branch’s consent and, as a condition precedent to granting such consent, a favourable opinion from the competent regulator (Enargas). No specific requirements apply to the transfer of other downstream licences.
The transfer of any downstream licence is subject to the rules of Argentine antitrust law, so the approval of the antitrust regulator might be required, depending on the specific circumstances of each transaction.
There are no foreign investment approvals or restrictions in relation to investment in petroleum.
As mentioned above, companies that directly or through an affiliate perform or have performed activities in the Argentine continental shelf (including the Malvinas/Falkland Islands area) area without authorisation from the Argentine government cannot register as an oil company in Argentina, and thus cannot hold an upstream interest or be an operator.
There are no specific foreign investment protections in connection with investment in petroleum. However, as a general principle, any foreign investor in Argentina has the same legal rights and guarantees as any domestic investor, due to an "equal treatment" principle established by Article 20 of the National Constitution.
As regards stability provisions, the general principle is that nobody has a legal right to claim that a specific legal framework must remain unchanged. However, any beneficiary of contractual rights granted by the government pursuant to a specific regime shall be able to exercise such rights even after such regulations have been abrogated or amended. The rights are considered to be part of the patrimony of the beneficiary, and the wholeness of such patrimony is protected by law (Article 14 of the National Constitution and related regulations).
As an exception to the principle, the Hydrocarbons Law grants the holders of exploitation concessions a right to enjoy stability in respect of the provincial and municipal tax regimes that were in force when the respective concessions were granted (Article 56, paragraph (a) of the Hydrocarbons Law). This principle has been confirmed by the Argentine Supreme Court and is subject to the following exceptions:
The National Constitution acknowledges everybody’s right to use and dispose of their property. In addition, such property shall not be violated, although it can be subject to expropriation if the following requirements are met:
Such indemnification shall be the objective value of the expropriated property and any direct damages arising therefrom. Loss of profits is excluded from the compensation (Article 10 of Law No 21,499).
Dividends can be freely repatriated, which applies to profits of a branch resulting from audited financial statements approved by the branch’s legal representative.
There are more than 60 bilateral investment treaties in force between Argentina and other countries.
Upstream licences are governed by Argentine law, and any disputes in relation thereto shall be submitted to the jurisdiction of provincial or federal Argentine courts.
Arbitration, either national or international, can be agreed upon among private parties, including YPF SA as a stock company that is state-controlled but ruled by the regulations applicable to private companies. As regards Association Agreements with province-owned companies, although arbitration provisions were included in a few agreements some time ago, the rule now is that any disputes shall be submitted to the provincial courts.
Pursuant to Article 41 of the National Constitution, legislative powers are transferred by the provinces to the federal state for the issuance of basic rules of general application in environmental matters.
Following this criterion, at the national level the hydrocarbons sector is governed by general regulations containing minimum environmental protection standards, such as Law No 25,675 (General Environmental Law) and Law No 24,501 (Hazardous Waste Law), and by general regulations and minimum standards specifically applicable to hydrocarbon activities issued by the enforcement authority while exercising the powers delegated by the Hydrocarbons Law to that effect. Such authority is held by the Secretariat of Energy, currently within the scope of the Ministry of the Economy (www.argentina.bob.ar/energia). Other regulations could also be issued by the Secretariat of the Environment and Sustainable Development (http://argentina.gob.ar/ambiente) and Enargas (www.enargas.gob.ar/).
The main applicable regulations include the following.
An environmental study must be prepared prior to the development of a new project and submitted to the relevant (provincial or national) environmental enforcement authority. Upon the approval of the study, the operation can begin and the operator shall comply with recommendations, restrictions and conditions (if any) contained in such approval (Resolution SE 105/92 and related regulations).
Additionally, the operator will have to obtain an authorisation for the use of water in the project, which shall include the origin of the water and the conditions under which it shall be used, register with the National Hazardous Waste Generators Registry and be issued an Annual Environmental Certificate (Law No 24,051, Decree No 831/93 and other regulations).
Joint Resolution No 3/19, issued by the Secretariat of Energy and the Secretariat of Environment and Sustainable Development, published in the Official Gazette on 27 November 2019, set forth a set of rules governing the environmental impact assessments to be conducted in connection with exploration and exploitation activities in the continental shelf subject to federal jurisdiction (beyond 12 nautical miles from the coastline).
