Argentina launches Oil and Refining Plus programs

Dec 12, 2008 01:00 AM

Argentina's President Cristina Fernandez launched initiatives to boost investment in E&P and refining, according to the presidential press office.
The Oil and Refining Plus programs will offer tax and investment incentives to producers and refiners but appear to fall short of directly increasing the regulated price of oil. A number of provincial governments and hydrocarbons producers had been hoping for a price increase when talks of the Oil Plus program began several months ago. A Gas Plus program launched earlier in the year allowed producers to sell incremental natural gas production at unregulated prices.

The influx of new investment as a result of the Oil and Refining Plus program, however, will reach $ 8.570 bn, according to Planning Minister Julio De Vido.
"We are incentivizing and promoting investment that increases the production of energy products," De Vido said. "We can't forget that all economic growth depends on increased oil production."

Incentives include tax credits that can be used to pay for oil export rights and the amortization of VAT. Special incentives also will be provided to smaller refiners that present plans to increase capacity.
"Historically, tax credits in our country have been unjust and resulted in the transfer of revenue without the ability to verify results," Fernandez said. "But today we are presenting a plan that ties the tax credits to specific increases in production."
"Private companies obviously need to make a return on their investments, but the public sector must also demand results," she continued.

Fernandez stated the tax breaks could still be favourable to the government's budget as the state will have to subsidize fewer fuel imports if domestic production increases.
"If the financial crisis has taught us anything at all, it's that profits not connected to real economic growth don't last," Fernandez added.

Price impact
While not directly increasing the regulated price, currently between $ 42-47/bbl, the tax incentives applied to export taxes may increase the regulated price to $ 52/bbl, one CEO of an oil company that operates in the country told.
"I don't have a clear picture of incentives yet," the CEO said. "But as far as I know, the price cap will go up to $ 52/bbl and the government is announcing a new set of tax incentives to promote exploration."

Producers still are waiting for full details of the plan to be published in the official gazette, but the CEO added the pricing information came from contacts within the federal government. Another executive with a different Argentine producer said there were still more questions than answers. Companies are still waiting to see how the new oil production will be defined and if government approval will be needed for each project to increase production, the executive said.
Some companies, for instance, have criticized the Gas Plus program for the government's role in certifying and regulating what qualifies for increased production and where it can be sold.

It is still not known who the increased oil production can be sold to and if the tax incentives will be deductable immediately or if government certification will be needed, the official added.
"Nevertheless, it is an interesting development and could be a benefit to us," the executive continued. "The government will have to be proactive with all levels of the oil business in Argentina, both upstream and downstream. At present, they are governing a shrinking industry, which is approaching the point where it will not be recoverable."

Petro Andina CEO Wayne Foo, meanwhile, said in a conference call he would be travelling to Argentina in the next few days to talk with authorities because so little information had been released about the plan. Companies able to export from Argentina under the current fiscal regime may be the biggest winners under the plan, another industry source said.
"My personal take is this measure will help those who export oil, particularly a crude called Escalante, which is produced the south of the country. It's not used very much by local refiners because of its lower quality. That said, the biggest exporter of Escalante is Pan American Energy," the source said.

"What happens is that if you increase reserves and production, then you'll qualify for this tax credit. If you cannot use the tax credit, you can sell it to someone who can, but there is nothing in the bill that says it must be sold at face value," the source said.
"So I'm concerned this is a really a bill for exporters, because there's nothing in the bill to prevent the exporters from paying us pennies on the dollar for these tax credits."

Under the current fiscal regime, producers must first offer crude to local refiners. If the refiners decline to purchase the crude as is often the case with Escalante, it can then be exported.
Argentina's government in October 2007 increased taxes on exported oil and refined products to keep internal prices at below-market levels. The tax capped the price of oil at $ 42/bbl, but the federal government later allowed the price for higher quality Medanito crude to rise to $ 47/bbl in May this year. Below-market energy prices in Argentina have artificially increased demand, draining foreign investment along the way.

Something better than nothing
The Oil Plus program will be welcomed by companies operating in Argentina, Rob Johnston, country manager for US-based Apache's operations in Argentina, told.
"Apache is supportive of any program that helps normalize Argentina's oil and gas industry," Johnston said.

"We'll probably take a wait-and-see approach before we change our investment strategy," he continued, adding the company would be willing to increase capex if the program started really to help producers.
"If we receive [increased revenues], we will spend it," he said. "We are still optimistic about Argentina and our properties there are on a par with anything else we have in the world."

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