Global Insight Perspective | |
Significance | The Senate has approved a bill aimed at providing greater incentives for hydrocarbons exploration. |
Implications | Argentina's ability to boost reserves and production is key to its continued economic recovery, but without greater investment Argentina risks becoming a net oil importer in a few years time as well as a permanent gas importer. |
Outlook | The need for greater investment has meant that despite some populist energy policies and greater state interference since the crisis, policy changes have not been as radical as those introduced in the hydrocarbons sectors of Venezuela or Bolivia. Even so, the policy framework is less attractive than it was in the 1990s and further improvements are needed to generate much-needed investments. |
Senate Approves Bill Offering Incentives for Hydrocarbon Exploration in Argentina
Argentina's Senate on Wednesday approved a government-sponsored bill aimed at promoting oil and gas exploration. The incentive plan approved by the Chamber of Deputies on 12 September was initially launched in May 2005 (see Argentina: 19 May 2005: Argentine Government Unveils Exploration and Production Incentive Plan). The Senate approved the version of the bill approved by the deputies, which includes value-added tax (VAT) refunds for investment in capital goods and infrastructure projects; the accelerated depreciation of the profits tax; and exemption from the minimum-earning tax and expenditure on importation rights for exploration equipment. Companies that seek to take advantage of these incentives for new exploration projects must agree to the participation of state energy company Enarsa as a partner.
The bill has been controversial with opponents criticising the government for making too many concessions to foreign oil companies and some legislators worried that the provincial governments have not been given a greater role. Under the new legislation, even new provincial energy companies will have to associate with Enarsa to benefit from the tax incentives. In the context of rising concerns about President Néstor Kirchner's centralising powers and the political sensitivities attached to the suggestion of any changes in the distribution of oil rents this is not surprising.
Nevertheless, the new legislation is likely to be regarded positively by foreign investors even if it does increase the role of Enarsa in the hydrocarbons sector. The bill does not give precise details as to how much of a stake Enarsa would take, but the spirit of the proposed changes is completely different to the new contracts introduced in Venezuela, which include higher royalties and income tax and a controlling stake for the state oil company PDVSA. Furthermore, recent association agreements signed by Enarsa and foreign companies have seen it take a modest 35% stake (see Argentina: 13 September 2006: Petrobras, Enarsa, and Repsol-YPF Agree to Joint Venture for Exploration off Argentina)
Outlook and Implications
Rapidly rising energy demand prompted by the resumption of economic growth has increased pressure on the government to promote greater investment in gas exploration in order to avert a future energy crisis. Shortages in domestic gas supplies have already forced Argentina periodically to reduce its exports to Chile and increase imports from Bolivia since 2004, and despite signs of increased interest by foreign companies in the sector, the investment lag means that the situation is unlikely to improve significantly in the short term. It may even get worse as demand continues to rise, since gas production and reserves have fallen since 2004. Given that only five of Argentina's 20 sedimentary basins are currently in production, there is considerable acreage remaining with hydrocarbon potential, particularly offshore, where little or no exploration has been conducted to date.
Although the fiscal incentives offered under the new plan are a positive step forward, the announcements this week that the government was introducing tougher measures to guarantee the supply of diesel to the domestic market and that exports of gas from Tierra del Fuego to Chile's far south would also be subject to export duties demonstrate that it continues to give out mixed messages to investors. The threat that company executives could face imprisonment if diesel demand was not met had populist overtones reminiscent of Kirchner's earlier call for the population to boycott Shell service stations after it raised petrol prices. Meanwhile, the resolution authorising the export tax was yet another of the many rule changes that have been introduced without prior warning since the economic crisis. Although the government is justified in prioritising the domestic over the export market in times of supply uncertainty, if the returns from sales in the domestic market were more comparable to the higher prices that could be obtained abroad then this would also help to provide more incentives for exploration.