Thought leadership from our experts

New energy scenarios in Argentina, a time for transition and for opportunities

The sweeping mid-term elections won by the end of the third 2017 quarter by the current administration of President Macri gives a boost to the energy policy for opening the sector to energy multinationals.

After a decade of interferences by the former rulers in the economics of both oil & gas and power sectors, the current government decided to realign prices and margins to international ones, with a transition path in previously frozen, heavily subsidized, tariffs for natural gas and power that is nearly complete.

The power generation and the natural gas upstream have still to see a full deployment of free market policies, however, as seen below.

Since Argentina has the 2nd largest world resources in shale gas, and a five years' experience in such field, not surprisingly it is the most dynamic growing area (30 % last year), both in investments and production, under a comprehensive program granting new projects or developments a significant price floor of USD 7.5/MMBTU with respect to the median price of the aggregate production of gas of all sources for the relevant producer, with a sliding scale landing at 6 USD/MMBTU in 2021, while as from then onwards domestic prices would supposedly be equivalent to an import parity price (since Argentina is importing up to 25 % of its aggregate demand for consumption, and current imported LNG regas is around such figure ). The tariffs´ transition path is considering a natural gas price upstream of USD 6.8 /MMBTU for 2021, but the development of rules assuring a free market for term supply contracts to distributors and large customers (amongst them, thermal power generators burning natural gas, which constitute 2/3 of the power matrix) is still on the drawing table1.

With a solid legal structure (a hydrocarbons law in force since 1967 and partially amended in 2014 that supports this framework)2 of non-conventional exploration permits and 35 years´ exploitation concessions with successive 10 years roll overs, royalty caps3 and other well established terms4, there is a good time window for farm-ins or joint ventures with current players (Total, Shell, Chevron, Panamerican, and specially YPF, the latter being the major holder of permits5 and concessions) which would require investments and even expertise6 for expansion and development of such areas, and for either joining with Gas y Petróleos de Neuquén as the provincial state owned company in the Neuquén Basin, the most significant for shale oil & gas, or for participating in bidding rounds for new exploration permits.

This legal framework will also be available for the next round of offshore exploration in the in three areas of the continental shelf in the Southern Atlantic Ocean( YPF has identified 22 million barrels of oil equivalent for further investigation)7, the Argentina, Austral and Malvinas West basins. Total SA is the major player with its current concessions in the neighboring areas of the Austral basin (around 21 MM m3/d, January 2016)), holding the necessary infrastructure in Tierra del Fuego for access to the TGS gas pipeline up north to reach the greater Buenos Aires industrial center, a gas pipeline in the need of further compression and other enhancements to receive the relevant gas shipping in case of success. Current offshore areas are the Carina, Vega –Pleyade, Hidra, Alfa and Argos fields, while Malvinas West is east from these, in the Economic Exclusive Zone in the continental shelf

However, other possibilities arise, as the recent deal of YPF8 to deliver natural gas to the Methanex plant in the Chilean Tierra del Fuego Area as a swap for methane (though currently limited by a further commitment to import natural gas -from Bolivia, or LNG regas from anywhere)- this restriction is provisional, while the setting-up of a free natural gas market is on the making, that is also of the essence for the onshore shale gas production development at a mature stage.

Though better terms and assurances will result from the bidding terms to be disclosed in July 2018, in a nutshell the general framework for offshore exploration permits grants two periods, 4 + 4 years, plus up to five years extension after a 50 % relinquishment, under heavier surface charges than those in the former period (trade off with works, admitted) , and a right to request a 30 years (plus 10 years successive extensions, with a 3 pct royalties increase for each extension on top of the former royalty ) exploitation concession , subject to a 12 % royalty, exports proceeds spared from remittance up to 60 % (exports are currently totally spared from such remittance and foreign currency exchange, thus making such 60 % to act as a floor in case of future restrictions).

Power is also subject to the challenges brought by the current dismantling of the maze of the last 15 years' regulatory restrictions that did interfere with a highly successful scheme in the 90's by which power generation had boomed and reduced by half the price of power, in a highly competitive (and sources diversified) market with more than 40 Independent power producers, under a free access to a uniform, hourly dispatch at a price equal to the marginal, variable, cost of the next, most expensive unit that would be necessary to satisfy additional demand.

The present government is also committed to make that the power distribution tariffs´ transition path enables recognition of the real cost of energy, and the elimination of governmental subsidies to power consumption, leading to a free market, but is struggling to build the same with clear signals for investing in the sector.

