The Argentine Gas and Oil Market
Natural gas and oil constitute the main energy sources in the national primary energy matrix. The following table illustrates their shares as of December 31, 2019, as there is no available information for the year 2020 as of the date of 2020 Annual Report’s release:
|Type of Energy||Million ton of oil equivalent||%|
Note: All figures have been subject to rounding, so figures shown as totals may not sum. Source: The former Government Secretariat of Energy (‘SGE’).
In 2020, the total gross natural gas production amounted to 123 million m3 per day, representing a 9% decrease compared to the volumes produced in 2019. This variation is due to the decline recorded in the country’s basins, mainly in the Neuquina Basin (-8 million m3 per day) and, to a lesser extent, in the Golfo de San Jorge and Austral Basins (-3 million m3 per day) as a result of the lower activity on account of the continuous fall in market prices and the demand contraction resulting from the impact of COVID-19.
Although domestic consumption experienced a 5% year-on-year decrease for the second consecutive year, domestic gas production could not meet the demand, a deficit evidenced since 2003, so the Federal Government resorted mainly to natural gas imports and the use of alternative fuels. In 2020, Bolivia’s supply averaged 15 million m3 per day (6% higher than in 2019), and seaborne LNG (liquefied natural gas) at the Escobar port recorded an average of 5 million m3 per day (5% higher than in 2019). Moreover, as in 2019, no imports of regasified LNG from Chile were recorded in 2020. On the other side, gas and LNG exports decreased by 29% compared to 2019, to a total of 4 million m3 per day, representing 3% of the total domestic production in 2020.
Based on the last annual information published by the SGE, as of December 31, 2019, the country’s total natural gas reserves and resources reached 1,140,445 million m3, of which 35% were proven reserves. Moreover, 57% of the total reserves and resources were unconventional. In a year-on-year comparison, total reserves and resources have experienced a slight 1% increase, especially resources, which have risen by 4%, totaling 415,020 million m3.
In 2020, total oil production amounted to 77 thousand m3 per day, 5% lower than the volumes produced in 2019 (81 thousand m3 per day), thus reversing the upward trend over the last two years, mainly on account of the demand contraction resulting from the impact of COVID-19, experiencing a 12% decline compared to 2019. In April and May, the months most impacted by the lockdown, the consumption of crude oil decreased by 35% compared to the same period of 2019, then gradually recovering although without reaching 2019 consumption levels and finishing the month of December -7% year-on-year variation.
Based on the last annual information published by the SGE, as in 2019, no oil imports were recorded in 2020. On the other hand, due to the sharp drop in domestic demand caused by the preventive and mandatory social isolation, oil exports amounted to 12.3 thousand m3 per day in 2020, a volume 18% higher than in 2019. This volume represented 16% of the total domestic production during 2020.
As of December 31, 2019, total oil reserves and resources within the country totaled 832,098 thousand m3, of which 49% were proven reserves. In addition, 32% of the total reserves and resources were unconventional. In a year-on-year comparison, total reserves and resources have recorded a 4% increase. Furthermore, resources totaled 163,252 thousand m3, 4% lower than the levels recorded as of December 31, 2018.
On October 29, 2014, the National Congress enacted Law No. 27,007 amending Hydrocarbons Law No. 17,319, which considered new drilling techniques in the industry and mainly introduced changes to terms and extensions of exploration permits and exploitation concessions, levies and royalty rates, the incorporation of concepts for on and off-shore unconventional exploration and exploitation, and a promotion regime according to Executive Order No. 929/13, among others. The main changes introduced by Law No. 27,007 are detailed below:
Unconventional hydrocarbons exploitation
The Law conferred legal status to the concept of ‘Hydrocarbon Unconventional Exploitation Concession’ created by Executive Order No. 929/13. The term hydrocarbon unconventional exploitation is defined as the extraction of liquid and/or gaseous hydrocarbons by unconventional stimulation techniques applied in reservoirs situated in geological formations of schist rock or slate (shale gas or shale oil), tight sandstone (tight sands, tight gas, tight oil), coal bed methane and/or deposits characterized, in general, by the presence of low permeability rocks.
Holders of exploration permits and/or exploitation concessions will be entitled to request a hydrocarbon unconventional exploitation concession to the enforcement authority under the following terms:
- The exploitation concessionaire may request, within its block, the subdivision of the existing block into new hydrocarbon unconventional exploitation blocks and the granting of a hydrocarbon unconventional exploitation concession. Such request will be based on developing a pilot plan aiming at the commercial exploitation of the discovered reservoir according to acceptable technical and economic criteria.
