4) OIL & GAS
- Legal Framework´s Brief History
Until the 90´s, the oil & gas exploration, exploitation and transportation activities in Argentina were performed by the public sector, and besides Law N° 17.319 (enacted in 1967) allowed the Government to grant exploration permits and exploitation concessions to private companies, such permits and concessions were never granted. However, private companies performed exploration and exploitation activities through the execution of service contracts entered with the state-owned company YPF. The oil and gas prices were fixed by the Government generally at lower levels than international prices.
In the early 90s, besides Law N° 17.319 was not amended, substantial reforms were made to the Oil & Gas sector through different laws and regulations that deregulate the activity, by eliminating governmental fixed prices for well-head gas, crude oil and refined products, as well as performing public tenders for the acquisition of permits and concessions. Following that, oil and gas state-owned companies, such as YPF, were privatized.
The current hydrocarbons´ legal framework is still based on Law N° 17.319 (the "Hydrocarbons Law"), which regulates the national criteria regarding exploration, exploitation, industrialization, transportation and marketing activities.
In 2002, together with the Country’s most devastating economic crisis, a Public Emergency Law was enacted, introducing major changes in the sector, as it main purpose was to control price increases in the domestic market, as well as to guarantee the provision of oil and gas to certain key demand segments.
In 2007, Law N° 21.197 reformed the Hydrocarbons Law, establishing that oil and gas fields belongs to the domain of the National or Provincial Government, depending their location, and putting to an end to a long constitutional discussion between both governments. According to the Hydrocarbons Law, such domain or ownership is different from the surface ownership that may belong to a third private or public party.
According to a 2011 study of the US Energy Information Administration (EIA), Argentina was ranked in the second place in shale gas resources and in fourth place regarding shale oil resources.
In 2012, Law N° 26.741 declared the Country´s hydrocarbons self-sufficiency as a public concern and expropriated the 51% of YPF assets, which became a state-owned company once again. Decree N° 1277/1212 then regulated the aforementioned Law N° 26.741, creating the “Hydrocarbons Investments National Registry”, where any company carrying out hydrocarbon activities must register and annually file their Investment Plan for the following year.
Finally, the most important reform performed to the Hydrocarbons Law was enacted by the end of 2014, after the National Government reached an agreement with the productive Provinces (gathered together through the OFEPHI organization). Law N° 27.007 substantially reformed the Hydrocarbons Law, based on the premise of improving and updating an old law according with the last exploration techniques and Argentina´s potential in unconventional fields, and also taking in consideration the Country´s main goal of reaching hydrocarbons self-sufficiency.
The new reform created incentives for investments in unconventional resources, which according to such Law´s definition include shale gas or shale oil, tight sands, tight gas, tight oil, coal bed methane or those fields characterized generally by the presence of low permeability rocks.
- Exploration permits and Exploitation Concessions
Fields Exploration Permit Period Exploitation Concession Period
Conventional Basic period of 6 years (3 + 3) + 5 years Extension = 11 years Basic period of 25 years + unlimited extensions of 10 years
Unconventional Basic period of 8 years (4 + 4) + 5 years Extension = 13 years 35 (Pilot Plan includes 5 years) + unlimited extensions of 10 years
Off-Shore Basic period of 8 years (4 + 4) + 5 years Extension = 13 years 30 years + unlimited extensions of 10 years
Extension requirements - Fulfillment of compromised investments and other assumed obligations
- Reversion of the 50% of the Exploration Area - Fulfillment of obligations (information, environmental, appropriate economic exploitation, etc.)
- 1 year advance notice
- The area must be producing Hydrocarbons
- File an Investment plan
- Pay for additional Royalties (monthly) and Extension Bonus Fee (only at the extension granting)
The exploration permits confers the permit holder an exclusive right to execute all related tasks that are required the search for hydrocarbons in the delimited area, as well as the right to obtain an exploitation concession over the area where hydrocarbons were found.
The Hydrocarbons Law establishes that permit holders and concessionaries should carry out all works observing the most modern, rational and efficient techniques, as well as to adopt the necessary measures to avoid damaging the fields and wasting Hydrocarbons.
Exploitation concessionaires must assure the maximum hydrocarbon production compatible with an adequate economic exploitation and the preservation of hydrocarbon reserves.
Exploitation concessionaires are entitled to one non-exclusive transport concession license for the same period as the hydrocarbon concession. Such concession entitles the concessionaires to construct pipelines, to have storage facilities, pumping stations and roads over the concession area.
According to the Hydrocarbons Law, concessionaires must pay a royalty of 12% of the declared value of the oil and gas extracted minus the transport costs. The Government may reduce such royalty percentage down to a minimum of 5% considering productivity, condition and location of the wells. Also, unconventional concessions granted before November 2017 will pay 25% less of royalty, as an incentive to produce unconventional hydrocarbons.
With the granting of any extension of the concession, the concessionaire must pay an additional royalty of 3%, up to a maximum royalty of 18 %.
- Surface Fee (Canon):
The Hydrocarbons Law establishes an annual surface fee for each square kilometer of an Exploration and/or Exploitation Area, which increases depending each exploration stage or exploitation period, according to the amounts updated from time to time by the National Government.
- The Enforcement Authority:
The Enforcement Authority of the Hydrocarbons Law is nowadays the Ministry of Energy and Mining or the pertinent Provincial enforcement authority, depending on the location of the hydrocarbon fields. However, the National Government is in charge of designing the national oil and gas general policies that the Provinces shall follow.
