Argentina cuts wellhead crude prices

OREANDA-NEWS. January 12, 2016. Argentina's new government has cut artificially high wellhead crude prices by 10-12pc as part of a wider market-oriented economic adjustment.

Despite the price cut, wellhead crude prices remain above international levels for now. The decrease is aimed at preventing consumer fuel prices from soaring after the devaluation of the local currency last month.

Some of the cost of the devaluation will be passed on to the consumer that will face a 6pc increase in pump prices for gasoline and diesel starting tomorrow, according to two industry executives. A further increase of at least 6pc is expected in March.

Producers of 34°API Medanito crude will receive \\$67.5/bl from local refiners, a 12.3pc decrease from the \\$77/bl they received previously, but retaining a steep premium to global prices. Lower-quality 24°API Escalante crude is now pegged at \\$54.9/bl, a 10pc decrease from the previous price.

The energy ministry was not immediately available for comment.

President Mauricio Macri, who was sworn-in on 10 December, lifted tight capital controls that had been in place for four years. The move triggered a currency devaluation of around 30pc.

Following the devaluation, energy minister Juan Jose Aranguren, a former Shell executive, had said the government would work to prevent fuel prices from skyrocketing.

The decrease in domestic crude prices was not unexpected. Last month, Aranguren said the higher prices would be maintained "until international prices recover." He also said the government would submit a bill to the congress to provide financial incentives for unconventional and offshore production.

Aranguren vowed the government would increase wellhead natural gas prices but no decisions have been made on that yet. During the campaign, Macri's opponent Daniel Scioli pledged to double wellhead gas prices to \\$5/mn Btu for existing production while maintaining new production at \\$7.50/mn Btu, which was part of a stimulus scheme implemented in February 2013.

The previous administration led by president Cristina Fern?ndez de Kirchner had set up the higher wellhead crude prices, among other incentives, to encourage exploration and production amid lower international prices. In addition to the higher wellhead prices it also subsidized oil production and exports by as much as \\$6/bl as part of a scheme that expired on 31 December. But the policy was not enough to overcome other investor concerns.

Although Argentina's extensive shale resources have drawn international interest, most oil companies have shied away from significant investments partly because of heavy state intervention in the economy, such as limits on repatriating profits, and relatively high development costs.

The new government is betting that the lifting of capital controls, including the ability to repatriate profits, will stimulate more upstream investment.

Argentina produced 533,000 b/d of crude in 2015, flat with the previous year. Gas production averaged 117.6mn m3/d (4.2bn ft3/d) in the first 10 months of 2015, a 3.6pc increase from the same period last year, according to the latest available data from the energy ministry.