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Argentina strikes deal to jumpstart shale investment

10 Jan 2017, 8.32 pm GMT

Argentina strikes deal to jumpstart shale investment

Buenos Aires, 10 January (Argus) — Argentina's government has agreed to extend a natural gas wellhead price subsidy until 2020 and reduce labor costs in a bid to jumpstart investment in the Vaca Muerta shale formation.

The agreement, reached between the national government, the provincial government of Neuquen, industry and labor unions, comes at a time of lackluster upstream activity, reflecting an uncertain price environment and cost concerns.

Under the new pact, the government will maintain the subsidy that pays as much as $7.50/mn Btu for new gas production. The subsidy had been scheduled to expire this year.

One of the key costs dissuading investors in Argentina's emerging shale patch is labor. Under the agreement, the government appears to have negotiated with the unions to limit benefits in exchange for fresh investment.

Companies that already have a presence in Vaca Muerta—mainly state-controlled YPF, BP-controlled Pan American Energy, France's Total, Shell, Chevron and US Dow—have pledged to invest a combined $5bn this year in the shale formation with a goal of reaching $15bn/yr in 2018.

"We knew we had to give guarantees and certainty in order for investments to arrive," President Mauricio Macri said today in announcing the agreement, which has yet to be signed.

The wellhead price support, put in place by Macri's predecessor, flies in the face of the administration's efforts to re-introduce market prices across the energy chain. The process has run into headwinds, not least from the oil and gas producers, who say market-based prices would spark layoffs and bankruptcies.

"These measures will allow us to boost development of unconventional resources in the country and promote investments to generate the energy that Argentina needs to grow," YPF chief executive Miguel Angel Gutierrez said.

The deal to extend the subsidy coincides with a gradual increase in wellhead prices for all gas production earmarked for residential users. That price currently averages $3.42/mn Btu, almost three times the previous prevailing price. The plan is to reach $6.80/mn Btu in October 2019.

On the oil front, Macri confirmed today that Argentina would no longer charge export taxes on crude, reinforcing a policy of scrapping almost all duties on overseas sales. The main beneficiary is PAE, which exports 24°API Escalante crude that is too heavy for local refiners.

The agreement came after "three or four months of hard work," said Neuquen governor Omar Gutierrez, who qualified the measure as "historic." As part of the deal, Neuquen agreed to keep its provincial taxes steady.

The US Energy Information Administration (EIA) ranks Argentina second in the world for gas and fourth for oil in terms of potential shale resources, in large part thanks to 30,000km2 (11,583mi2) Vaca Muerta, which is mostly in Neuquen.

While several big foreign oil companies have a stake in Vaca Muerta, large-scale development has been carried out mostly by YPF, which has invested around $3.5bn in unconventional development across the country.

Although the government presented the agreement as finalized, it has yet to be officially signed on by unions.

Senator Guillermo Pereyra, the leader of the key oil workers union in Neuquen, said the agreement "creates the conditions for investments to arrive" and denied the agreement involved "labor flexibility" – a euphemism for layoffs. "Workers will benefit from clear labor regulation," he added.

A portion of the agreement includes concessions from unions, including allowing the use of fewer workers per rig, decreasing workdays and eliminating commuting bonuses, among other measures that would reduce labor costs, according to a person familiar with the deal that has yet to be publicly released.

The agreement also features a government commitment to invest in roadworks and railways to improve logistics.

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