Every holder of a superficial inspection permit, exploration permit or exploitation concession willing to carry out an exploration or exploitation project, in the terms of Annex II of the Resolution, shall comply with certain environmental impact proceedings and obtain an Environmental Impact Statement to be issued by Secretariat of Environment and Sustainable Development.
The proceedings include a public hearing, in accordance with the rules established in Law No 25,675 (General Environment Law).
Depending on the complexity of the activity to be performed, a standard proceeding or a simplified proceeding shall be carried out.
The Secretariat of Energy, with the assistance of the Secretariat of Environment and Sustainable Development, if needed, shall monitor compliance with the Environmental Impact Statement and the relevant Environmental Management Plan.
Infringements of the regulations set forth in Joint Resolution 3/19 or in the relevant Environmental Impact Statement shall be subject to the sanctions set out in Title VII of the Federal Hydrocarbons Law No 17,319, which include the imposition of fines, as well as the suspension or removal from the relevant national oil companies registrar.
Resolution No 5/96, issued by the Secretariat of Energy, established rules and procedures for the abandonment of oil and gas wells, including a timetable for the abandonment of certain wells. On an annual basis, the operator shall report the decommissioning works performed in the past year and those to be performed in the following year. Four years before the expiry of the respective concessions, or as from the date of relinquishment of all or part of an exploitation block, the concessionaire must submit a technical and economic study explaining the reasons why the abandonment of each inactive well could be inconvenient. Recommended techniques for performing definitive abandonment are detailed in the same resolution. The technical conditions applicable to the abandonment of gas pipelines and ancillary facilities are established in Resolutions NAG 100 and NAG 153 of Enargas. The abandonment of these facilities requires prior consent from Enargas, which will evaluate whether there is a general interest in keeping the facilities operative.
There is no requirement to constitute a fund to pay any costs associated with the abandonment of wells and facilities.
Although not regulated specifically, the non-operator owner of an interest in an upstream licence or transportation concession can be held liable by third parties (including the enforcement authority) in connection with abandoned assets in the event of non-compliance with the applicable decommissioning obligations. In the same way, even after having fully divested an ownership interest, the former owner of the asset can be liable towards third parties if it can be evidenced that it breached an obligation to carry out abandonment works before such divestiture, and that the breach resulted in damage to the environment.
Argentina has ratified the United Nations Framework Convention on Climate Change (UNFCCC), Law No 24,295; the Kyoto Protocol, Law No 25,438; and the Paris Agreement, Law No 27,020.
Certain actions have been taken in Argentina in line with the objectives of such conventions (although they are not a specific enforcement thereof), including:
As mentioned above, the power to issue basic rules on environmental matters, generally applicable in the whole country, rests with the federal state (Congress and executive branch), while the provinces may supplement the federal regulations with local regulations, provided that they do not overstep the principle of federal law pre-eminence established by Section 31 of the National Constitution. In this regard, provincial regulations have been passed in connection with several environmental matters, such as a gaseous emissions control regime, subterranean water exploitation regime, groundwater exploitation regime and pressurised devices control regime. Such provincial regulations may imply certain limits on the oil and gas development, or the obligation to follow certain rules or submit to certain monitoring from the local authorities, but they should not reach the point of prohibiting such activity or imposing extremely restrictive conditions that would render the development of hydrocarbon resources impracticable. So far, oil and gas-producing provinces have been pretty much aligned with the federal government in respect of the strategic importance of developing such resources, especially unconventional hydrocarbons.
The amendments made to the Hydrocarbons Law by Law No 27,007, passed in 2014, included several provisions specifically related to unconventional resources. As discussed above, such provisions include longer exploration periods, the creation of the Unconventional Exploitation Concession, with a longer term, and the possibility to annex a field adjacent to an Unconventional Concession area when there is geological continuity.
As regards pricing, ME Resolution No 46/17, as amended and supplemented by Resolutions No 419/17 and No 12/18, provided for a guaranteed price for petroleum produced from new unconventional projects in the Neuquén Basins, ranging from USD7.50/million British thermal units (MMBtu; the price currently in force) to USD6/MMBtu by the end of 2021, when this pricing scheme will end. ME Resolution No 447/17 applied a similar programme to production from the Austral Basin. A few projects qualified for this subsidy until 2019, when the government announced that no more projects would be approved under this scheme.