For the time being it is addressing, by means of public bids, the set-up or the closing of open cycle generators into combined cycle ones able to grant power capacity in a system where the peak aggregate demand is reaching or exceeding the effectively operative aggregate demand, and also some additional energy supply. However, it is continuing to supply natural gas to thermal power generators at a loss –since the government is importing LNG for regas at international prices- since electric energy dispatched is not subject to free competition and is still regulated.

In the one area where a dynamic growth is evident is the non-conventional renewables sources energy (wind energy, thermal solar energy, photovoltaic solar energy, geothermal energy).

The scheme is based on a mandatory, renewable sourced energy consumption by -until now- great consumers (Great Consumers, of more than 300 Kw peak capacity demand during the year) , thus conforming a progressively increasing captive aggregate demand for such kind of energy, with an increasing participation of the same in the overall power consumption of such consumers (a first step –postponed, the share of renewables in the energy matrix being at present 2 %- of 8 % of the aggregate electric energy demand of such consumer, stepping up to 20 % in the future).

The great consumers have a choice to fill-in their share of renewables sourced power consumption commitment by either (i) purchasing this energy from the authority in charge of the technical and economical dispatch, the Dispatch Center (CAMMESA) with power supplied from the successful bidders in the successive rounds below described, or (ii) excluding themselves0 from such CAMMESA offer, by directly purchasing their quota of renewable sourced energy from Independent Power Producers (IPPs), in the term contracts´market, and/or self-generate their own electric power from a renewable source.

A series of successful bidding rounds as from the end of 2016, and continuing, has requested an offered price with escalation clause for a term of 20 years´ yearly energy supply amounts, with a make-up for up to 10 % in the next year . The compliance by the purchaser of the renewables supply under the contract –PPA- is assured by the Sovereign through the payment for the energy supply (with a special fund, FODER, with a one year in advance payment reserves), and for the anticipated termination compensation, also supported, if so requested, by the World Bank in case of default (including the case of foreign exchange restrictions in the future) as a guaranty of a put price, based on the non-amortized part of the investment, plus the outstanding debt that triggered the default. International Arbitration jurisdiction –including ICSID- clauses may be agreed to with respect to any dispute related to the PPA.

The program has received offers well in excess of the bids energy requests, and prices have plummeted to reach 36 and 40 USD p/MWh, which, in order to compare with conventional energy, should add power capacity charges or costs for supplying in case of interruptions of supply (the commitment under the above mentioned PPAs is for energy supply throughout the year, and not for capacity at each hour, that the electric energy system has to consider in order to keep a perfect match between dispatch and consumption) and tax incentives10.

  1. For the time being, the government has promoted an agreement between the natural gas producers and the distributors for allotting volumes from each basin and their destination, and a reference price related to an increasing price path (Javier Martínez Alvarez, general director of Tenaris South Cone, Vaca Muerta debe poder convertirse en un Proyecto-país para la Argentina, Trama Magazine , dec 2017,p. 42. In the same publication, Daniel Ridelener, General Director of TGN considers that a long term contractualization is essential through the entire process (p. 55)
  2. Law 17319, as amended by Law 27007.
  3. On a general basis, 12 % (or less, depending on the bidding terms for high risk areas) on a well-defined price at the source, plus bonuses and carry obligations depending on the kind or concessions/renegotiation or extension by the relevant Province or government instrumentality.
  4. 20 % of production is guaranteed to be allowed to be exported with no duty to sell the proceeds at the foreign exchange into local currency, though now exports in general are entirely spared from such remittance.
  5. Law 27007 admitted to the existing holders of exploitation concessions to expand by requesting new non-conventional exploration permits (4+4 years plus a five years extension, with a 50% relinquishment to obtain the same) and the right to request a non-conventional 35 years (first five for a Pilot project), by means of subdivision or unitization of EC Blocks, coexisting with conventional exploitation concessions, with a minimum 250 USD investment in three years. As a consequence, YPF , already present in the shale basins with conventional exploitation concessions is the company having considerable leverage on the sam, as proven by iits more than 90% predominance in the shale gas production
  6. Statements by YPF officers
  7. Reuters, March 13, 2018
  8. Resolution 502-E/2017
  9. An exception from this exclusionary alternative is available for those Large Consumers that, while relying in auto-generation or in direct contracts with renewables sourced power generators for reaching their quota, may decide not to make the option, and purchase power from both alternative systems, at a cost, and thus avoid paying penalty energy prices for the shortfall
  10. idelener, above mentioned, p.55: If to the median price of Renovar's last round, of USD 42/MWh, 14 USD of subsidies and 20 USD of capacity charge are added, the natural gas continues to be more competitive.