- Holders of a hydrocarbon unconventional exploitation concession also being holders of a preexisting and adjacent exploitation concession may request both blocks’ unification as a single hydrocarbon unconventional exploitation concession, provided they duly demonstrate the geological continuity of these blocks. Such request should be based on the development of a pilot plan.
Terms for exploitation concessions and permits
The terms for the exploration permits will be established in each tender issued by the enforcement authority according to the exploration’s purpose (conventional or unconventional):
i. Conventional exploration: the basic term is divided into two periods of up to three years each, plus an optional extension of up to five years. In this way, the maximum extension for exploration permits is reduced from fourteen to eleven years;
ii. Unconventional exploration: the basic term is divided into two periods of four years each, plus an optional extension of up to five years, that is, up to a maximum of 13 years; and
iii. On and off-shore exploration: the basic term is divided into two periods of three years each, plus an optional extension of one year each.
Upon expiring the first period of the basic term, the exploration permit holder will decide whether to continue exploring the block or transfer it back in whole to the Government. The whole originally granted block may be kept provided the obligations arising from the permit have been appropriately met. Upon the expiration of the basic term, the holder of the exploration permit will revert the whole block, unless it exercises its right to extend the period, in which case the reversion will be limited to 50% of the remaining block.
Exploitation concessions will be granted for the following terms, which will be computed as from the granting resolution’s date:
i. Conventional exploitation concession: 25 years;
ii. Unconventional exploitation concession: 35 years; and
iii. On and off-shore exploitation concession: 30 years.
Moreover, the holder of an exploitation concession may, with a minimum one-year notice before the concession’s expiration, request indefinite extensions for a 10-year term each, provided it has adequately met its obligations as exploitation concessionaire, hydrocarbons are produced in said block and files an investment plan consistent with the concession’s development.
Awarding of blocks
Law No. 27,007 proposes drafting a standard bid form that the SE (former Secretariat of Energy) and the provincial authorities will jointly make and adjust to all tenders. Also, said law introduces a specific criterion for awarding permits and concessions by incorporating the specific parameter of ‘greater investment or exploration activity’ as tie-breaker, at the PEN (National Executive Branch or Poder Ejecutivo Nacional) or the Provincial Executive Branch’s duly supported discretion, as applicable.
Levy and royalties
The amended Argentine Hydrocarbons Law set the values for the exploration and exploitation levy established by Executive Order No. 1,454/07; such values may, in turn, be generally updated by the PEN. The current values for each levy and royalty are detailed below.
Law No. 27,007 set the levy values per km2 or fraction to be paid annually and in advance by the permit holder. The exploitation permit will amount to AR$4,500. In contrast, for the exploration permit, the following values will apply: AR$250 in the first period and AR$1,000 in the second period of the basic term; and AR$17,500 during the first year of the extension, with a 25% annual cumulative increase.
The amount payable for the second period of the basic term and the extension period may be readjusted by offsetting it with exploration investments made until reaching 10% of the levy per km2 applicable for the period.
On September 26, 2019, the Province of Neuquén published new levy values per km2 or fraction effective for the said province as from 2020. The exploitation levy was set at AR$22,410, and the exploration levy, at AR$1,245 for the first period, AR$4,980 for the second period, AR$7,470 for the third period, and AR$87,150 for the extension period (Executive Order No. 2032/19).
As of 2021, PEN Executive Order No. 771/20 set a maximum levy in AR$ equivalent to a certain volume of oil at the average domestic market price(1), at the Argentine National Bank (Banco de la Nación Argentina)’s exchange rate effective last business day before payment. This scheme is applicable nationwide (including the Province of Neuquén). The exploitation concession amounts to 8.28 barrels. The exploration permit applies 0.46 barrels in the first period and 1.84 barrels in the second period of the basic term; and 32,22 barrels during the extension period.
Note: (1) Corresponding to the first semester of the year prior to settlement.
Royalties are defined as the only revenue the jurisdictions holding title to the hydrocarbons will collect, in their capacity as grantors, from hydrocarbons production. The percentage the exploitation concessionaire should pay monthly to the grantor as royalty remains at 12% of the proceeds derived from liquid hydrocarbons production extracted at the wellhead. Natural gas production will bear a like percentage of the value of extracted and used volumes and will be payable monthly. In the case of extension, up to 3% additional royalties’ payment is applicable upon the first extension but limited to an 18% rate.
