October 24, 2014 / 1:11 AM / 4 years ago

Argentina's energy sweeteners won't mask bitter taste of state controls

BUENOS AIRES (Reuters) - Persistent government intervention in Argentina’s stagnating economy means oil and gas firms will remain cautious even if Congress backs a proposed law offering sweeteners to attract new investments worth tens of billions of dollars.

An aerial view is seen of a shale oil drilling rig in the Patagonian province of Neuquen in this July 11, 2013 handout photo. REUTERS/Prensa YPF/Handout via Reuters

Argentina needs to ramp up production from its vast but barely tapped Vaca Muerta shale oil and gas deposits in order to reverse a gaping $7 billion energy deficit that is draining foreign reserves.

Developing Vaca Muerta in the shadow of the Andes mountains and securing energy independence will cost up to $200 billion in the next 10 years, state-controlled energy firm YPF says.

Argentina has just over $27 billion in foreign reserves and a new debt default this year further hindered its access to global capital markets, so President Cristina Fernandez’s leftist government is relying on foreign oil firms to lead the investment drive.

But investor confidence is unlikely to improve before next year’s presidential election, although there could be a turnaround if the next government loosens state controls on the economy.

Fernandez is unable to run again and the three early front-runners are all touting more business-friendly policies.

Argentina curbs imports to protect a trade surplus that is a key source of dollars for the government, blocks foreign firms from repatriating hard currency profits and restricts access to dollars. It also sets the price paid to gas producers.

The proposed regulations before Congress would overhaul a 1967 energy law and cut the minimum investment needed for companies to be exempt from import controls to $250 million from $1 billion

The same level of investment would also allow oil and gas producers to hold on to the hard currency earned from 20 percent of their exports.

The bill has been approved by the Senate and Congress’ lower chamber of lawmakers will almost certainly pass it in a vote due next week.

“We want them to come and invest and we want to give them a single, consistent regulatory framework so that we become energy independent as soon as possible,” Carlos Zannini, the government’s legal secretary, told senators. “This is so that more investment comes faster.”

Argentina has the world’s second largest shale gas resources and fourth largest shale oil resources but officials say financing is beyond the reach of state-controlled energy firm YPF and regional governments.

Chevron Corp, Petronas [PETR.UL], Royal Dutch Shell and Total have dipped their toes in but their initial investments fall short of putting Argentina on the path to energy independence.

One official at an international petroleum firm with interests in Vaca Muerta said imbalances in Argentina’s $510 billion economy - the result of heavy-handed trade and currency controls - have weighed on investment plans.

Inflation is surging toward an estimated 40 percent this year, dollars are scarce and the spread between the official and black market dollar-peso exchange rate sits at over 70 percent.

“The draft legislation is better than nothing. But it does not solve the underlying problems,” said the company official, who requested anonymity because of the political sensitivity of the comments.

The source cited hard currency shortages to pay for drilling equipment, the demands of powerful labor unions for wage increases and volatile economic conditions as among the day-to-day difficulties of doing business in Argentina.

“The industry invests often in countries with difficult political or social situations because of the profit reward. At the moment in Argentina, you have neither. Neither profit, nor a stable environment.”

REGIONAL COMPETITION

Under existing legislation, provincial governments issue licenses and determine concessions and taxes companies pay. Backers of the draft regulations seek a national framework they say will create the same terms for all regions, which they say will ease doing business and cut corruption.

The head of Shell Argentina, Juan Jose Aranguren, on Tuesday said there had been insufficient consultation with industry experts during months of negotiations between the federal government and provinces.

In an opinion column in the pro-opposition daily Clarin, Aranguren also voiced concerns the president could scrap the benefits owed to firms investing more than $250 million without needing the consent of legislators.

Argentina began running an energy deficit in 2011, a year before Fernandez accused Spanish energy giant Repsol of inadequate investments and seized the firm’s controlling stake in YPF.

YPF’s chief executive, Miguel Galuccio, appointed after the nationalization of Repsol’s stake, said Argentina requires five to 10 years to meet its own energy demands.

The push to adopt energy policies that encourage investment comes as the government tightens import allowances and currency controls in other sectors of the ailing economy.

“The government talks about Vaca Muerta as if it were a new lottery ticket that is going to solve all our problems,” said opposition Senator Ernesto Sanz, who voted against the bill in the upper chamber.

“But we’re debating this bill against an economic backdrop which instead of drawing in investors, scares them off.”

Argentina’s recoverable shale oil resources stand at 27 billion barrels and its shale gas resources are estimated at 802 trillion cubic feet, second only to China, according to U.S. Energy Information Administration data.

The Vaca Muerta formation covers 30,000 square km, an area roughly the size of Belgium, and mostly lies under Argentina’s southern Neuquen province.

Regional government data shows expected investments in Vaca Muerta this year of $5.14 billion, a quarter of what YPF says is needed annually over the next decade.

“(The draft) law patches up some economic distortions,” said Mariano Lamothe, economist at the Buenos Aires-based consultancy Abeceb.com. “But in any other country access to hard currency and imports is normal and not something that require a law.”

The reforms will lengthen the terms of exploitation concessions by a decade to 35 years for non-conventional energy and 25 years for conventional energy. Firms can win 10-year extensions if they fulfill investment promises.

With each extension, provinces will be able to increase an initial 12 percent royalty by 3 percentage points up to a limit of 18 percent.

Failure to improve the regulatory environment could see Argentine lose out to other countries competing for investment to develop their energy industries.

“We need fiscal and legal stability,” Jorge Sapag, governor of Neuquen said in support of the bill. “There are other non-conventional energy investment destinations. We’re up against Mexico, Colombia and Poland.”

Writing by Richard Lough; Editing by Kieran Murray

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