The government of Argentina has moved to attract international oil companies (IOCs). At this time last year, prospects for investing in the country’s Vaca Muerta shale were quite negative from the political and regulatory sides. The trouble with Argentina as usual is government and politics, said Roberto Aguirre Luzi, partner, international arbitration practice, King & Spaulding.

“Argentina doesn’t have the capability to get all the infrastructure and technology needed to develop this play. And there were lot of import restrictions in the regulations and in the way the government was enforcing those regulations,” he told participants at King & Spaulding’s forum on “Unconventional O&G Projects in Argentina: What Can IOCs Expect?” on Nov. 21, 2013.

“Even the Argentine president in a speech Nov. 20 said that the country needs IOCs. They need companies with the expertise, know-how, and more importantly with the financial strength to support them in their business to bring back production of natural gas quickly in order to reduce the fuel account,” he continued.

Aguirre explained that macroeconomics have gotten worse in Argentina during the past year with annual inflation reaching 25%. The energy crisis has gotten worse with the country importing more and more energy. Energy imports, especially LNG, is having a huge impact on the economy with federal reserves dropping to the lowest level since 2005, which is below US $30 billion. “This is going to put a lot of pressure on this administration and especially on the next administration. This is something serious,” he said.

Argentina still has state interference in the sector, depressed gas prices, no exports of natural gas, strong regulations on the oil pricing mechanism, taxes that depress exports of oil, and foreign exchange restrictions. Investors are frustrated. They can get their money into the country but can’t get it out, which means the country is not on the right track, he added.

New Regulations Are Foiled

The government recently announced new regulations that were approved to fast-track importing drilling rigs and equipment needed to start developing Vaca Muerta, which is actually working.

Although the regulation is good, companies still have to deal with government officials. One of the worst officials to deal with was Domestic Commerce Secretary Guillermo Moreno. He actually decided what could or could not be imported over the phone. He did not let the regulation work.

“The good news is that he resigned Nov. 19. There’s hope that maybe the next person would let the system work and stop using the phone to approve or not approve imports. The main force behind this was the provinces, particularly Neuquen Province,” Aguirre said.

Energy Cost Drives YPF Nationalization

The biggest driver behind the expropriation of YPF was energy imports. The current energy account has seen a large deficit over the last five years. In 2012, it was $9 billion. For 2013, it is $12 billion. Next year, it is going to be $13 billion.

“For a country the size of Argentina, that’s huge. They have managed to survive so far because of soy exports. The value of those exports has given them enough reserves to play around importing LNG and natural gas from Bolivia. But, that’s unsustainable in the future. They know that, and they’re trying to address it,” he continued.

Over the last 14 months, a number of deals have been signed with foreign investors. Some of them with YPF are just for the international market, while others are for the Vaca Muerta play and offshore. In July 2013, Chevron signed a deal with YPF to invest $16.5 billion to develop the Loma Campana block in the Vaca Muerta. Another contract was signed by YPF and Dow Chemical in September for a $188 million pilot project on the El Orjano block. Wintershall closed a $3.3 billion deal with Gas y Petroleo del Neuquen for the Aguada Federal block. YPF signed an agreement with Petrolera Pampa for $151.5 million to develop shale gas on the Rincon del Mangrullo block.

“There are some tricks here. Most of them have pilot projects in the initial phases. So it’s an early exit in case things don’t go as planned. It looks like something has changed. What has now changed? Is Argentina now attractive? Is it attractive from the business side? Is it attractive from the regulatory, political side?” he asked.

“The main reason for the majority of these projects is Federal Decree 929 that was passed last July. This provides an ad hoc solution. It is not a long-term solution. It is what the administration could grant without going to congress during an election period. Mid-term elections took place last October, and the government didn’t do well,” Aguirre said. “This was the government answer to the IOCs’ request for ‘I want to invest, but I need some incentive, some certainty.’”

There are some specific incentives for shale concessions. What Decree 929 provided is that those concessions that are about to expire that carry a short-term duration, which is the situation for most of the concessions on the Vaca Muerta play, can obtain a new unconventional concession for 35 extended years. However, this is something that hasn’t been tested by the courts. This was done by the president. The industry needs to see how the courts will react to it.

This decree also acknowledged that there was no distinction between conventional and unconventional reserves in the old hydrocarbon law. “This decree is only what this administration was able to offer without entering into a political fight. I believe the next administration will overhaul this system to stop enforcing some of the legislation that wasn’t repealed. The other way to change the law has strong risks. That would be to pass a new law. That will be the most preferred and the most difficult too,” he continued.

Benefits From Vaca Muerta

The Vaca Muerta has a very low population density. The Neuquen Province is quite pro industry. Listening to the shale players, the provincial government imitated some of the US regulations, passing regulations which basically copy what is in the US.

Water, according to Neuquen Province, is not a problem. Producers can take advantage of the largest river basin in Argentina. According to the province, only 1% of the water resource will be used per year. The province is strongly supporting this unconventional production, he added.

Getting Worse Before Getting Better

Companies need to know that if they come to Argentina, they are gambling. “Today things can get really bad. This opportunity looks very good. But nobody knows what is going to happen. They all have hope and faith. Argentina has been cyclical. I think we are reaching the end of one cycle and beginning the next one. But, nobody knows what’s going to happen,” Aguirre said.

The good news is that elections are going to be in 2015. “I think that all the presidential candidates today are market friendly. They know they need to develop Vaca Muerta. They need that gas to reduce the fiscal issues that they have today,” he continued. “Unfortunately, things are going to get worse in the next 18 months from an economic, macroeconomic perspective. Everybody agrees things are not going to improve short to mid-term.”

Contact the author, Scott Weeden, at sweeden@hartenergy.com.