For the conduction of hydrocarbon conventional exploitation complementary activities, from the granted concession’s expiration and within the hydrocarbon’s unconventional exploitation concession, the enforcement authority may fix additional royalties up to 3% above the current royalties, up to a maximum of 18%, as applicable.
The PEN or the Provincial Executive Branch, as applicable, acting in its capacity as granting authority, may reduce by up to 25% the applicable royalties to the hydrocarbons production during a term of 10 years after the conclusion of the pilot project in favor of companies requesting a hydrocarbon unconventional exploitation concession within a period of 36 months as from Law No. 27,007’s effective date.
For exploitation concession extensions, Law No. 27,007 empowers the enforcement authority to establish the payment of an extension bond, capped by the amount resulting from multiplying the remaining proven reserves at the expiration of the concession by 2% of the average basin price applicable to the specific hydrocarbon during a term of 2 years before the granting of the extension.
The enforcement authority may establish the payment of an exploitation bond, capped by the amount resulting from multiplying the remaining proven reserves associated with the exploitation of conventional hydrocarbons at the expiration of the granted concession by 2% of the average basin price applicable to the specific hydrocarbons for the two years before the granting of the unconventional hydrocarbon exploitation concession.
Transportation concessions (so far granted for 35 years) are now awarded for the same term as the originating exploitation concession, with the possibility of receiving subsequent extensions up to 10 years each. Thus, transportation concessions originating in a conventional exploitation concession will have a basic 25-year term. In contrast, an unconventional exploitation concession will have a basic 35-year term, each plus any granted extension term. After these terms expire, the facilities will be transferred back to the Federal or Provincial Government, as applicable, by operation of law and without any charges or encumbrances.
Law No. 27,007 provides for two types of non-binding commitments between the Federal Government and the provinces regarding tax and environmental issues:
i. Environmental Legislation: it provides that the Federal Government and the provinces seek to establish uniform environmental legislation primarily aiming to apply the best environmental management practices to hydrocarbon exploration, exploitation, and/or transportation to further develop the activity while adequately protecting the environment.
ii. Tax System: it provides that the Federal Government and the provinces will seek to adopt a uniform fiscal treatment encouraging the development of hydrocarbon activities in their corresponding territories in adherence with the following guidelines:
- The gross receipts tax rate applicable to the extraction of hydrocarbons will not exceed 3%;
- The freezing of the current stamp tax rate and the commitment not to charge with it any financial contracts executed to structure investment projects, guarantee and/or warrant investments; and
- The provinces and their municipalities commit not to impose new taxes —or increase the existing ones— on permit and concession holders. Exceptions are service compensation rates, improvement contributions and general tax increases.
Restrictions on the reservation of blocks for national or provincial government-controlled companies
The amendment to the Argentine Hydrocarbons Law restricts the Federal Government and the provinces from reserving new blocks in the future in favor of public or mixed companies or entities, irrespective of their legal form. Thus, contracts entered by local companies for the exploration and development of reserved blocks before this amendment are safeguarded.
Associative schemes may be used in blocks that have already been reserved in favor of public companies and have not yet been awarded under joint venture agreements with third parties. In which case, such companies’ participation during the development stage will be proportional to their investments. In this way, the ‘carry’ system during the blocks’ development or exploitation stage has been done away. Such system has not been prohibited for the exploration stage.
Conventional and unconventional hydrocarbon investment promotion regime
On July 11, 2013, the PEN issued Executive Order No. 929/13, which created the Investment promotion regime for the exploitation of hydrocarbons —both conventional and unconventional— to encourage investments and the concept of unconventional exploitation concession.
Law No. 27,007 extended the benefits of the Promotion Regime to hydrocarbon projects involving a minimum of US$250 million direct investment denominated in foreign currency, assessed at the time the hydrocarbon exploitation investment project is presented, to be invested during its first three years. Before the amendment, the Promotion Regime benefits reached investment projects denominated in foreign currency for a minimum of US$1,000 million amount during a term of 5 years.
Holders of exploration permits and/or hydrocarbon exploitation concessions, and/or third parties associated and registered with the National Registry of Hydrocarbon Investments submitting this kind of projects will enjoy, as from the third year of execution, the right to freely sell abroad 20% and 60% of the liquid and gaseous hydrocarbon production in the case of conventional and unconventional exploitation projects and offshore projects, respectively, with a 0% export duty, if applicable. Moreover, they will have free availability of 100% of the foreign currency derived from the exportation of these hydrocarbons, provided the applicable projects have involved a minimum of US$250 million entry of foreign currency into the Argentine financial market.
