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Highlights

Crude sales price falls to $40-42/b

Caps seen a threat to Vaca Muerta development

Refined products imports rise

Buenos Aires — Argentina imposed a 90-day freeze on diesel and gasoline prices Friday, driving down domestic crude prices by around 30% even after oil companies warned that the measure is bound to slow investment and production growth, including in the giant Vaca Muerta shale play.

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The price cap takes effect immediately, according to a decree published in the Official Bulletin, the newspaper of record.

The downstream sector must keep oil product prices at the same levels as August 9 in all outlets, including retail and wholesale, through November 15, the decree states.

As a result, the final crude price for refiners has tumbled from a reference of $59/b, minus export taxes, on August 9 to around $40-42/b, according to most calculations reported in the local press.

Argentina President Mauricio Macri announced the price freeze Wednesday as part of a raft of measures to try to contain 55%-plus inflation. He took the step after the peso plunged against the dollar to a record low of 62.18 per dollar Thursday following a massive setback for his conservative coalition in Sunday's primary election. This raised concerns that the populist regime of 2003-15 could beat Macri in the October 27 general election, bringing back policies that could extend an economic recession now in its second year and push the country to a debt default.

The oil sector sought to negotiate the price cap, saying it would squeeze profit margins and slow production growth.

The sector gained a one-day extension to sit down with authorities including Energy Secretary Gustavo Lopetegui, but oil representatives could not convince the government to halt the freeze -- or amend it.

After the meeting, Interior Minister Rogelio Frigerio told reporters that the freeze is important, along with other measures like a lifting of the 21% sales tax on bread, milk, rice and other essential goods, because it will bring people "peace of mind" at a time of fast inflation.

POTENTIAL LOSSES

With the freeze, producers and refiners face lower revenue and profits, given that many costs are in dollars, including on imported products, or will rise with inflation, like salaries.

The integrated players like Shell, BP-backed Pan American Energy and state-backed YPF, which have a combined market share of about 80% of diesel and gasoline sales, are expected to be able to handle some of the losses from the cap because they supply their own refineries, or most of the crude they need.

The producers without a downstream business such as Argentina's Pluspetrol and Tecpetrol, China's Sinopec and Mexico's Vista Oil & Gas may face the brunt of the impact, as will the pure refiners like Trafigura that buy all of their crude.

There is little wiggle room with the cap. That's because it is encased in a 1974 Supply Law that imposes fines, closures and prison time for executives if they don't comply, meaning that producers and refiners must amply supply the market. They cannot reduce domestic sales to ramp up dollar-priced exports of crude or products to try to compensate for the losses on local sales.

Refiners must also import products to meet demand, even if they have to sell at a loss.

Imports have been rising of 98 RON gasoline and ultra low sulfur diesel because of a lack of refining capacity to make enough products of these specifications. ULSD imports, for example, shot up 19.2% to an average of 39,717 b/d in the first half of this year from 33,319 b/d in the year-earlier period, according to Energy Secretariat data.

The freeze has brought grumbling from the oil sector.

Gaston Remy, CEO of Vista in Argentina, said Friday that the oil industry understands the need for "some measure" to shield consumers from the brunt of the devaluation, but said there was no negotiation with the government on how to do this.

The result is that "today producers are selling the oil at 30% less than the value at which we did yesterday," he said on Radio Mitre in Buenos Aires.

"With these prices, production costs cannot be covered," he said.

'DEATH BLOW' TO VACA MUERTA

Guillermo Pereyra, a national senator and secretary general of the Union of Private Oil and Gas Workers in Rio Negro, Neuquen and La Pampa, said the cap is "a death blow to Vaca Muerta," warning that the state interventionism will slow what had been a steady rise in investment in Vaca Muerta, one of the world's biggest plays.

Jorge Sapag, a former governor of Neuquen, home to the brunt of Vaca Muerta, said Macri's move puts development of the shale play at "serious risk" and could spark layoffs, according to comments on Twitter.

"If the price of our oil is below what the international markets indicate and if the national government changes the rules of the game again, where do you think the investments will go?" he wrote.

YPF, the country's biggest oil producer that also has a 55% share of diesel and gasoline sales, is analyzing the impact of the freeze, according to a filing Friday with the Buenos Aires Stock Exchange.

The impact has yet to be seen, but warnings are emerging that lower investment will push back the government's target of doubling oil and gas production by 2023.

The Energy Secretariat had set that as a goal in 2018, saying that the immensity of Vaca Muerta's resources made it feasible to reach 1 million b/d of oil output and 260 million cu m/d of gas by 2023, allowing exports to surge to 500,000 b/d and 80 million cu m/d.

-- Charles Newbery, newsdesk@spglobal.com

-- Edited by Jeff Mower, newsdesk@spglobal.com