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

A New Administration On a Learning Curve

Javier Milei’s presidency was inaugurated on 10 December 2023. Consistent with its plans for the economy in general, immediately after taking office the government announced its intention to deregulate the petroleum sector and took certain steps in this direction.

Such steps included a temporary adjustment to the electricity and gas distribution tariffs, whose costs were highly subsidised, and setting forth a schedule for the completion of an Integral Tariff Review to establish a new tariffs scheme for the next five years, contemplating, in the tariff calculation, the actual costs incurred by the distributor, the investment plans required to maintain and expand the transportation and distribution infrastructure, and a reasonable profit for carriers and distributors.

Other reforms, those that required the passing of laws, have proved to be much more difficult to achieve. In this respect, during the first semester of 2024 we have seen President Milei’s administration on a steep learning curve in respect of real-life politics and administration. The ambitious (it contained over 600 Articles) “Bases Law” bill (which amended hundreds of laws) submitted to the National Congress in late December failed to obtain the votes required to be passed and, thereafter, a long and complex political negotiation process began, which resulted in the passing of Law No 27,742 in early July. This Bases Law, although much shorter than the original bill, contains, among other significant provisions, several amendments to the legal framework for the petroleum industry, and a comprehensive incentives regime for large investments, applicable to large and long-term investment projects in certain sectors, including the petroleum industry.

Bases Law No 27,742

The law aims at providing the National Executive Power with the tools to deregulate several sectors and reduce state intervention in the economy. Two titles of the law are especially relevant to the petroleum industry: Title VI, which modifies several sections of the Federal Hydrocarbons Law and the Federal Gas Law, and Title VII, which establishes the Large Investments Incentives Regime.

Amendments to petroleum sector legislation

The law amended several sections of the Federal Hydrocarbons Law with a focus on liberalising the trade of petroleum products in the domestic and international markets, for freely agreed upon prices in accordance with prevailing market conditions. In this respect, substantial amendments were made to Articles 3 and 6 of this law.

The amended Article 3 now establishes, as a main objective of the national petroleum policy, the maximisation of the revenue obtained from the exploitation of the resources and the satisfaction of the domestic demand, although the requirement to satisfy the domestic demand with domestic production was eliminated from this provision. The amended Article 6 now establishes that producers shall be able to freely trade their hydrocarbons and by-products and limits the government’s ability to block exports based on domestic market supply.

The amendments to the Federal Gas Law include, among others, a provision whereby the export of natural gas will be regulated without the condition that domestic supply has been safeguarded and a regulation specifically applicable to firm LNG exports authorisations, which will be granted for 30 years.

Large Investments Incentives Regime (RIGI)

For the last few years, several sectors, including the petroleum industry have stated that, given Argentina’s track record, a comprehensive and stable incentives regime would be important to encourage companies to engage in large projects that will develop through several presidential terms. Title VII of the Bases Law contains a Large Investments Incentives Regime (known as “RIGI”, for its acronym in Spanish) that sets forth an unprecedented package of incentives that include tax, customs and foreign exchange benefits, a 30-year stability provision and provisions for international arbitration to resolve disputes with the government.

The regime contemplates projects in the tourism, infrastructure, mining, technology, forestry, steel, energy and petroleum sectors.

The Minimum investment required is USD200 million, although the enforcement agency will be able to increase this figure to up to USD900 million for certain sectors, sub-sectors or stages of projects; 40% of the minimum investment required must be spent within the first two years of the project.

The incentives include:

• foreign exchange benefits – ability to access the foreign exchange market to remit dividends and pay external debt, among other things;
• tax – a reduced income tax rate and early amortisation, among other things; and
• customs benefits – an import duties exemption in respect of capital goods and supplies.

The regime provides for tax, customs and foreign exchange stability for 30 years and for the beneficiary’s right to submit disputes concerning the regime to international arbitration.

Several aspects of the RIGI need to be complemented or clarified by the secondary legislation to be issued by the National Executive Power, the Central Bank and the Federal Public Revenue Agency.

Opportunities and Challenges Ahead

The passing of the Bases Law was good news, not only because of its content, but also because it showed that the government was able to have an important law passed by the National Congress, based on a better understanding of the dynamics of parliamentary politics and the political context in which the new president has taken office, with just a handful of legislators belonging to the governing party. Initially, the government submitted an enormous bill and urged the members of the moderate opposition parties to vote for it as it was. After the government’s failure to obtain the votes necessary to pass the law, a complex and long negotiation process began, in which several trade-offs were agreed with members of the “soft” or moderate opposition parties, which eventually resulted in the passing of a negotiated law, based on a general consensus of a majority of legislators pertaining to centre and centre-right parties, including the centre-right wing of the traditionally populist “Peronista” party.

As regards the petroleum sector, the passing of the Bases Law provides the government with tools that will allow it to implement policies towards a more deregulated market, in which producers shall be able to freely market their petroleum products, either on the domestic market or on external markets, for freely agreed market prices, subject to less stringent restrictions. An example of this would be implementing a more expeditious procedure to obtain crude oil export authorisations, instead of the current procedure, under which each intended export is subject to a preferential purchase right by local refiners, who have the right to block such intended exports and purchase the crude oil, paying for it the prevailing domestic price.

However, for these free-trade principles to effectively contribute to a massive increase in investment in the petroleum sector, the implementation thereof should be paired with a substantial gain in flexibility, and ultimately the entire removal, of current foreign exchange restrictions that have been in force for the last four and a half years. The beneficial effect on investment that would derive from the elimination of, or greater flexibility in, restrictions on exports of petroleum products, and from the producers’ ability to charge prices to the domestic market that are more or less aligned with export-parity prices, would be limited by foreign exchange restrictions like the ones currently in force, whereby exports proceeds would have to be brought to Argentina and exchanged for pesos at the exchange rate applicable at the official foreign exchange market (considerably lower than the “blue chip swap” implied exchange rate), while exporters will not be able to access the foreign exchange market to remit dividends abroad.

Provided certain requirements are met, the government intends to begin to gradually lift the foreign exchange restrictions in the last quarter on 2024 and to have such restrictions substantially removed by the end of 2025.

RIGI will provide companies in the petroleum and other sectors (especially mining) with a reasonable degree of comfort in connection with foreign exchange matters, as well as significant tax and fiscal advantages, together with a 30-year stability clause and the ability to submit disputes to arbitration under ICC or other international arbitration rules.

In this new scenario, certain major projects for which final investment decisions were on hold or conditioned upon the implementation of a comprehensive set of incentives, could be launched in the near future. In the petroleum sector, such investments include LNG liquefaction (and related midstream facilities) projects by a YPF-Petronas consortium and by Pan American Energy and the Vaca Muerta Sur crude oil and maritime terminal project, which is led by YPF but will include other upstream companies and, probably, a large international midstream operator. Other midstream and petrochemical projects are also being evaluated and could be announced next year.