During periods in which the national hydrocarbon production is insufficient to meet domestic supply under Section 6 of the Argentine Hydrocarbons Law, the subjects covered by the Promotion Regime will have, as from the third year following the execution of their respective investment projects, the right to obtain a price not lower than the reference export price (without computing the incidence of any applicable withholdings) from the exportable liquid and gaseous hydrocarbon percentage produced under such projects.
According to these investment projects, Law No. 27,007 provides for two contributions payable to the producing provinces, where the investment project is developed: (i) 2.5% of the investment amount paid by the project holder, destined to corporate social responsibility projects; and (ii) an amount determined by the Hydrocarbon Investments Committee paid by the Federal Government, based on the size and scope of the investment project, destined to infrastructure projects.
|Encouragement programs for the increase in domestic natural gas production|
On November 16, 2020, Plan Gas.Ar was created to promote the production of Argentine natural gas and manage the impact of gas’s cost on the tariff of the Priority Demand. The term for onshore production is four years, with an additional four years for offshore production, as from January 2021 (Necessity and Urgency Decree or Decreto de Necesidad y Urgencia No. 892/20).
The SE (Secretariat of Energy) instrumented a tender between producers as sellers, and CAMMESA (Compañía Administradora del Mercado Mayorista Eléctrico or the Argentine Wholesale Electricity Market Clearing Company), natural gas distributors and IEASA (Integración Energética Argentina S.A.) as purchasers, for a total base volume of 70 million m3/day, extendable for the winter period (May – September), with 100% daily DoP (deliver or pay) and 75% monthly ToP (take or pay) condition for CAMMESA and quarterly for gas distributors and IEASA. The DoP constitutes 70% of the awardees’ production commitment.
The maximum base price was set at US$3.7/MBTU (million BTU). A 0.82 factor will adjust the award price for the non-winter period, 1.25 for the winter period, and 1.30 for the additional volume during winter. The purchasers, CAMMESA and IEASA, will pay the price awarded in the tender. In contrast, gas distributors will pay the price from the tariff scheme in force, and the Federal Government will offset the balance of the awarded price.
On December 15 and 29, 2020, the SE awarded 67.4 million m3/day of natural gas (55% destined to power plants) at an average annual base price of US$3.5/MBTU and an additional volume during the winter period of 3.6 million m3/day at US$4.7/MBTU. Pampa was awarded a base volume of 4.9 million m3/day at US$3.6 per million BTU and an additional 1.0 million m3/day volume during the winter period at US$4.7 per million BTU.
Finally, on February 22, 2021, under Resolution No. 129/2021, the SE called for a second round to award additional winter gas volumes in the Neuquina and the Austral Basins, with a daily growing DoP and a monthly 100% ToP. The first round awardees may tender up to a maximum price equivalent to the price awarded in the first round. According to SE Resolution No. 169/21, a total amount of 3.3 million m3/day at US$4.7/MBTU. Pampa participated in this round and tendered 0.8 million m3/day at US$4.7/MBTU. Additionally, the awarded companies will enter into a contract with IEASA.
|Natural gas for the residential and CNG (compressed natural gas) Segment|
|Priority Demand and CEE (Emergency Executive Committee or Comité Ejecutivo de Emergencia)
In June 2016, criteria were established to guarantee the Priority Demand’s meeting through the CEE in case of operational emergencies that may affect its regular operation (Resolution No. 89/16 of the MEyM (former Ministry of Energy and Mining), as amended). In June 2017, the procedure for the administration of dispatch in the CEE was approved (Resolution No. 4502/17 of ENARGAS (National Gas Regulatory Entity or Ente Nacional Regulador del Gas)). If the CEE did not reach an agreement, ENARGAS defines the required supply considering each producer’s available quantities, deducting the amounts previously contracted to meet the Priority Demand, with a progressive allocation until matching the proportional quota of each producer/importer in the Priority Demand.
Natural gas price within the PIST (Transportation System Entry Point)
In December 2017, the extension period set forth by Law No. 27,200 to the public emergency declared in 2002 terminated. Therefore, Law No. 24,076 was reinstated, which provides that the price of natural gas supply should be determined by the free interaction of supply and demand.
