Delving deep into Argentina’s LNG, hydrogen bills

Argentina is working on the legislative front to help attract investment in LNG production infrastructure and low-emission hydrogen projects.

Regulatory frameworks that incentivize and protect investment are widely deemed a vital piece of the jigsaw puzzle – as are improved macroeconomic stability and offtake contracts.

The country holds abundant natural gas and renewable energy resources and, in the case of green hydrogen, swathes of land for deploying clean energy plants.

LNG and hydrogen projects have been announced but are still at the engineering and studies phase.

To find out more about two bills recently submitted to congress – one focused on LNG and the other hydrogen – BNamericas conducted an email interview with Augusto Damiani, audit partner-oil & gas lead at the Argentine office of professional services firm KPMG.

BNamericas: For potential investors, what appear to be some of the key pillars, or most important aspects, of the LNG bill?

Damiani: The bill relating to the establishment of a regime for the promotion of liquefied natural gas, or LNG, aims to establish a legal regime that provides the necessary stability in legal, economic and fiscal terms that investors require to bet on LNG in Argentina.

Argentina has enormous potential with [unconventional hydrocarbons formation] Vaca Muerta, which has already demonstrated world class productivity and is the country with the second largest amount of unconventional gas resources in the world.

From the significant increase in oil and gas production that Vaca Muerta had in the last five years, other problems began to arise, mainly in terms of product distribution. And it is from there that the first ideas regarding LNG emerged in Argentina, because the liquefaction of the gas allows its volume to be reduced by 600 times and, therefore, makes its distribution more viable and less complex and expensive.

Different players from the world of O&G have shown interest in investing in LNG in the country, in a global context of growing energy demand, greater requirements regarding emissions reduction, and significant price increases in hydrocarbons in general. But until now, the main obstacle to making these investments comes from the legal and economic instability that Argentina represents for investors, considering the current context of high inflation and shortage of foreign currency.

It should be noted that LNG-related projects are long-term projects, given that not only does the infrastructure take years to build and complete, but the [lag for] return on investment is even greater. Therefore, any regime that wishes to promote investments of this type must consider these factors when implementing it.

The bill in question aims for Argentina to become an LNG exporter, a scenario that could substantially modify and improve the country's macroeconomics in the future. For this, it grants the possibility of presenting investment projects during the first five years of the rules entering into force with the requirement of an investment commitment of at least US$1bn and a minimum production capacity of 1Mt of LNG a year. 

Among the main benefits provided by the bill are the following:

• It allows exports throughout the year and for 30 years, even in the winter months, which are those when domestic consumption is highest

Fiscal benefits:

• non-fixed withholding tax for export rights: establishing different percentages based on the international price of LNG (0% up to US$15/MMBTU, 8% to US$20/MMBTU).

Income tax:

• accelerated depreciation of assets for income tax purposes, which permits a smaller payment in the initial years
• maximum rate of 30%, compared to 35% for other economic activities in general
• deduction of interest and exchange rate differences generated by the financing of the project
• compensation for losses in up to 10 years and updatable using the consumer price index if certain conditions are met, among others

Access to foreign currency: The bill grants freedom to access foreign currency for payments of capital, interest and dividends of up to 50% of what is obtained from exports, a measure that attempts to grant predictability on a fundamental aspect that today is hindering investments in the country as consequences of the measures to alleviate the current macroeconomic situation.

Likewise, the bill tries to promote local development, since it requires investments with national content, increasingly as the years go by: 15% the first 10 years, 30% from year 11 to 20, and 50% to 30 years. 

BNamericas: And for the hydrogen bill?

Damiani: In the case of the draft law for the promotion of hydrogen, it responds to two main areas that Argentina must address. On the one hand, the country's commitment to reduce carbon emissions, which emerged from the Paris Agreement. On the other hand, provide a regulatory framework for a sector that has the potential to develop in the country, even parties interested in investing and developing projects, but little knowledge today of how to carry it out.

The bill promotes the use of hydrogen for power generation, granting benefits that are differentiated based on the origin of the hydrogen, and has a term of 30 years.

It should be noted that hydrogen is one of the elements some countries have decided to bet on to achieve the decarbonization of their energy matrix. Hydrogen is the simplest and most abundant element in the universe. Its combustion does not generate emissions by itself, but it releases water. One of its main advantages is that it is storable and transportable since it can be compressed and stored in tanks.

Considering these factors, it could be used for land transportation, either as a replacement for fuel in the tank and in the internal combustion engine, releasing water, or through conversion in a fuel cell, where hydrogen decomposes, releasing electrons and generating electric current. These potential uses in the automotive industry and transportation in general, in which the industry is already investing and developing, make it attractive when analyzing investment projects in hydrogen.