Following the amendment to the Collective Bargaining Agreement for the Neuquén Basin that set forth certain rules specifically applicable to unconventional operations, which were designed to achieve more efficient operations and reduce labour costs, a similar amendment was entered into in connection with the Collective Bargaining Agreement applicable in the Austral Basin. Such amendments include aspects such as a reduction in the number of workers per crew on account of the use of new technology; more flexible rules regarding the suspension of activities due to wind, which shall be suspended only in connection with works performed above ground level when the wind blows at more than 60 km/hour; the elimination of "taxi hours" (travel time to or from the field that was paid as overtime worked hours); a more efficient rest scheme (one day of rest per two days of work, instead of the current one-x-one regime); the allowing of simultaneous operations, so two or more service companies will be able to work simultaneously at the same location; and the allowing of companies to conduct activities such as mobilisation and demobilisation during the night if sufficient artificial light is provided at the location.
There is no special scheme relating to LNG projects yet. However, both the government and the industry concur in that, in order to create the conditions that would allow one or more companies to invest in the liquefaction and LNG export facilities needed to market the increasing unconventional gas production, certain specific regulations will be required sooner rather than later.
The result of the 2019 primary election, from which it was clear that President Macri did not have a chance of being re-elected in the general election that year, caused a significant adverse effect on the financial markets, which led to a period of increasing financial instability, a dramatic depreciation of the Argentine peso and rampant inflation. In this context, the exiting government resolved to freeze the prices of petroleum and fuels until 15 November 2019. This, together with the reinstatement of export duties on exports of any product (including petroleum, natural gas and fuels) and of stringent foreign exchange restrictions, and the political uncertainty associated with the beginning of the new administration of President Alberto Fernández (he took office on 10 December 2019) resulted in a significant reduction of investment in the petroleum industry. In this context, the crash of international prices at the beginning of this year and then the mandatory total lockdown ordered by the government due to the COVID-19 pandemic produced a virtual paralysis of investment and any drilling activity, as well as a significant reduction of the already low prices.
In this scenario, the president signed Executive Order No 488/20 (May 19/20), which included the establishment of a fixed reference price of USD45 per barrel (bbl) to be used in domestic petroleum sales until 31 December 2020. The provisions of this Executive Order are described in further detail in 6.4 Material Changes in Oil and Gas Law or Regulation.
Executive Order No 488/20 (published in the Official Gazette on 19 May 2020) established a fixed reference price of USD45 per barrel (bbl) to be used as reference for all domestic petroleum sales until 31 December 2020 or until the price of Brent reaches USD60, whichever occurs first. The Executive Order also established that the royalty payable to the provinces shall be calculated on the fixed price established therein. Other provisions contained in the Executive Order include the prohibition, applicable to refineries and traders, to import petroleum or by-products unless it can be evidenced that no domestic supply is available, and a duty, applicable to petroleum companies, to maintain activity and employment levels similar to those of 2019.
As regards taxes, the Executive Order includes amendments to the export duty rates applicable to exports of hydrocarbons and by-products, replacing the fixed 12% rate by a sliding scale ranging from 0% to 8%, depending on the price of Brent. Lastly, the decree replaced the fixed-amount fines provided in the Hydrocarbons Law, which required periodic adjustments due to high inflation, with fines linked to the average price charged for domestic petroleum sales.
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Argentina: Cyclical Crisis, International War on Prices and COVID-19 Create a Perfect Storm
In recent years Argentina has experienced a significant and continuous decrease in the production of conventional hydrocarbons and, simultaneously, a steady growth in unconventional hydrocarbons, especially shale oil and gas, which is an irreversible trend in a country with mature and declining conventional fields but with world-class shale resources.
The production of unconventional oil increased at an average annual rate of nearly 40% during the last five years and currently represents 19% of the total oil production (until 2012 it represented less than 1% of the total production).
The production of unconventional gas grew at an average annual rate of nearly 33% during the last five years and currently represents 43% of the total production.
It is worth pointing out that during the last two years the production of shale oil and gas increased significantly vis-à-vis the production of other unconventional hydrocarbons (tight oil and gas).