In mid-February 2019, a tender was launched to supply natural gas to distribution companies on a firm basis to ToP and DoP up to 70% of the maximum daily volume and for a term of 12 months starting April 2019. For the Noroeste Basin, 9.4 and 3.8 million m3 per day were assigned for the winter (April – September 2019) and summer (October 2019 – April 2020), respectively, at an average tender price US$4.35/MBTU. For the rest of the basins, 36.1 and 14.4 million m3 per day were assigned for the winter and summer, respectively, at an average tender price of US$4.62/MBTU. Pampa submitted and was awarded.
Producers billed to distribution companies in AR$ considering Argentine National Bank (Banco de la Nación Argentina)’s average currency FX (exchange rate) for the first 15 days of the month immediately preceding the beginning of each seasonal period or, if lower, the FX stipulated in the agreements (ENARGAS Resolution No. 72/19). However, the FX update, which should have been implemented on October 1, 2019, applicable to the October 2019 – April 2020 summer seasonal period, was deferred on several occasions. These agreements expired on March 31, 2020. Given the devaluation of the AR$ added to the tariff freeze (Solidarity Law, No. 27,541), as from April 2020, pricing agreements began to be based on the range recognized by ENARGAS in the tariff schemes.
In December 2020, the tender under Plan Gas.Ar was conducted, agreeing on the supply to gas distributors and power plants for the 2021 – 2024 period for a total of 67.4 million m3/day, 35% of which will be destined to distributors. The average tendered annual base price was US$3.5/MBTU, and an additional winter volume of 3.6 million m3/day was awarded at a yearly average base price of US$4.7/MBTU to be exclusively destined to the Priority Demand. Pampa submitted and was awarded.
Besides, Executive Order No. 1053/18 of the PEN (National Executive Branch or Poder Ejecutivo Nacional) provided that the Federal Government would bear the difference between the price of gas purchased by distributors and that recognized in final tariffs between April 2018 and March 2019. As of this date, Pampa has collected the first installment of AR$41 million. However, on December 14, 2020, Law No. 27,591 was published, which abrogated this executive order. Pampa is evaluating the courses of action to take.
It is worth mentioning that as from 2021 and under SE Resolution No. 354/20, the new reference price at the PIST was set for natural gas production out of Plan Gas.Ar, being US$2.30/MBTU in the summer (October – April) and US$3.50/MBTU in the winter (May – September) for the Neuquina Basin.
|Natural gas for power generation|
|From December 30, 2019, the supply of fuel for power plants was again centralized in CAMMESA (except for generators under Energía Plus and Resolution No. 287/17 of the SEE (Subsecretariat of Electric Energy) contracts). CAMMESA has launched successive tenders to cover its monthly consumption. On December 27, 2019, it tendered gas for January 2020 on an interruptible basis, at an average PIST price of US$1.73/MBTU in the Neuquina Basin. However, from February to December 2020, CAMMESA tendered for the purchase of gas on a partially firm basis, with a 30% DoP, the resulting average PIST price being US$2.24/MBTU for the Neuquina Basin. Pampa participated in these tenders.
As of 2021, most of Pampa’s gas to CAMMESA is channeled through the Plan Gas.Ar, for the volumes committed under this program for a term of 4 years. Pampa submitted and was awarded. However, CAMMESA’s monthly tender mechanism is still in force, complementary to the Plan Gas.Ar and, therefore, on December 22, 2020, and January 27 and February 24, 2021, CAMMESA launched tenders for gas consumption in the months of January, February and March 2021, respectively. The resulting average price at the wellhead for the three months was US$2.30/MBTU for Neuquina Basin, respectively. For producers not awarded under Plan Gas.Ar, the tender was under a 30% DoP condition, whereas for beneficiaries of Plan Gas.Ar, it was on an interruptible basis. Pampa participated in these tenders.
Generators covered by Energía Plus and SEE Resolution No. 287/17 contracts had the option of assigning the natural gas operation and transportation to CAMMESA.
|Natural gas export|
|Resolution No. 417/19 of the SGE (former Government Secretariat of Energy) issued in July 2019 established the procedure for the authorization of natural gas exports, the security of supply to the Argentine domestic market being a condition in all cases. It is worth mentioning that the exported volume does not qualify for calculating the incentive for domestic production encouragement programs.
In this sense, in September 2019, Pampa obtained a permit to export gas on a firm basis to Refinerías ENAP in Chile until May 15, 2020. In November 2020, Pampa obtained new permits to export gas to several customers in Chile on an interruptible basis, expiring between April 2021 and January 2022.