It can be obtained through different processes and sources, the most relevant being the following types:

• Green hydrogen: obtained through a process called electrolysis, which uses electrical energy generated by renewable sources to separate water into its components, hydrogen and oxygen.
• Pink hydrogen: obtained using nuclear energy.
• Gray hydrogen: obtained from the reformation of natural gas.
• Black hydrogen: obtained from the gasification of coal.
• Blue hydrogen: obtained from the two previous processes, but applying carbon capture, storage and use techniques, which decreases the emission of equivalent carbon dioxide.

The bill seeks to establish this regulatory framework, giving predictability to investors in this type of project, promoting those with low emissions.

The main benefits of the bill are:

• Accelerated amortization of the income tax on goods, whose term varies depending on the type of hydrogen obtained
• Accreditation and/or advance return of VAT generated by the purchase or manufacture of capital goods or infrastructure works for the production of hydrogen
• Deduction of the financial charge, generated by the financing of the project, from income tax
• Compensation of losses in up to 10 years
• Exemption from duties and rates on the importation of goods for hydrogen production projects for the first 10 years after the entry into force of the law
• Fiscal stability for up to 30 years
• Freedom to access foreign currency for up to 50% of what is obtained from exports
• Export duties of 0% during the first 10 years, which will increase differentially depending on the type of hydrogen.

Likewise, the bill creates a national hydrogen agency as a decentralized body in charge of advising the relevant authority.

As in the case of the LNG bill, the hydrogen promotion bill establishes requirements for the integration of local content, which varies from 20% to 50%, depending on when the investment project is carried out and of the type of hydrogen that is finally going to be obtained, with the possibility of calculating the surplus against income tax of up to 10%.

BNamericas: It seems to us that, today in Argentina, everything indicates that the investment would reach the LNG sector first. What do you think?

Damiani: Natural gas has been adopted by the world in general as the transition fuel towards cleaner and less polluting energies. We can visualize that investment in LNG may come first considering that it is a fuel that is currently used in the world in large quantities to generate electricity and increasingly replace the use of coal and oil. Likewise, there are already LNG-exporting countries such as Australia, the US, Qatar and Russia, among others, so it is an area that requires less research, development and experimentation compared to hydrogen as an energy source, which is in a more incipient stage. 

We already know the potential of Vaca Muerta, and that is the key for Argentina to develop LNG given the large amounts of resources that the country has – more than 800Tf3 of unconventional gas.

Additionally, there are oil companies interested in developing the infrastructure projects necessary for gas liquefaction. If a regime is established that can give predictability to the main concerns of all parties involved, it is to be expected that investments will arrive first in this sector. Basically what is being expected to invest is that we demonstrate, at the country level, that we can provide legal and economic security in the medium and long term.

In any case, it is important to highlight that predictability is precisely needed given that these are long-term projects, both for infrastructure and for the production and export of LNG. As an example, it is estimated that the construction of the LNG plant may take up to 10 years. For this reason, the bill also establishes benefits of different types for 30 years, in order to establish a reasonable time horizon for the purpose of developing the sector.

BNamericas: The respective regulations are going to be key, it seems. Is it the case that specific details are generally the most difficult to establish?

Damiani: The key for this bill to be a success depends on the regulations and provisions that the enforcement authority must deliver based on what the law permits and requires. For this reason, it is important to discuss these bills as soon as possible and also to establish deadlines for the regulations, in order to give investors confidence and so that the benefits provided by the bills take on even more relevance and are visibly feasible, to spur development of projects. For example, the guidelines for the eligibility of projects will be key, as well as the mechanisms for calculating the national component.

BNamericas: Is there a general consensus in Argentina on the macroeconomic factor – that is, is an improvement considered an important enabling condition for the development of projects?

Damiani: The key to achieving sustainable economic development that permits a changing of the Argentine economic matrix and avoiding the recurring crises lies in achieving investment in long-term projects that allow the generation of genuine foreign exchange and skilled jobs. But to carry out this type of project, it is imperative to have a regulatory framework that grants economic, political and regulatory predictability in general.

For this reason, these long-term bills, which declare a national interest in these key activities such as hydrogen and LNG production and will be executed during different presidential and legislative terms, must grant sufficient confidence and security to investors that the rules of the game are clear and will not be changed once approved. This can give the necessary impetus to investors to believe and trust in the country, thus generating development and growth possibilities that help stabilize Argentine macroeconomics.