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Argentina eyes $45/b minimum crude to sustain production: draft proposal

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Fuel for Thought: Argentina puts fresh focus on developing Vaca Muerta, but concerns abound

Argentina eyes $45/b minimum crude to sustain production: draft proposal

Highlights

Move would seek to keep output at 2019 levels

Refiners restricted to domestic crude, product imports limited

Government warns of 'serious risk' to energy security

Buenos Aires — Argentina is considering setting a minimum oil reference price at $45/b for local production, as much as $9/b less than some producers had requested, in a bid to revive output and limit a surge of imported crude and petroleum products, according to a draft copy of the proposal.

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If the proposal is approved as is, the price of Medanito, a light crude from the western basin of Neuquen, the country's most-productive, would be used as the reference price for refiners to buy from producers.

The price would take effect at $45/b retroactively from April 1 and remain in effect until December 31 according to the preliminary draft of the presidential decree.

Argentina's oil-producing provinces and some producers have been lobbying for a minimum price of up to $54/b, helping to encourage companies to sustain output despite a plunge in international oil prices since March.

Brent, the international reference price followed in Argentina, has dropped below $30/b from a most recent high of nearly $59/b in February, making many fields unviable to keep in production in Argentina. The breakeven price for most fields runs above $30/b and is even higher at $50/b for new projects in Vaca Muerta, the country's biggest shale play, according to state-backed YPF, the biggest oil producer in Argentina.

With the plunge in prices, concerns have swelled that a cutback in upstream investment could stymie the development of Vaca Muerta, one of the largest shale plays in the world. The play has been leading a recovery in crude output from a 28-year low of 479,000 b/d in 2017 to an average of 508,000 b/d in 2019, and has the potential to more than double national production to 1.1 million b/d by 2030, according to estimates from the Energy Secretariat.

The country's oil production has fallen since March, when a spread of the deadly novel coronavirus led the government to shut down the economy from March 20 to April 26.

While no data has been released on production levels since February, when it averaged 516,141 b/d, refiners have been cutting back on orders from producers as demand drops because the lockdown has cut petroleum product demand by around 80%.

Omar Gutierrez, the governor of Neuquen province, said recently oil demand is running at less than 200,000 b/d, more than half of the average of 450,000-500,000 b/d.

KEEPING A LID ON PUMP PRICES

As part of the government's proposal, producers would have "to make their best efforts to sustain the activity and production levels registered during the year 2019, trying to maintain the sources of work and the contracts in force with the regional service companies."

Refiners would have to keep their retail prices unchanged from March 31 levels and source all of their crude domestically.

Refiners and traders would also have to limit product imports to only the amounts they need to meet demand, the draft said.

While Argentina has not imported crude for more than a year because of the rise in local production, refiners make regular imports of higher-grade products because they lack capacity to produce enough to meet demand. The largest import is of ultra low sulfur diesel, trailed by 98 RON gasoline, according to Energy Secretariat data.

The government has been taking steps to try to lessen the fallout on the sector and consumers, including by delaying a fuel-tax hike and making it harder to import crude, diesel and gasoline. Still, it said the plunge in international prices coupled with a decline in domestic demand is putting at "serious risk" the self-supply of oil and energy security in Argentina.