Argentina: A Step-by-Step Walk in the Road toward the Shale Miracle?

by King & Spalding

We have already highlighted Argentina's potential to become a magnet for foreign direct investment in shale oil and gas projects in the "Vaca Muerta" play located in the Province of Neuquén. [1]

Recent events are promising. Although with caution, investors are responding to the "dead cow's call." In July 2013, the newly State-owned company YPF and Chevron closed a deal to invest in the "Loma Campana" block (5,000 acres) an overall "capex" of US$ 16.5 billion. [2] In September 2013, YPF and Dow Chemical closed a deal of US$ 188 million in a pilot project to exploit shale gas in "El Orejano" block (10,131 acres). [3] A few days later, the company owned by the Province of Neuquén (Gas & Petróleo del Neuquén) and Germany's Wintershall, the oil and gas arm of chemicals group BASF, closed a deal of US$ 3.3 billion over the "Aguada Federal" block (23,969 acres). [4] Finally, a joint venture formed by Wintershall, French's Total and Argentine PAE closed an investment of around US$ 2 billion over off-shore gas fields (737,361 acres). [5]

But many more deals and regulatory action must be achieved to satisfy the dead cow's thirst of US$ 25 billion of investment per year, in order to develop a shale play of 7.4 million acres, where YPF holds rights to approximately 3 million acres. Argentina's regulatory framework includes many restrictions that impact the development of the oil and gas sector, including governmental interference on energy prices.

Natural Gas Prices

Since 2002, the Argentine Government has regulated oil and gas prices at depressed levels, de-linking them from the prices of hydrocarbons in world markets. It seems that the Government is now realizing that the current scenario of strong government intervention and depressed energy prices is incompatible with the need for abundant energy supply and attracting foreign capital.

In respect of crude oil, the Government has relaxed its interference over the price of crude oil and by-products offered by domestic producers and refineries. [6] Now a barrel produced in Neuquén (a light crude oil named "medanito") is currently averaging US$ 83.

In the case of natural gas, the Government, through the "Commission for Strategic Planning and Coordination of the National Hydrocarbon Investment Plan" (the "Commission"), implemented a package of measures whereby the Government basically pays to producers the difference between the "market-interfered" price (e.g., US$ 2 per MMBTU in average) and a guaranteed minimum price that varies according to the volumes supplied to the domestic market by the relevant producer. The Government plans to fund these payments through savings it expects to achieve by reducing LNG imports as a result of incremental increases in domestic natural gas production as a result of this scheme. [7]

In January 2013, the Commission issued Resolution 1/2013 [8] (further supplemented by Resolution 3/2013) [9] creating the so-called "Guaranteed Price Agreements" for natural gas supplies to the domestic market, which guarantee producers a minimum price of US$ 7.5 per MMBTU for any incremental sales to the domestic market. These agreements contain certain features that make large oil & gas projects attractive, such as the off-shore gas project recently announced by French-Total (mentioned above) that is expected to inject around 10 million cubic meters per day.

The most relevant features of these price agreements include the following: (i) the Government guarantees the producer a minimum price of US$ 7.5 per MMBTU for any incremental sales to the domestic market, above an adjusted base supply quantity; (ii) the Government guarantees the producer a minimum price of US$ 2.3 per MMBTU for any supplies to the domestic market within the adjusted base supply quantity; and (iii) the producer guarantees quarterly incremental minimum supply quantities to the domestic market, which progressively increase from 2013 to 2017. If in any relevant quarter, the supplied quantities to the domestic market are below the minimum supply quantities applied to such period, the producer is subject to the following penalties: (a) Producer to supply LNG or imported natural gas in energy equivalent quantities equal to the shortage quantities at a price of US$ 7.5 per MMBTU; or (b) the producer to pay a penalty equivalent to the LNG import price paid by the Government less the price of US$ 7.5 per MMBTU, times the quantity shortfall.

In November 2013, the Commission issued Resolution 60/2013 [10] (further supplemented by Resolution 83/2013) [11] that launched a new scheme of the so-called "Guaranteed Price Agreements" applicable to gas producers having a low natural gas supply to the domestic market.

The main differences with the program approved by Resolution 1/2013 include:

  • Only producers with a natural gas average injection below 3,500,000 cubic meters per day during the six months prior to the issuance of Resolution 60/2013 may apply, including producers with no gas injection at all.

  • This new program sets a range of guaranteed minimum prices that depend on the natural gas injection performance of the producers. Interestingly, the program acknowledges the fact that natural gas production has a natural decline curve. Accordingly, the price ranges are as follows:
    • For any incremental sales to the domestic market above the base supply quantity (equal to the daily average injection during the six months prior to the issuance of Resolution 60/2013), producers will receive a price of US$ 7.5 per MMBTU.
    • For any sales to the domestic market between the base supply quantity and 95% of such base supply quantity, producers will receive a price of US$ 6 per MMBTU.
    • For any sales to the domestic market between the base supply quantity and 90% of such base supply quantity, producers will receive a price of US$ 5 per MMBTU.
    • For any sales to the domestic market between the base supply quantity and 85% of such base supply quantity, producers will receive a price of US$ 4 per MMBTU.
    • The new program does not provide any penalties for non-fulfillment, as those established under Resolution 1/2013.
    • The benefits of this new program have a maximum duration of four years, which the Commission may extend for one additional year. The rationale of this time limitation is that the Government expects that the natural gas domestic market will gradually transition into a supply and demand market rather than a State regulated one. [12]

    Resolution 60/2013 states that companies currently participating in the original injection stimulation program (i.e., the program created by Resolution 1/2013) that are eligible for the new program may withdraw from the original program and apply to the new program. Companies interested in applying to this new program must file their projects with the Commission before March 31, 2014.

