Spotlight: Alberto Fernández’s Vaca Muerta plan

A bill being discussed by Argentine president-elect Alberto Fernández’s economic team to protect investment in the huge Vaca Muerta formation will include shielding investors from capital controls and significant tax benefits.

The measures being considered include free access to foreign currency for oil and gas companies and incentives aimed at achieving steady LNG exports, including a temporary suspension of export duties, according to local newspaper La Nación.

While gas producers struggle to cover demand during the winter months of June-August, during the rest of the year producers must find ways to dispatch extra gas, store it or curtail production in an oversupplied market.

Argentina’s shale oil market could develop by itself by removing unnecessary government intervention, analysts say, but Fernández’s economic team feels the gas market faces more complex problems that need targeted solutions.

LNG STRATEGY

To take best advantage of Vaca Muerta, which contains much more shale gas than shale oil, both the market and the price must be stimulated to make large-scale investments attractive, hence officials are mulling incentives to build a US$5bn liquefaction plant, probably in the port city of Bahía Blanca.

Several companies have expressed interest in building the plant in the past, including state-controlled YPF. The plant, however, would cost considerably more than the NOC’s entire annual capex, so various firms are expected to build it together. Since the new administration, which takes office December 10, is expected to change YPF's leadership, it is likely the company will spearhead the project.

A major liquefaction plant would help unlock big international markets, especially Asia and Europe, and spur large-scale development, bringing down the unit cost of producing gas. The bill would eliminate LNG export duties both at the federal and provincial level and suspend stamp duties on any contract involved in the construction of a liquefaction plant. The bill would also reduce royalties on any gas production destined for LNG from the current 12% to 5% for the first 10 years and 10% for the following 10. The bill would also make contracts with LNG offtakers non-interruptible, meaning only shipments exceeding the maximum in the contract can be interrupted by the government in case of excessive domestic demand.

The bill would also establish a 25-year contract framework, extendable if investments increase, along with a series of protections for investors and other players in the value chain.

Participants will be shielded from any form of capital controls, guaranteeing the freedom to make full use of the foreign currency derived from exports, including the ability to repatriate profits. The same would apply for currency controls, allowing companies to buy and sell foreign currency freely.

Also, the law would establish fiscal stability for the length of the contract, preventing federal and provincial governments from modifying taxes, introducing new ones or scrapping previously established tax benefits. If fiscal stability were broken, those affected would have the right to full and immediate compensation, according to the draft.

Exploration would be subject to immediate tax deductions, and investments in production, plants, equipment, pipelines and infrastructure would enjoy accelerated depreciation.

OIL MARKET

The outlook for the local oil market recently got a big boost as Mauricio Macri's government decided to unfreeze oil and fuel prices. But energy ministry authorities defied expectations and did not establish a framework to gradually increase prices, choosing instead to return to the standard regulatory framework at once.

As a result, it will be harder for the next administration to interrupt regulation again. The fact Fernández aims to boost the sector suggests he is likely to refrain from direct intervention, at least initially. However, the current administration’s move to freeze prices did negatively affect investor sentiment. Investors are likely to remain in wait-and-see mode until Fernández assembles an economic and energy team and outlines policies for the sector. Vice president-elect and former president Cristina Fernández has a history of freezing prices and heavily intervening in the energy sector, which bodes ill for regulatory stability, especially in times of crisis. 

Vaca Muerta, the world’s second largest shale gas deposit, has undeniable potential, although Argentina has had trouble avoiding policy shifts that undermine investor confidence. That is partly due to the lack of regulation for the formation’s development, relying instead on presidential decrees that can be modified arbitrarily.

During good times, this matters little, but when crisis hits and fiscal pressure mounts, Argentina has a track record of freezing prices, setting capital controls, forcing companies to liquidate dollar reserves and reneging on promised subsidies.