Moreover, awardees tendering lower prices under Plan Gas.Ar have preferential access to firm exports during the summer period, extendable to the winter period when there is an oversupply in a specific basin, and with the prior approval of the applicable authority.
In the case of higher costs are incurred by the Federal Government as a result of the use of alternative fuels for the WEM (Wholesale Electricity Market)’s power generation (imported liquefied natural gas, coal, fuel oil, or gas oil), between September 15, 2019, and May 15, 2020, exporting companies should compensate CAMMESA (SGE Resolution No. 506/19). The range between US$0.1 and 0.2/MBTU was set for the exported volume, which could be offset by receivables from CAMMESA held by each exporter for the sale of gas in the domestic market. Said compensation would be included in the cost of electricity in the WEM.
Finally, there was an export duty of AR$4 per exported US$ in effect as of September 2018, with a maximum 12% rate (PEN Executive Orders No. 793/18 and 865/18). The Solidarity Law provided, effective as of December 23, 2019, this rate may not exceed 8% of the taxable value or the Free on Board price. However, until its regulation, PEN Executive Orders No. 793/18 and 865/18 continued to apply. PEN Executive Order No. 488/20 issued on May 19, 2020, stipulated an export duty exemption as long as the international Brent price was equal to or below US$45/bbl (barrel). The rate could rise to 8% proportionally with the international reference price, the cap to be recognized when the reference price equals or exceeds US$60/bbl. As of this date, the rate amounts to 8%.
Crude oil commercialization in the domestic market
In response to the sharp drop in international reference prices and the domestic demand resulting from the preventive and mandatory social isolation, Executive Order No. 488/20 established a local commercialization reference price for Medanito-type crude oil of US$45/bbl (barrel), effective from May 19 to December 31, 2020. This measure was rendered ineffective on August 28, 2020, the date on which the Brent reference price exceeded US$45/bbl for ten consecutive days.
Liquid hydrocarbons export duty
As with natural gas exports, as of September 2018, there was an export duty of AR$4 per exported US$, with a maximum 12% rate (Executive Orders No. 793/18 and 865/18 of the PEN (National Executive Branch or Poder Ejecutivo Nacional)). The Solidarity Law (Law No. 27,541) provided that, effective as of December 23, 2019, this rate may not exceed 8% of the taxable value or the Free on Board price. However, until its regulation, PEN Executive Orders No. 793/18 and 865/18 continued to apply. PEN Executive Order No. 488/20 issued on May 19, 2020, provided for an export duty exemption as long as the international Brent price was equal to or below US$45/bbl, rising gradually as the international reference price increased until reaching 8%, the cap to be recognized when the reference price equals or exceeds US$60/bbl. As of this date, the rate amounts to 8%.
Tariff situation before the RTI (Integral Tariff Review)
Public Emergency and Exchange Rate Regime Reform Law No. 25,561, enacted in January 2002 and extended on several occasions until December 31, 2017, provided for the turning into pesos of utility service tariffs, with the transportation tariff remaining unchanged in AR$ as from 1999, despite the sharp increase in price indexes and operating costs. This mismatch directly affected the operating costs of this business segment, deteriorating its economic and financial situation. From 2002 to 2015, TGS (Transportadora de Gas del Sur S.A.) only had two tariff increases: 20% as from April 2014, as a result of the implementation of the transitory agreement entered in 2008; and, in May 2015, a 44.3% increase in the natural gas transportation tariff and a 73.2% increase in the Access and Use Position (CAU or Cargo de Acceso y Uso).
To normalize the segment, on February 24, 2016, TGS entered into a transitory agreement with the Federal Government and, consequently, on March 29, 2016, the MEyM (former Ministry of Energy and Mining) issued Resolution No. 31/16, which among other measures, instructed ENARGAS (National Gas Regulatory Entity or Ente Nacional Regulador del Gas) to conduct the RTI process and to grant a transitory tariff increase to be charged against the RTI. Within this framework, on March 31, 2016, ENARGAS passed Resolution No. 3724/16 approving a 200.1% increase in tariff schemes effective as from April 1, 2016, applicable to the natural gas transportation utility service and the CAU. However, on August 18, 2016, the Supreme Court of Justice of the Argentine Nation established the obligation to perform a public hearing for setting tariffs and prices without market intervention, and declared the nullity of MEyM Resolution No. 28/16 and 31/16 regarding residential users; therefore, tariff schemes were taken back to the values effective as of March 31, 2016. The public hearing took place on October 6, 2016. Consequently, ENARGAS approved a 200.1% transitory tariff increase effective from October 7, 2016, executing of the investment plan and restrictions on dividends distribution (Resolution No. 4054/16).