    Tackling the Restrictions Little by Little

    Argentina is tackling, little by little, the obstacles that investors are facing to invest in the "Vaca Muerta" shale play, in this case, the regulation of sales prices. Many remain to be solved, including macroeconomic issues such as inflation (approx. 25% annually), dual exchange rate between US Dollar and Argentine Peso (the spread between the official rate and the black market rate is about 50%), and foreign exchange restrictions (repatriation of proceeds, transfer of funds abroad, etc.).

    But the good news is that the Government is aware that the situation must change if Argentina wants to attract foreign investment to develop its local oil & gas resources and stop importing fuels for US$ 13 billion a year. Accordingly, many regulations are under scrutiny for elimination or relaxation.

    Another interesting development is the support that the provinces are offering to foreign investment. Provinces in which shale plays are located are enacting regulations to facilitate and support foreign investment, and when isolated measures against the oil & gas sector are issued, the courts are reacting favorably.

    It is difficult to change investors' country risk perception of Argentina but the shale revolution in the U.S. has demonstrated the favorable economic impact of developing shale gas resources. It is likely that economic constraints continue to force Argentina to provide a stable and predictable legal regime to allow the required investments to boost its economy.

    [1]See "Argentina: New Investment Promotion Regime for the Production of Shale Oil and Gas" by Vera De Brito de Gyarfas and Tomas Lanardonne (King & Spalding's Energy Newsletter, October 2013).
    [2]See "Report to the Province of Neuquén", available at According to this report, the most salient aspects of this deal are: (i) Of the US$ 16,506 million, US$ 1,146 million will be applied during the first year (defined as a "pilot plan"), and depending on the results of such "pilot plan", US$ 15,360 will be applied until the 16th year of the Project; (ii) The Project's lifetime is 35 years; (iii) The Project would entail the drilling of 1,677 wells during the first 15 years; (iv) Since the 5th year until the 9th year, the estimated level of crude oil production of the Project is approx. 75,000 Bbl./day, and of natural gas is approx. 3,400,000 MMBtu/day; (v) The Project proposes an overall "opex" of US$ 9,441 million during its 35 years; and (vi) The Project estimates a 9-year pay-back period, and a net accumulated cash-flow from the 10th year until the 16th year of US$ 8,465 million.
    [3]See "Dow and YPF ink shale gas deal", available at According to public information, of the US$ 180 million, US$ 120 USD million will be funded by Dow Chemical through a convertible loan. The agreement contains a conversion option that enables Dow to choose, depending on the results of the pilot phase at the end of the first year, whether to have the loan repaid through a 50 per cent stake in the "El Orejano" block, or alternatively, for YPF to repay the loan over a five year term.
    [4]See "Wintershall Signs Oil Deal in Argentina's Vaca Muerta Field", available at According to public information, Wintershall acquires a stake of 50% in the block, and G&P will be carried during exploration, but will pay production costs with oil production. During 2014/2015, US$ 115 million will be invested in a pilot project of 6 wells. If successful, 20 wells will be drilled during 2016/2020, and if successful, 120 wells during 2020/2030.
    [5]See "Total, Wintershall to Invest $2.1B in Argentina Natural-Gas Production", available at
    [6] In an attempt to mitigate inflation, the Government exerted pressure on producers and refineries (by way of different mechanisms including "price agreements", export taxes, etc.) to maintain the price of crude oil and by-products lower than in the international market place.
    [7]Argentina is currently importing more LNG than the U.S (See
    [8]See Spanish text at
    [9]See Spanish text at
    [10]See Spanish text at
    [11]See Spanish text at
    [12]See "Argentina and the dollar: A fistful of financial instruments" available at
    [13] From January 1994 until January 2002 (when the "Peso" crisis emerged), the Argentine natural gas market was mainly driven by the laws of supply and demand with no interference on prices by the Government. Indeed, a project of establishing a spot market was well underway.
    [14]On August 22, 2013, the Municipality of Allen in the Province of Rio Negro issued Resolution 46/2013 banning the use of the hydraulic fracturing method in the development of unconventional reservoirs. Following the required procedures, the Rio Negro Supreme Court (in its Decision of November 26, 2013) concluded that the provinces have the eminent domain of the natural resources located within their territory and so the subject matter of the Resolution interferes with the Province's jurisdiction. Accordingly, the Tribunal declared the unconstitutionality of the Resolution.

     Tomas Lanardonne
     +1 713 276 7312

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     Vera De Brito de  Gyarfas
     +1 713 495 8815

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    DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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