Written by Chloe Marie – Research Fellow
The Global Shale Law Compendium series addresses legal developments and other issues related to the governance of shale oil and gas activities in various countries and regions of the world. In this article, we will highlight governance actions taken by Argentina to develop policies specific to shale gas development.
Argentina holds an estimated 308 Tcf of technically recoverable shale gas reserves located within the Neuquen basin in the Vaca Muerta formation. Several local and international energy companies have already begun exploration work, including American Energy Partners, Dow Chemical Company, Chevron, Exxon Mobil, Apache Corporation and Americas Petrogas, most of which partnered with Argentina’s state-owned company Yacimientos Petroliferos Fiscales (YPF).
On January 14, 2016, American Energy Partners, an Oklahoma-based company, signed a joint venture agreement with YPF to drill exploration wells at the Bajada de Anelo block covering 200km2 in the Neuquen province. The project is scheduled for completion in 2018. As for Dow Chemical Company, it entered into a $118 million joint venture agreement with YPF in September 2013 to drill wells at the Ol Orejano block in Neuquen province. In December 2015, YPF and Dow announced that they would commit an additional $500 million investment to exploit shale gas. On July 16, 2013, subsidiary Chevron Argentina S.R.L. signed a $1.24 billion agreement with YPF for the development of shale oil and gas resources from the Neuquen basin. ExxonMobil Exploration Argentina S.R.L. invested $200 million to explore the Neuquen basin and now holds working interest in the Bajo del Choique and La Invernada blocks with provincial state-run oil company GyP Neuquen. On August 30, 2011, Americas Petrogas, a Canadian company, entered into a farm-out agreement with ExxonMobil Exploration Argentina S.R.L. for the exploration and potential exploitation of Los Toldos blocks in Neuquen province. Finally, Apache Corporation, a Houston-based company, partnered with YPF in the exploration of shale gas but, in February 2014, agreed to sell its Argentina energy assets to YPF for $800 million in cash due to financial difficulties.
In September 2015, YPF announced that it was in negotiations with Gazprom to develop shale gas projects in the Neuquen region. In addition, Royal Dutch Shell announced in September 2016, that it could invest $300 million in Argentina through 2020 for shale gas exploration in the Neuquen basin.
The Argentine Constitution provides for a federal union of provinces: 23 provinces and one autonomous federal district, Buenos Aires. Provinces are fully autonomous with their own Constitution, laws and judicial system, and local governments organization. They, however, must not contradict the national Constitution. Provinces also hold all the power that they chose not to delegate to the federal government. With regard to the energy sector, the National Secretariat of Energy and the Ministry of Federal Planning, Public Investment, and Services represent the enforcement authority for the hydrocarbon regime and set general rules for the oil and gas industry. Provincial governments, however, retain the power to issue exploration permits and exploitation concessions and set tax and royalty regulations. Under the Hydrocarbons Law, provincial governments own the surface above oil and natural gas resources. As for the national government, it owns offshore oil and gas fields. The extracting companies own the minerals underneath the surface once extracted.
In order to overcome the acute imbalance between energy supply and demand, the government of Cristina Fernandez de Kirchner adopted law no. 27.007 in October 2014 reforming the prior hydrocarbon law no. 17.319, which dated back to 1967. Under the so-called New Hydrocarbon Law, the Argentine government implemented two main changes: (1) unconventional oil and gas development has been integrated into the hydrocarbon regulatory framework, and (2) the powers of provincial governments over the oil and gas sector have been restrained.
Before the 2014 New Hydrocarbon Law, fixed price energy tariffs and utility rates along with tough taxation dramatically discouraged foreign direct investment. Thus, in an effort to encourage new investments, the Fernandez government agreed on loosening up taxation, royalty and duration of E&P provisions while standardizing concession agreements, bidding process and getting rid of the carrying system.
In that respect, companies investing more than $250 million over a three-year period would receive tax exemptions and would be allowed to export 20% of onshore production and 60% of offshore production free from export taxes. In addition, the government set a standard royalty rate equal to 12% with possibility for the provincial governments to increase it by 3% on each concession extension. This 3% increase is subject to a maximum cap at 18%. Furthermore, prior to the New Hydrocarbon Law, each provincial government could include their own financial and legal requirements in the concession contract. To avoid confusion among the investors, and in collaboration with the provincial governments, the Energy Secretariat worked on the standardization of concession agreements with common requirements.
The Energy Secretariat eliminated the so-called “carrying system” by which foreign exploration companies were required to partner with state-owned companies, and the Fernandez government created a nationwide standardized bidding process preventing each province from undertaking its own licensing round. Under the New Hydrocarbon Law, all companies must go through the national bidding process. Provincial governments are no longer permitted to assign new areas for development. Finally, time periods for exploration and production have been extended for conventional exploration permits (up to 11 years) and for unconventional exploitation concessions (up to 13 years), and the Fernandez government reduced oil export tariffs to limit the influence of low oil prices on production.
At the beginning of 2016, President Mauricio Macri, newly elected in December 2015, indicated that he wanted to attract “$20 billion in foreign investment this year from energy to infrastructure as he tries to persuade global investors that this time is different for Latin America’s third-largest economy.” His plan to attract new foreign investment includes tax incentives for foreign investment, access to international financial markets, decreasing reliance on imported gas while developing trade, relaxing foreign currency controls, devaluing the peso to reflect its real value, making exports more competitive, and updating prices and tariffs to end subsidies.
Interestingly, on April 27, 2017, Total, the French giant energy company, announced it launched the first phase of shale gas development in the Vaca Muerta shale play. A company executive declared that such project “is a key milestone in the development of the giant Vaca Muerta shale play. Total is also increasing its interest in the eastern part of the Aguada Pichana concession where the results of pilot wells drilled to date have been excellent.”
Prior articles in the Global Shale Law Compendium series: