BUENOS AIRES (Reuters) - Argentina has clinched a deal with labor unions and energy companies aimed at luring investors to the Vaca Muerta formation in Patagonia, one of the largest shale reserves in the world, the government said on Tuesday.
Vaca Muerta has attracted investment from Chevron Corp and Exxon Mobil Corp. But the formation, which is about the size of Belgium, remains mostly unexplored, largely due to high production costs and a lack of labor flexibility, oil major executives have said.
As part of the pact, Argentina will offer a subsidized price of $7.50 per million British thermal units of natural gas produced at new wells through 2020. The price, which is more than double that of front-month natural gas futures on the New York Mercantile Exchange, is “indispensable for attracting long-term investment,” the government said in a statement.
Companies including state-owned YPF SA, Chevron, Total SA, Royal Dutch Shell Plc and BP unit Pan American Energy LLC [BPPAE.UL] will invest $5 billion to tap the formation in 2017 and double that in coming years as part of the deal, President Mauricio Macri said in a televised address.
YPF now plans to invest $2.3 billion in Vaca Muerta in 2017, 20 percent to 30 percent more than it would have without the deal, chairman Miguel Gutierrez told reporters after the announcement.
The other companies either declined to comment or did not immediately respond to requests for comment on their specific plans.
YPF shares on Argentina’s Merval stock index jumped 10.5 percent on Tuesday to 321 pesos ($20.25), their highest level since August 2015.
Argentina suffers from a substantial energy shortage, a major cause of its wide fiscal deficit. The government has calculated Vaca Muerta would need total long-term investment of $200 billion to reverse the country’s sustained energy shortage.
Neuquen province, where most of the formation is located, will stabilize taxes as part of the deal and labor unions have signed on to more flexible contracts. Strikes are common in Argentina, where high inflation often strains relations between powerful unions and management.
The $7.50 per mmBtu price matches the subsidized price under Argentina’s “Gas Plan” launched in 2013 to stimulate production at existing wells.
The government also subsidizes locally produced oil to encourage domestic production. But employment in the sector had been affected by an increase in fuel imports spurred by world crude prices that are well below local prices.
Of the 19 concessions awarded in Vaca Muerta so far, just two have started producing. The government hopes the agreement will spur development in the remaining 17.
While initial additional production would likely go toward closing the domestic energy gap, last weekend Argentina allowed a 15-year-old export duty on oil and oil products to expire.
Vaca Muerta contains 308 trillion cubic feet of shale gas and 16.2 billion barrels of shale oil, according to the U.S. Energy Information Administration.
Reporting by Nicolas Misculin, Luc Cohen and Hugh Bronstein; Additional reporting by Ernest Scheyder in Houston; Editing by Meredith Mazzilli
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