This evolution of unconventional hydrocarbons, now driven by shale, resulted in a change in the production trends of both oil and natural gas in the country. Beginning in 2018, the total production of oil showed a modest but steady recovery for the first time in years, while the total production of natural gas, which had been declining steadily until 2013, shows a V-shaped recovery from 2014 onwards.
The crash of international prices that took place early this year, together with Argentina’s domestic economic and financial problems and, lately, the effects of the COVID-19 pandemic, have had a massive impact on the domestic oil and gas sector and threaten the continuity of the positive trends described above, and will, once again, delay the full development of a key asset for Argentina.
The following sections describe how things developed in the oil and gas sector in Argentina during the last part of President Macri’s administration and the beginning of Alberto Fernández's administration. As usual in Argentina’s contemporary history, this latest change of government implies a sharp turn in public policies, going from a centre-right governing coalition to a centre-left-populist governing coalition, in which Cristina Kirchner (a former president of two terms) is the vice-president but the “owner” of the votes that enabled Mr Fernández to win.
The Second Half of President Macri’s Administration
Just a few months after a very good performance in the mid-term election of October 2017, which led many observers to take Mr Macri’s re-election in 2019 for granted, the financing the country had been receiving through the issuance of sovereign debt bonds was cut abruptly in April 2018. This exposed the weak condition and bad macroeconomic shape the country’s economy was in, with several basic issues inherited from the previous administration that remained unsolved, like a significant fiscal deficit that, until that time, had been financed with debt. The consequence was another one of Argentina’s cyclical financial and economic crises, including a significant devaluation of the Argentine currency, the acceleration of the (already high) inflation rate, economic recession and, eventually, the negotiation of a USD50 billion financial assistance package from the International Monetary Fund (IMF) as the only available means to prevent a massive crash of the economy. The IMF’s help came with a very stringent fiscal deficit reduction programme that, although successful in terms of reducing the country’s primary deficit, cooled the economy even more.
By the time the primary elections for the 2019 presidential campaign took place in August that year (in Argentina the primary elections of all competing parties are held simultaneously, which makes the primary election a sort of official poll, or preliminary round of the general election), Macri’s popularity had plummeted and the result was that he was clearly and irreversibly beaten by the opposition candidate, Mr Alberto Fernández (with former president Cristina Kirchner in the ticket as vice-president). This had a devastating effect on the financial markets and led to a second wave of massive devaluation of the local currency, boosted inflation and aggravated the economic recession.
In this context, while the investments made in previous years had caused the promising change in the production trends in respect of crude oil and gas described above, the government decided, pressed by the general state of affairs, to adopt measures that were against the basic principles and goals of its energy and foreign exchange policy until that time.
In the last quarter of President Macri’s administration, crude oil and fuels domestic prices were frozen by Executive Order No 566/19; Ministry of Energy Resolution No 46/17 (which enacted the subsidies scheme that boosted investment in large shale gas projects in Vaca Muerta, such as the extraordinarily successful shale gas block Fortín de Piedra) was “interpreted”, without any solid legal grounds, so as to significantly reduce the amount of subsidies that the companies whose investment plans had been approved legitimately expected to collect; and export duties were reinstated for all goods and services, including oil, gas and their by-products (export duties for the hydrocarbons sector had been eliminated in 2017). This situation, together with the uncertainty with respect to the policies that the newly elected government could implement, resulted in a sharp reduction in investment and in drilling and fracking activity, and in Tecpetrol (the holder of the Fortín de Piedra exploitation concession) filing a claim against the federal government in connection with the way in which the government applied the shale gas incentive programme set out in Resolution No 46/17.
Stringent foreign exchange restrictions were also reinstated, after almost five years during which such restrictions had been gradually softened until reaching a mostly deregulated framework.
Alberto Fernández Takes Office
Even before taking office, Mr Fernández and some of his key economic advisers announced that the development of the country's shale resources would be of strategic importance for the new administration and that they intended to promote and give a renewed boost to the development of hydrocarbon resources, with an active participation of the state-controlled YPF and the private sector, and to create the legal framework and conditions required to enable a gas liquefaction project in order to gain export markets for the increasing shale gas production from Vaca Muerta. In fact, from November 2019 to January 2019, drafts were circulated and discussed among the industry, with the intention of having one or more bills sent to the National Congress as soon as possible. Such draft laws contemplated promotional benefits (special tax treatment, tax stability, special foreign exchange regime, etc) for the upstream sector in general (including conventional and unconventional) or LNG projects or shale projects, or a combination thereof. The fact is that, due to a mix of internal issues within the governing coalition, the delays in the restructuring of the sovereign debt (which was regarded by the new president as a condition precedent to the implementation of any economic or energy plan) and the impact that the crash of international prices had on the activity, discussions on the new oil and gas legislation were put on hold, and continued like that after the COVID-19 pandemic hit the country and became a national priority, by late March this year.
