Argentine passes reform bill to spur oil investment

October 31st, 2014

Awake Goy

World Bulletin/News Desk

Argentina’s government secured congressional approval Thursday for a reform it sees as key to rebuilding oil and natural gas production after a decade of decline.

The lower house passed the reform bill 130-116 with one absentee after more than 14 hours of floor debate, sending the Senate-approved legislation to President Cristina Fernandez de Kirchner to sign into law.

Mario Metaza, a ruling party congressman who runs the energy committee, said the law will “attract the necessary investments” so the country can regain “energy self-sufficiency.”

Latin America’s third-largest economy had been a net exporter of crude, gas, gasoline and other products from the mid 1990s to 2004 after a flood of foreign investment led to a surge in production and refining capacity.

However, the investment started drying up after a 2001-02 economic crisis reduced profit potential that was worsened by a rise in state intervention with price controls, tax hikes, export restrictions and shifting regulations.

This spawned a 20 percent decline in oil and gas production, forcing the government to restrict energy exports and turn abroad for increasing amounts of diesel, gas and gasoline supplies, and, beginning this year, more crude. The decline turned a long-running energy trade surplus into a deficit, estimated by the government to reach $10 billion this year. The energy imports, in turn, have become a major drain of dollars that is shrinking central bank reserves needed to pay for other imports, service the national debt and finance a fiscal deficit now surpassing 4 percent of gross domestic product.

With the law, “energy sovereignty will become a reality,” said Juliana Di Tullio, head of the ruling party’s bloc in the lower house. “This will benefit all Argentines who will be able to buy fuels at logical prices.”

The legislation cuts some taxes on the oil sector, provides fiscal incentives and makes it easier for companies to bid on tenders for field licenses. Also, licenses will be extended to 35 years for unconventional projects and 30 years for offshore, up from 25 years for conventional oil and gas. All of the licenses will be eligible for 10-year extensions, while production royalties will be capped at 12 percent for the initial 25-35 years of the concession, and then 18 percent during the extension.

Developers, too, will be able to export up to 20 percent of their dollar profits without restrictions.

Critics said the reform is too lenient on companies, exposing the country to corporate abuse.

Ricardo Alfonsin of the Radical Civic Union, the country’s second-biggest political party, said the government wants with the reform “to resolve problems that it created with its previous mistakes.”

“Until now it didn’t consider the importance of private interests, even though 100 percent of the (oil) activity was in private hands. Now it is disregarding public interest.”

Most oil companies in the country have come out in favor of the reform, saying it will help speed up investment, including in developing Vaca Muerta, a southwestern play considered among the greatest potential in the world, according to the U.S. Energy Information Administration.

Argentina’s state-run energy company, YPF, has started to produce shale oil and gas from the play in partnership with U.S.-based Chevron.

Now other companies are exploring the potential, including U.S.-based Exxon Mobil, France’s Total and the Netherlands-based Shell.

If the investment continues, Argentina could become self-sufficient in oil and gas supplies by between 2020 and 2025 as production surges, according to estimates by Dublin-based consultancy Accenture.

It estimates that the development of Vaca Muerta will more than triple national oil and gas production by 2035.

And for that to happen, congressman Metaza said the law is key to attract more oil majors.

“We need many Chevrons,” he said.

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