Argentina tries to entice investors with a new energy bill

Argentinian flags
Source: DollarPhotoClub

With 802 trillion cubic feet of technically recoverable shale gas, Argentina is the second richest shale country in the world. It’s energy-rich deposits, most of them located in the country’s Vaca Muerta formation, have already attracted foreign investors such as Chevron and Royal Dutch Shell.

Still, the country needs much more in terms of foreign investment to unlock its shale reserves. This is particularly difficult for a country which defaulted on its debt in July and consequently cannot tap global credit markets. Shale exploration is a very expensive business – far beyond the financing capabilities of the state-owned exploration company YPF and regional governments.

This is why, Argentina’s federal government reached a deal on Wednesday to reform energy regulations making the country friendlier to foreign investment.

“We have one of the most important underground reserves in the world and we have to exploit it,” said Francisco Perez, governor of oil-producing Mendoza province. “Neither Argentina, nor YPF, nor the provinces can raise that kind of debt capacity so we have to find strategic partners.”

The new law would unify the exploration terms for all regions of the country – a departure from the current law, set in 1967, that allows each local government to set its own taxes, issue licenses and determine concessions. The government believes that creating a national framework will simplify doing business in Argentina.

Cabinet chief Jorge Capitanich said that the bill, which was handed to Congress on Wednesday, will “become national law, no later than October or November.”

Sources say that Argentinian government is eager to push through the legislation before 2015 when a number of concessions held by YPF expire.

The reformed law will increase the time of exploitation concessions from 25 to 35 years, with firms able to win 10-year extensions if they fulfil investment promises. The local governments will be able to increase royalties by three per cent with every extension granted, up to the top limit of 18 per cent.

The bill will also cut the minimum investment needed for companies to be exempt from certain import and capital controls to $250 million from $1 billion.

Argentina is still fighting to overcome its negative image after in 2012 Argentinian government seized 51 percent of YPF from Repsol – it’s former parent. To alleviate the bad effects of the move, Argentina agreed in April this year to pay Repsol $5 billion in bonds as compensation for the nationalization of YPF.

Meanwhile, ExxonMobil, which holds 85 per cent shares in the licenses in Bajo del Choque Invernada within the Vaca Muerta formation, is looking for companies to invest in shale gas exploration. The company hopes that potential investors will be encouraged by the production on the Bajo del Choque concession, which – according to the IAPG – yields 28 thousand cubic metres of gas per day.

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