In December 2016, the public hearing required for the RTI process took place. On March 30, 2017, under ENARGAS Resolution No. I-4362/17, a transitory tariff scheme was approved, with a 214.2% and 37% increase in the natural gas transportation utility service and the CAU, respectively, applicable as of April 1, 2017. The RTI contemplates a semiannual non-automatic tariff adjustment mechanism subject to the IPIM (Wholesale Domestic Price Index) published by the INDEC (National Institute of Statistics and Censuses or Instituto Nacional de Estadística y Censos de Argentina). As a result, TGS executed the 2017 Comprehensive Memorandum of Understanding and the 2017 Transitory Agreement to implement the tariff update; to such effect, ENARGAS Resolution No. 4362/17 was issued, which applied the tariff increase resulting from the RTI in three stages, 58% in April 2017, and the remaining in December 2017 and April 2018.
The RTI considered the needed income to execute a Five-Year Investments Plan between April 2017 and March 2022 for AR$6,787 million, expressed as of December 2016 values, which are essential to operate and maintain the main gas pipelines under TGS’s concession, and guarantee the safety and continuity of the gas transportation utility service to meet the system’s expected higher demand resulting from the development of reserves.
The public hearing to present costs variations occurred on November 14, 2017, and under ENARGAS Resolution No. 120/17, an average 78% increase in tariff schemes was established, effective as from December 1, 2017, including a 15% increase on account of the non-automatic adjustment set in the RTI for the January – October 2017 period. This increase was deemed charged against the amounts resulting from the Comprehensive Renegotiation Memorandum of Understanding for the License executed by TGS on March 30, 2017.
The Federal Government ratified the Comprehensive Renegotiation Memorandum of Understanding on March 28, 2018 (Executive Order No. 250/18 of the PEN (National Executive Branch or Poder Ejecutivo Nacional)). Hence, it ended the RTI process launched in April 2016, and as a result, on June 26, 2018, TGS voluntarily dismissed the Arbitration Proceeding it had brought before the ICSID (International Centre for Settlement of Investment Disputes). Moreover, ENARGAS issued Resolution No. 310/18 approving, effective as from April 1, 2018, the last installment of the tariff increase established by Resolution No. 4362/17, equivalent to a 50% increase in tariff schemes, including a 13% recognition on account of IPIM variations for the November 2017 – February 2018 period, and a compensation for the programmed deferral of the increase payable in installments.
For the February – August 2018 period costs variations applicable from October 2018, TGS requested an approximate 30% tariff increase based on the IPIM variation. However, on September 27, 2018, ENARGAS issued Resolution No. 265/2018 set a 19.7% increase based on the simple average of the IPIM, the Construction Cost Index and the Salary Variation Index (provisional as of June 2018). The ENARGAS alleged that according to the RTI, under certain macroeconomic conditions and circumstances and the semiannual update being a non-automatic adjustment mechanism, it may use other indexes different from the IPIM to determine the tariff increase.
ENARGAS Resolution No. 192/19 determined a 26.0% increase in cost variations as effective as from April 2019. This increase was calculated based on the IPIM semiannual variation for the August 2018 – February 2019 period. Later, 22% of the bills issued during the July – October 2019 period were deferred to be recoverable in five installments from December 2019, under Resolution No. 336/19 of the SGE (former Government Secretariat of Energy). Residential users could opt-out of this benefit.
According to several regulations, the semiannual update that should have been applied since October 1, 2019, was deferred. With the entry into force of the Solidarity Law (Law No. 27,541) and its supplementary regulations, it was established that gas tariffs under federal jurisdiction would remain unchanged for a maximum term of 450 days or until the entry into effect of the new transitory tariff schemes. The PEN was vested with the power to begin an extraordinary review of the current RTI.
Consequently, TGS has not received instructions by ENARGAS for the semiannual remuneration update, which according to the RTI, should have applied on October 1, 2019, and April 1 and October 1, 2020. Additionally, on December 17, 2020, Necessity and Urgency Decree or Decreto de Necesidad y Urgencia No. 1020/20 was published, launching the RTI renegotiation for a term that could not exceed two years from its publication. Finally, ENARGAS called for a public hearing for March 16, 2021, to consider the transitory tariff regime.
