Who may benefit first from eased capital controls in Argentina’s O&G sector?

Current Argentine oil exporters would potentially be first to benefit from an easing of capital controls in the hydrocarbons sector, rating agency Fitch told BNamericas.

Economy minister Martín Guzmán recently announced the measures, under which oil and gas firms are granted access to dollars.

The move comes amid strong international energy prices and geopolitical shifts, which the country wants to leverage to boost economic growth.

A key objective of granting access to the forex market is to facilitate the import of specialist equipment needed to boost output, which would reduce reliance on imports and spur increased exports that, in turn, would help bolster the central bank’s depleted foreign reserves.

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Any associated increases in oil production would likely take more than a year to record.

“The immediate beneficiary of this is probably Pan American Energy as they’re currently a net exporter of oil,” Julieta Seebach, Fitch’s Latin America corporates director, told BNamericas. Pan American Energy produces around 125,000b/d of crude.

Another private sector player that is currently exporting, CGC, which produces around 21,000b/d, could also obtain benefits in the short term. Other major sector companies, such as national hydrocarbons firm YPF, whose oil output is currently absorbed by the local market, and gas-focused private player Pampa Energía would first face investment requirements. Another key upstream player, Vista, said earlier this year that it would boost crude exports.

During its last results call, YPF said it was moving ahead with plans to revive oil exports to neighboring Chile much more rapidly than outlined by authorities in meetings that took place last month.

Oil sector investment would likely flow chiefly into unconventional hydrocarbons fields in the Vaca Muerta formation, which has been driving growth in national output amid a downtrend in production of conventional oil and gas elsewhere.

Pan American Energy currently produces about 80% of its oil from conventional assets in the Golfo San Jorge basin, with around 16% from Vaca Muerta. 

Under the new framework, hydrocarbons firms can obtain dollars from a proportion of additional output, with 2021 production as the baseline. A 2021 hydrocarbons investment promotion bill, which contained similar measures, remains in congress.

A central question is whether the bespoke forex carrot – which had been expected – is big enough to tempt upstream players, who still face high financing costs on account of the country’s risk profile. The predictability of the regulatory environment, given that the rules will be implemented via decree rather than legislation passed in congress, is also a factor.

On the new capital controls measures, Seebach said: “It makes economic sense. It’s an opportunity not only for the companies to generate hard currency revenues, but also the country.”

Firms would focus on both midstream and upstream investment. “Infrastructure is a critical component for success,”  Seebach said. 

Omar Gutiérrez, governor of Neuquén province – which sits over the biggest chunk of Vaca Muerta and the Neuquina basin – said the move was positive, but that a special framework was required for acquisition of equipment. 

“To accelerate the development of Vaca Muerta, new equipment is needed that is neither manufactured nor available here [in Argentina],” Gutiérrez said in a statement from the provincial government. “There is a lack of a regime that permits companies to obtain the equipment necessary to accelerate the new investment and it's necessary to advance with infrastructure work.” 

Oil is easier to export than gas, which is currently piped to offtakers in Chile, Brazil and Uruguay during the Southern Cone’s warmer months, when Argentine domestic demand eases. Exporting gas to overseas markets would require major investment in liquefaction facilities and production assets.

Argentina imports some refined petroleum products, including diesel and premium grade gasolines, to help meet demand. The country has a local crude oil reference price, known as the “criollo barrel”, which was around US$60/b earlier this year. Argentina exports oil via maritime tankers, while a mothballed oil export pipeline connecting Neuquén province to Chile – the Transandino duct – could be back online this year. Other midstream oil and gas expansion work is being carried out.

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To help defend the peso, Argentina began implementing capital controls even before President Alberto Fernández took office in 2019. Argentina fell into an economic tailspin around mid-2018.