ARGENTINA: An Introduction to Energy & Natural Resources: Oil & Gas

Introduction 

Around 13 years ago, Argentina’s upstream industry was facing significant challenges, marked by a sharp decline in production and reserves. This downturn was largely due to the rapid decline in the country’s conventional hydrocarbon assets, many of which were declining swiftly, while some were nearing depletion. Compounding this issue was a decrease in exploration activities, a consequence of the government’s policy implemented in 2001, which set wellhead prices at low and fixed levels. Notable areas affected by this downward trend included the Rincón de los Sauces region, the Neuquén Basin, the blocks located in Mendoza and the whole Northwest Basin, all reflecting the broader challenges faced by the industry during that period.

In this context, a 30,000-square kilometre geological formation in the Neuquén Basin, known as Vaca Muerta, came into the spotlight. Although it had been known for years, Vaca Muerta had not yet been commercially exploited. The formation drew attention due to its significant potential, boasting the fourth-largest shale oil reserves and second-largest shale gas reserves in the world.

Since then, pioneers like EOG Resources (associated with YPF in Bajo del Toro and Cerro Avispa) have spearheaded efforts to evaluate the formation’s true potential. These early ventures set the stage for remarkable advancements by both local and international companies. A notable example is the YPF-Chevron collaboration in Loma Campana, which marked the first substantial investment in the area. These efforts have transformed Vaca Muerta into a globally recognised, world-class asset. The development of Vaca Muerta has played a crucial role in counteracting the decline in Argentina’s conventional hydrocarbon assets. With less than a third of its area under extensive development, Vaca Muerta has been pivotal in restoring Argentina’s hydrocarbon self-sufficiency. Moreover, the country is now on the verge of exporting a significant surplus of hydrocarbon production for many years ahead, marking a significant turnaround in its energy sector. 

In this context, one of the most urgent challenges to be dealt with by the industry is the lack of sufficient infrastructure to cope with Vaca Muerta’s increasing production.

Several goals have been achieved in this regard during the last couple of years:

Last year, YPF and Petronas signed a memorandum of understanding for the analysis and eventual execution of a large LNG project, including the construction of a liquefaction plant as well as dedicated upstream and midstream infrastructure.

The other major challenge faced by all sectors, including the hydrocarbons industry, is to resolve the serious macroeconomic problems that have been affecting Argentina’s economy for several years. Among other issues, it is worth mentioning that (i) the projected inflation rate for 2024 is around 250%; (ii) the Argentine Peso suffered a 78% devaluation (against the US dollar) during 2023; (iii) the Central Bank has negative net reserves; and (iv) the country’s primary and financial fiscal deficits for 2023 were 2.9% and 6%, respectively, of the country’s GDP.

In this context, foreign exchange restrictions have become more stringent year after year, severely affecting the ability of companies to access the official foreign exchange market to pay dividends or repay debt abroad and pay for imports.

A New Pro-Market President in Office 

Javier Milei, a libertarian economist, was elected president and took office on 10 December 2023. Mr Milei, a relative newcomer to politics, was defeated by Sergio Massa (the former government’s minister of economy) in the first round of the general election, but then won the second round of the election, obtaining 56% of the votes cast – ten percentage points more than Mr Massa. However, due to the lack of a strong party structure supporting him, Mr Milei’s position at the National Congress is extremely weak, with only a few representatives and senators belonging to his party, which poses a huge challenge for the implementation of Milei’s radical libertarian ideas.

The new government has a totally deregulated approach to the energy sector, including oil and gas (in alignment with Mr Milei’s vision of the economy in general), and intends to limit the government’s intervention to the minimum, letting the market self-regulate as much as possible, with the idea of aligning with market prices and eliminating or significantly reducing subsidies on natural gas and electricity tariffs. The government has also announced its intention to eventually privatise several state-owned companies in many sectors, including, as regards the hydrocarbons sector, YPF or some of its assets. However, a law from the National Congress would be required for much of this privatisation.

Following his inauguration, Mr Milei promptly introduced an ambitious fiscal policy, aiming for an aggressive reduction of Argentina’s fiscal deficit. The objective was bold: to completely eliminate the country's fiscal deficit within a single year.

