Argentina boosts subsidies for oil output, exports

OREANDA-NEWS. February 05, 2015. Argentina's government will subsidize oil production and exports by as much as \\$6/bl as part of a stimulus program to prevent a drop in output amid lower international crude prices.

The government will provide an additional \\$3/bl to companies that maintain or increase output when compared to the last quarter of 2014. Exporters will receive an additional \\$2/bl for crude sold abroad, which rises to \\$3/bl for companies that increase the amount exported from last year, according to a resolution published in the country's Official Bulletin today.

Companies that export crude will be eligible for both subsidies.

The additional money per barrel will be paid as long as producers of 34°API Medanito receive no more than \\$84/bl for their output, including the subsidy, while those who produce 24°API Escalante, much of which is exported because it is too heavy for the domestic refining network, can receive a maximum of \\$70/bl.

The program is retroactive to 1 January and expires at the end of the year, although it can be expanded for an additional 12 months. The stimulus program was unveiled after several meetings between the federal government, oil-producing provinces and companies in the sector to come up with plans to maintain production in the face of price volatility.

The efforts to stimulate the sector come more than a month after Argentina cut its heavily regulated domestic crude price by \\$7/bl on 23 December to facilitate a 5pc fall in retail fuel prices from 1 January.

Before the decrease, Medanito producers received around \\$83/bl from local refiners. Escalante fetched around \\$67/bl.

Starting in 2015, the government also implemented a system of sliding scale export duties on crude oil to as low as 1pc in an effort to ensure the viability of overseas sales. As long as Brent crude remains below \\$79, oil exporters will only pay a 1pc duty. Under the previous system, exporters paid 10pc if prices were below \\$70/bl, 11.5pc at \\$70-75/bl and 13pc if prices increased up to \\$80/bl.

The company that could most clearly benefit from the new subsidies is state-controlled YPF, which has been steadily increasing output over the past year. But the potentially biggest beneficiary of export subsidies is BP-controlled Pan American Energy (PAE), which is reponsible for 90pc of the country's crude exports. PAE is 60pc controlled by BP with the balance held by Bridas, a 50:50 joint venture owned by Argentina's influential Bulgheroni brothers and China's state-owned CNOOC.

The incentives for oil production, which for now mean companies can receive far better prices domestically than in the international markets, coincides with the government's efforts to attract international companies to its emerging shale play. Yet even before oil prices began falling in mid-2014, many international firms remained skeptical about investing in Argentina because of government intervention in the sector, high costs and uncertainty about its international credit situation.

Argentina remains locked out of international capital markets. Although the country already had limited access to international capital markets since its 2001 default, the government's credit situation worsened in July, when it was not able to service restructured bonds as a result of a US court ruling, leading to a partial default.

YPF is bucking the trend, and will issue \\$750mn in bonds today in what is the company's first effort to tap international debt markets since the July default.

YPF is the company that has been the most active in the Vaca Muerta shale formation, largely in partnership with Chevron. The two companies have invested around \\$3bn in the country's first large-scale shale oil production project. YPF is also carrying out a shale gas project with Dow Chemical, is set to start a \\$550mn shale oil project with Malaysia's state-owned Petronas soon and last month signed a preliminary partnership with China's state-owned Sinopec.

Other foreign firms, including Shell and Total, hold stakes in significant Vaca Muerta acreage.