Crash of Internal Prices and COVID-19
As mentioned above, the uncertainty and concerns in the local petroleum industry, and the slowdown in investment and in drilling and fracking activity, began before the end of 2019 and increased with the crash of international prices during the first quarter of 2020. As an example of this, the production of unconventional gas grew at an annual rate of 24.4%, if considered as of the end of 2019, but such rate decreased to 4.1%, if considered as of April 2020, which evidences a steep reduction in the growth pace, closely related to Tecpetrol’s decision to reduce investment in Fortín de Piedra.
In this context, the COVID-19 pandemic hit Argentina with devastating effects on most sectors of the economy, including oil and gas. The strict mandatory lockdown ordered by the government to protect the population and health system caused fuel sales to drop between 80% and 50% (depending on the type of fuel) and although domestic demand is slowly recovering after a mild softening of the lockdown, it continues to show very depressed figures. This resulted in a virtual paralysis of drilling and fracking activity, reduction of production or even shutting in of fields, large stock of oil and by-products that cannot be sold, shutting down of some refineries and massive drop of domestic prices. The impact on the production of natural gas was a little bit softer due to the low contribution of hydropower generation this year and the beginning of the cold season. For certain hydrocarbon-producing provinces, highly dependent on the royalties paid by producers, the situation described above caused a financial disaster.
Decree No 488/18 – Regulated Prices, Restrictions and Export Duties
Following several weeks of discussions between the hydrocarbon-producing provinces, the federal government, the unions, YPF and other companies, the federal executive issued Executive Order No 488/20 (19 May 2020), which established that, until 31 December 2020 or until the price of Brent oil exceeds USD60/bbl, domestic sales shall be priced considering a Medanito oil (the Neuquén basin light oil used as reference price for the domestic market) fixed price of USD45/bbl, adjusted in accordance with the quality of each type of crude and delivery port, in accordance with the usual practice in the domestic market. However, the Secretariat of Energy shall be able to (i) modify the fixed Medanito reference price every three months, and (ii) periodically revise the scope of this scheme, based on the production volumes and the activity and investment level. During the time in which the scheme is in force, the price established here, or the price that may eventually be determined quarterly by the Secretariat of Energy, shall apply, in all cases, to the calculation of royalties payable to the provinces.
During the term in which the scheme described above is in force, producers shall maintain the activity and production level of 2019, taking into consideration the current reduction of domestic and international demand of crude oil and its by-products as a result of the COVID-19 pandemic, within the adequate and economic exploitation parameters provided for in Article 31 of Hydrocarbons Law No 17,319, in accordance with supplementary regulation to be issued in this respect.
During the time in which the scheme described in above is in force, producers (i) shall not access the foreign exchange market for the formation of “external assets”, and (ii) shall not carry out transactions consisting of the acquisition of bonds or securities in pesos for their ulterior sale in dollars or for their ulterior transfer to a depository entity outside Argentina (a transaction widely used in Argentina to legally avoid foreign exchange restrictions).
In practice, the fixed reference price, which was presented as the result of discussions that involved all stakeholders and as something good for the upstream sector, caused several problems to the producers as, regardless of the provisions contained in the regulation, refineries are not able to pay prices based on a USD45/bbl Medanito reference price and, in fact, are paying much lower prices. Otherwise, they would rather not buy any production at all. This puts the producers in a difficult situation in which they either pay royalties to the provinces based on the fixed reference price, when they are actually selling at significantly lower prices (which implies a sort of additional royalty, neither contemplated nor permitted by the federal hydrocarbons legislation), or they pay royalties calculated on the actual prices charged and engage in a dispute with the provinces and even with the federal government in relation to the validity and enforceability of the fixed price established in the Executive Order. It is worth mentioning that the National Supreme Court has consistently sustained the basic principle, derived from the Hydrocarbons Law, that royalty has to be paid on the actual price received by the producer.