At the same time, the “Omnibus Law” bill was submitted by the government to the national Congress. The bill, which originally included more than 660 articles (eventually reduced to a third of that number), proposes to revoke or amend a large number of laws, deregulate many sectors of the economy, simplify regulations, and delegate legislative functions to the National Executive in relation to certain matters.

The bill contains several articles related to the oil and gas sector, including, among many others, provisions allowing upstream and downstream companies to freely commercialise hydrocarbons and their by-products without limitations or restrictions, both in the domestic and international markets, preventing the National Executive from fixing prices. The new provisions would also remove the requirement that domestic market supply must be guaranteed before natural gas can be exported.

The Omnibus Law bill also creates an investment regime for large investment projects that would apply to several sectors, including oil and gas.

These incentives include tax benefits such as special amortisation rules, reduced income tax rates, and reductions in import and export duties. Additionally, the investment regime offers foreign exchange benefits, which encompass the phased increase in the free availability of export proceeds, starting with 20% in the first year, 40% in the second, and reaching 100% by the third year following adherence to the regime. It also allows for the free availability of external financing for the project, along with unfettered access to the foreign exchange market for debt repayment and dividend distribution, and other benefits, such as the guaranteed ability to freely dispose of project output.

Furthermore, the investment regime provides a guarantee of stability for a period of 30 years from adherence to the project. This guarantee ensures that the applicable tax, foreign exchange, and customs regulations remain fixed, incorporating the preferential benefits offered by the regime. In the event of disputes arising from the regime, international arbitration serves as the exclusive mechanism for resolution.

After a month of intense negotiations, the government failed to secure the votes necessary to approve several provisions of the bill that it considered critical and non-negotiable and decided to terminate the voting procedure.

At this point, it is uncertain whether the government will resume negotiations with the other political forces in the House of Representatives in order to try and get the bill through. Alternatively, the government might consider splitting the Omnibus Law bill into smaller bills, each addressing specific issues. This approach could simplify negotiations, allowing for more targeted and potentially less contentious discussions on each aspect of the reform, thereby facilitating the passage of some or all components of the original bill. Another option is the implementation of parts of the reform package through lower-ranking regulations, such as “necessity and urgency” executive orders, which, subject to certain requirements, can be used in certain cases.

What is in Store for Argentina’s Oil and Gas Sector

The oil and gas industry in Argentina, particularly with the development of the Vaca Muerta resources, is regarded as a key sector with the potential to generate huge export proceeds. These resources significantly exceed the country’s current and anticipated future demand for hydrocarbons. Despite a consensus across major political forces, both in the government and opposition, on the industry’s potential, there are differing views on how to actualise this potential.

In line with its broader economic vision, the new government advocates for a fully deregulated energy sector, including the oil and gas industry. This approach favours minimal state intervention, providing a legal framework that allows companies to exploit resources or produce hydrocarbons by-products, and to freely dispose of the hydrocarbons and by-products produced. The government’s vision includes aligning prices with international market rates (either export parity or import parity prices, depending on the situation). 

As regards public utilities, including natural transportation, distribution and domestic consumption, the government intends to eliminate subsidies. This would mean that tariffs would fully cover the costs, including fees for transporters and distributors, with the exception of certain social tariffs designed for low-income segments of the population. Consistent with this deregulatory approach, the government is also inclined towards privatising state-owned companies or assets in the energy sector, among others.

The ability of the Argentine government to implement its economic plans, particularly those concerning the oil and gas sector, remains uncertain. This uncertainty is highlighted by the government’s recent inability to secure sufficient votes to pass the Omnibus Law bill. The bill’s oil and gas chapter was a clear embodiment of the new government’s approach to the industry, advocating for deregulation and reduced state intervention.

Having said this, we can expect the government to take the following actions:

Whether the planned actions will succeed in attracting the investment needed to fully develop Argentina’s oil and gas resources remains to be seen. The effectiveness of these actions will depend not just on the specific policies and regulations in the oil and gas sector, but also on broader macroeconomic and political factors.