The Ministry of Energy and Mining is in charge of the different registries where the companies that perform Oil and Gas Activities must register.
Oil and Gas Companies Registry: The Oil and Gas companies must register as Operating or Non-Operating Companies. In order to do so, they should demonstrate financial capacity (at least assets of AR$ 2,000,000 for onshore areas and Ar$ 20.000.000 for offshore areas, or through the assets of their controlling companies, where the demonstration of more assets is required). If an Operating Company is going to be registered, besides the financial capacity, technical capability to develop hydrocarbon projects is also required, demonstrating sufficient background on these type of activities or provide a guarantee of assessment from a company that has such background.
Hydrocarbons Investments National Registry: Any company carrying out hydrocarbon activities must register and annually file their Investment Plan for the following year.
In order to assign any Exploration permit and/or Exploitation concession the companies must be registered in both registries and ask for authorization to assign such rights to the pertinent Enforcement Authority.
- Agreements used for Exploration and Exploitation Activities:
The Joint Operating Agreement (JOA), based on the AIPN´s terms and conditions, is the most frequently instrument used in the oil and gas industry. The JOA provides the contractual basis for the cooperative exploration, development and production of oil and gas between companies.
Together with the JOA, in Argentina another similar instrument, called “UNION TRANSITORIA DE EMPRESAS” or “UTE”, is also used for tax purposes, as it is an agreement specially regulated by the law. These UTEs agreements are temporary unions between companies that do not imply the creation of a different corporate entity from those companies, but they are registered before a Public Corporations Registry.
- Pricing and Promotional Regimes:
Until the early 90’s Argentina´s economy has been characterized by the intervention of the Government in the determination of Oil and Gas Prices. After the deregulation of the economy and until the 2001/2002 economic crisis, oil and gas companies active in Argentina enjoyed free international trade and international prices to be applied to the domestic market. Together with the crisis, the Government established an export tax on crude oil exports with a sliding scale with nominal rates, depending on the international price of crude. Prices were again fixed by the Government generally at lower levels than international prices. However, in the last years domestic prices have been kept at higher levels than international prices, mainly in order to incentive investments in unconventional resources, considering the 2014/2015 international oil crisis.
Moreover, different promotional programs have been launched by the National Government in order to incentive new investment in hydrocarbons exploitation, granting an additional subsidized price to the new and additional Oil and Gas production (compared to previous production levels) put into market.
Finally, the recent reform (Law 27.007) to the Hydrocarbons Law established a promotional regime for the exploitation of unconventional resources, granting the right (from the 3rd year of execution of the project) to trade freely to the foreign market 20% of its production without export duties and the free availability of all currencies obtained from such exports. In case of supply shortage, the companies will be granted the same export price for domestic market sales, as well as the right to freely obtain foreign currencies for their sales to the domestic market, up to 20% of its production. In case of offshore exploitation, the above percentage will raise up to the 60% of its production. Also, import duties for certain capital goods and essential inputs were substantially reduced.
- Natural Gas Transportation and Distribution:
Argentina has a very gas-intensive economy, as natural gas is the main energy resource used in the country (more than 50% of its energy resource matrix). Gas production and consumption has increased constantly since the early 90s, making Argentina the second largest producer in the region after Bolivia. That is also the reason why the country has a well-developed and interconnected gas transportation and distribution infrastructure all over the country, as well as exportation facilities, while the consumer demand keeps continuingly growing up.
Until the privatization that took place in the early 90´s, the state-owned company Gas del Estado monopolized the activities of transportation and distribution of natural gas in Argentina. After such privatization took place, Law 24.076 regulated the public services of transportation and distribution of natural gas.
Such legal framework provided for an open access, a non-discriminatory system for producers, consumers and distributors, and determined the conditions that the transportation and distribution licenses have to meet.
A special entity, called ENARGAS, was created in order to supervise and regulate the transportation and distribution of natural gas, as well as to resolve any dispute arising among the industry participants.
Such law also set the basis for the calculation of tariffs for transporters and distributors, as well as prevents anti-competitive practices within the natural gas sector.
The public services that before the enactment of the law were provided by a state-own company were divided by zones. Two companies were put in charge of providing transportation and other 9 companies were responsible for the distribution. They operate under 35-year licenses that can be renewed for an additional term of 10 years.
Argentina’s 2001/2002 economic crisis had a particularly severe impact over the oil and gas industry. The devaluation of the Argentine Peso and subsequent measures to control the price of gas and to “freeze” public services tarriffs, resulted in a significant reduction in new investments in the gas sector.
In 2004, in order to promote the competition on the gas market, the national government issued the Decrees No. 180/04 and 181/04 that introduced important changes to the legal framework, such as the abandonment of the principle of uniform prices for all gas customers, resulting in a market price distinction between residential consumers, industrial consumers, GNC (gas used by cars) and energy generators.
The Decree No. 180/04 also created a Trust Fund for financing gas transport and distribution investments in order to increase the transport and distribution capacity, and also created the Electronic Gas Market (“EGM”) which was aimed to give more transparency and efficiency to the industry.
Recently, after the new government had removed exchange controls measures and partially stabilized the value of the Peso, in March, 2016, the transportation and distribution tariffs were updated to reasonable levels.
Contact: Fermín Berraondo (email@example.com)