Argentina’s oil and gas potential in the spotlight: an opportunity to alleviate macroeconomic hardships

August 2022 | EXPERT BRIEFING | SECTOR ANALYSIS

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Many factors are currently converging, placing a spotlight on the oil & gas sector in Argentina. Those factors can be divided into two categories: external and domestic. But at the end of the day they are deeply interconnected and, together are creating a window of opportunity to bring the development of the industry to its full potential. The question is: how can these investments be fostered in a country hit by macroeconomic hardships? Upon the need to isolate the sector from the delicate macro variables that Argentina is going through, regulations may be required to build confidence and boost investments.

From an external perspective, there is an urgent global need for energy and infrastructure, both at the regional and international levels. This is because of the ongoing recovery following the coronavirus (COVID-19) pandemic, and more recently the conflict between Russia and Ukraine, which has caused international energy prices, including oil, natural gas and liquified natural gas (LNG) to skyrocket, and has compromised Russia’s position as a major oil & gas supplier globally.

Domestically, the energy sector can be seen as both one of the main problems and, simultaneously, one of the solutions to the fragile macroeconomic situation Argentina is experiencing. The current lack of gas and gasoil self-supply, which Argentina had previously achieved, together with an export surplus, has put the public accounts in a difficult position, due to local natural gas shortfalls which have required the country to import expensive LNG, natural gas and liquid fuels. This does not make sense for a country with such rich natural resources.

This reliance on imports explains a large part of the country’s fiscal deficit, as well as the Argentine central bank’s hurdles to accumulate foreign currency, which prevent it from building strong reserves and recovering from the foreign exchange situation. In fact, reduction of the fiscal deficit, together with the monetary issuance to cover it, which in turn triggers high inflation rates, and the increase of hard currency reserves, are two of the main goals to be fulfilled by Argentina, as established under the agreement with the International Monetary Fund (IMF) which was recently refinanced. The country needs to grapple with ways to develop its economy, create genuine growth and incentivise sources of foreign currency accumulation. The oil & gas sector is one of the keys to achieving these objectives.

The upcoming implementation of the energy transition also creates an opportunity for Argentine natural gas to help countries which are heavily dependent on carbon and liquids to reduce their greenhouse gas emissions.

These elements must be viewed within the context of the geological potential of the Argentine oil & gas sector. According to the US Energy Information Administration (EIA), Argentina has world-class shale gas and shale oil potential, possibly the most prospective outside of North America. This is mainly due to the Vaca Muerta formation. In English, Vaca Muerta means ‘dead cow’ which, in a country whose economy is mainly driven by the rural sector, constitutes a symbolic paradox. In fact, Argentina is a country which has relatively low greenhouse gas output and the livestock sector contributes to a significant part of its total emissions, being second only to the energy sector.

This unique situation creates a platform for the country to use its resources now and increase exports.

But what is the main obstacle Argentina faces in its push to increase production and exports? The answer is a lack of infrastructure to increase production which, in turn, requires significant investment and, thus, strong financing. Given that access to international capital markets is closed for Argentina, mainly due to ongoing debt sustainability concerns, it is very difficult to attract investment. A possible solution is to segregate the sector to protect it from the emergency measures that the government regularly implements to tackle macroeconomic hurdles affecting the wider Argentine economy, to foster long-term oil & gas projects which can provide for the sustainable development of hydrocarbon resources. This way, the oil & gas sector may become the solution to overcoming many macroeconomic hurdles.

This can be done by building confidence and credibility by complying with the commitments already in place and establishing a legal framework which provides adequate incentives in order to develop these investments. There is a need to assure stability given that the projects must be carried out and continue to operate across several presidential administrations, with all the political risk that this entails. Political issues are among the main concerns of the agents investing in this sector since, although oil & gas investments are made under a certain administration, they will be amortised in future administrations, regardless of their political alignment. A regulatory framework that can resist different administrations and provide stability is required by all stakeholders, including producers, service companies, work unions, financial institutions, the public sector and Argentine citizens, all of whom will benefit from the economic growth resulting from the development of the industry.

For this purpose, it would not be necessary to replace the legal framework in full, but rather to issue additional laws and regulations to improve the existing framework in those aspects that need to be regulated to guarantee conditions necessary to develop the country’s resources and re-establish both Argentina’s self-supply and its export market.

A bill has been circulating for the last two years but not yet reached Congress for discussion and consideration. The bill mainly provides incentives to increase production, as well as for specific projects entailing significant investments, both for conventional and non-conventional resources, and for gas transportation works. The main benefits provided in the bill are enabling firm export rights and free availability of foreign currency obtained from those exports over a portion of additional production, as well as tax and export duty benefits. The bill requires the development of domestic providers to have access to those benefits. It may likewise provide for a novel underground gas storage concession, which also demands high investments.

One of the main issues Argentina faces is the foreign exchange restrictions that currently apply to almost all economic activities and which, in practice, prevent local companies from transferring funds outside of Argentina through the official foreign exchange market, except in very few cases. These restrictions are in force because of the scarcity of foreign currency affecting the country at the macro level. This naturally creates red flags for foreign investment and is a deterrent in most cases.

The government recently took a step toward the partial isolation of the sector by launching a regime providing access to the foreign exchange market for those oil & gas companies that increase their production year-on-year. Those that do raise production compared to 2021 will be authorised to obtain foreign currency to make payments outside of Argentina to pay debt and dividends, and to repatriate direct investments made by non-residents, for an amount of up to 20 percent of the increased production for oil and 30 percent for natural gas. These benefits can be transferred by producers to service providers. However, while this measure does send a positive signal, it is insufficient to drive the huge investment required by the sector to unlock its full potential.

Other aspects the legal framework must address to create the conditions for investment include firming up export permits and stabilising tax and export duties during the term of the export permits.

On the foreign investment side, it is also necessary to make clear that adverse governmental interferences with these projects and the long-term contracts on which they will be structured will trigger protection mechanisms under international treaties signed by Argentina, as has been suggested by local experts.

In the meantime, it is expected that the bill is discussed in Congress in the coming months. It remains to be seen what steps will be taken from a regulatory standpoint to foster Argentina’s oil & gas sector.

Agustina Ranieri is a lawyer at Marval O’Farrell Mairal. She can be contacted at +54 (11) 4310 0100 or by email: amr@marval.com.

Agustina Ranieri

Marval O’Farrell Mairal