In conclusion, until the domestic demand recovers in a more vigorous way, the fixed reference price set out in Executive Order No 488/20 will be a problem rather than a solution.
Executive Order No 488/20 has also made amendments in connection with the rate to be applied to hydrocarbons and by-products exports. The previous fixed rate (12% in practice, as the implementation of a reduction to 8% was still pending) is replaced by a system of mobile rates pursuant to which the applicable rate will be 0% if the international reference price (Brent) does not exceed USD45, and will be determined by a certain formula set forth in the decree when such international reference price is higher than USD45 but not higher than USD60. If the international reference price is USD60 or more, the rate shall be 8%.
The amendment to the export duty rate, which is not subject to any term, is better than the previous fixed rate and might help incentivise exports once the international demand recovers.
Domestic issues (political uncertainty in the last quarter of 2019) as well as global issues affected the continuity of the process to fully develop Argentina’s shale resources and have interrupted the modest recovery of the country’s total oil production as well as the V-shaped recovery of the total gas production. It has also affected the implementation of projects for the construction of infrastructure required to evacuate the increasing shale production (like the call for bids in connection with the Vaca Muerta – Saliqueló gas pipeline, which is currently on hold) or the implementation of a liquefaction project that enables the country to develop an LNG market for its shale gas production in the future.
If the full development of hydrocarbon resources is really strategic for the government, as the president and other officials have declared, an incentives promotional package, like the ones that were discussed until January this year, should be enacted and implemented sooner rather than later, so as to offer the industry an interesting framework that encourages the sector to resume and increase investment and on-field activity once the demand begins to grow steadily and markets begin to normalise, as the pandemic is left behind.
In recent declarations, the Minister of Production (the Secretariat of Energy belongs to this ministry) and other public officials ratified that the government sees the development of the country’s hydrocarbon resources as critical for the future of the nation and that, to that end, incentives need to be given. In fact, such minister mentioned that a draft bill of a new law is ready to be sent to Congress as soon as the general situation allows the government and the Congress to devote to it. He also announced that a new incentives plan for the production of natural gas is being analysed and discussed with the industry and should be implemented shortly, in order to reverse or minimise the decline of production foreseen for next year as a consequence of low investment in drilling and fracking this year. The scheme would be similar to the “Gas Plans” put in place between 2013 and 2015 (different from the incentives programme of Resolution No 46/17) but with a lower guaranteed price (between USD3 and USD3.5 per million British thermal units).
Due to a cocktail of domestic and global issues, the whole chain of the hydrocarbon industry in Argentina has been severely affected and it is not clear when or how the activity will be able to recover as the Argentine economy might take a long time to improve after the pandemic, for several reasons (restructuring of the sovereign debt or default if the restructuring fails, pre-existent and now deepened fiscal deficit, lack of access to financing, pre-existent economic recession, etc).
In this scenario, it will be crucial that the government be consistent with the announcements made, and actually put in force incentives and benefits, and guarantee a certain degree of regulatory stability, in line with the drafts discussed in late 2019 and early 2020. Such incentives should focus on fostering investment in the whole upstream sector, including unconventional and conventional resources.
A new “Gas Plan” aimed at encouraging investment in the short term would be good and should help to mitigate the adverse effects on production derived from the low investment and reduced activity since the last quarter of 2019, and the need to increase imports of LNG and natural gas from Bolivia during the 2021 cold season.
Taking into consideration the recent Executive Order No 488/20, which would allegedly benefit producers but actually created a problem for them (at least in the near future) as well as the lack of consistency within the governing coalition, it is still to be seen whether the announced promotional benefits legislation will be passed and whether the sector of the government that seems to better understand the industry and the incentives needed will be able to avoid any potential bill from being contaminated with amendments or insertions demanded by other sectors, belonging or not to the governing coalition, with more radical left-wing ideas, or supporting an erroneous and anachronistic idea of nationalism.
Even if new legislation is passed and the provisions contained therein are reasonably good for the industry, it will be of the essence that, thereafter, the government abides by the terms and condition set out therein, refraining from introducing amendments (either expressly or by way of “interpretation” or supplementary issues of regulations by lower administrative authorities).
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