Public tender for the Litoral main gas pipeline
SGE Resolution No. 437/19 issued on July 30, 2019, launched a national and international public tender for the award of a gas transportation license to connect the town of Tratayén, in the Province of Neuquén, with the city of Salliqueló, in the Province of Buenos Aires (phase 1), and Salliqueló with the City of San Nicolás de los Arroyos, in the Province of Buenos Aires (phase 2).
The new license provided for a Temporary Special Regime for the first 17 years of the total 35-year concession term for the repayment of the construction and, for the rest of the concession period, Gas Law No. 24,076 would be in effect. Moreover, the license agreement provides an irrevocable transportation offer of 10 million m3 per day to CAMMESA (Argentine Wholesale Electricity Market Clearing Company or Compañía Administradora del Mercado Mayorista Eléctrico) for 15 years.
The tenders’ opening date was successively postponed, and on December 30, 2020 SE Resolution No. 448/20 was published, which renders this call for tenders ineffective, and instructs the Under secretariat of Hydrocarbons to evaluate other alternatives for constructing a new gas pipeline and/or transportation capacities’ extension.
Household Gas Bottles’ Program and Propane for Grids Agreement
Currently, the butane supply for gas bottles at subsidized prices program is in force, created by Executive Order No. 470/15 of the PEN (National Executive Branch or Poder Ejecutivo Nacional) and encompassed under the Household Gas Bottles’ Program (Resolution No. 56/17 of the SRH (Subsecretariat of Hydrocarbon Resources), as amended). The program provides a defined LPG quota to fractionation companies, under a maximum reference price, to benefit low-income residential users. The sales price for butane and propane traded under the Household Gas Bottles’ Program is determined by the SRH, which set a price of AR$9,895/ton for butane and AR$9,656/ton for propane as of July 1, 2019 (Provisions No. 104/19 of SHC (Subsecretariat of Hydrocarbons and Fuels)). Later, prices were updated to AR$10,885/ton for both products effective as from October 19, 2020 (Res. No. 30/20 of SE (Secretariat of Energy). Consequently, this program’s participation forces TGS and Refinor to produce and sell LPG at prices ostensibly lower than market prices, which entails adopting the necessary mechanisms to minimize its negative impact.
As regards the Agreement for the Supply of Propane Gas for Undiluted Propane Gas Distribution Grids, on May 30, 2018, TGS executed the 16th extension to the agreement, which set a new methodology for the determination of the price and volumes to be sold for the April 1, 2018 – December 31, 2019 period under this program. On January 14, 2020, TGS was instructed by the SE to proceed with the deliveries according to such extension. On August 25, 2020, TGS executed the 17th extension to the Propane for Grids Agreement, effective until December 31, 2020. As of the date of release of this Annual Report, this program has not been postponed.
Both the Household Gas Bottles’ Program and the Propane for Grids Agreement provide compensation to participants, payable by the Federal Government, which is calculated as the difference between the sale price under such agreement and the export parity published by the SRH monthly, although with significant delays in collection terms.
Natural gas import financing charges
Regarding Resolutions I-1,982/11 and I-1,991/11 issued by ENARGAS (National Gas Regulatory Entity or Ente Nacional Regulador del Gas), which at the time provided for an approximate 700% increase in the natural gas import financing charge (created by PEN Executive Order No. 2,067/08), on March 26, 2019, TGS was served notice of the first-instance ruling upholding its claim for unconstitutionality and nullity of the provisions mentioned above. The Federal Government appealed this ruling on March 29, 2019; the appeal was granted on April 3, 2019, and has not been resolved as of the date hereof.
On December 1, 2020, the Court hearing the case resolved, taking into consideration the ruling and given the reasons alleged by TGS, to extend the validity of the granted injunction for a term of six months in such ordinary proceeding and/or until a final and conclusive ruling is issued.
As with hydrocarbon exports, as of September 2018, there was an export duty of AR$4 per exported US$ for propane, butane and LPG, with a maximum 12% rate (PEN Executive Orders No. 793/18 and 865/18). The Solidarity Law (Law No. 27,541) provided that, effective as of December 23, 2019, this rate should be lower than or equal to 8% of the taxable value or the Free on Board price. However, until its regulation, PEN Executive Orders No. 793/18 and 865/18 continued to apply. PEN Executive Order No. 488/20, issued on May 19, 2020, established an export duty exemption for as long as the international Brent price was equal to or below US$45/bbl (barrel), rising gradually as the reference price increases up to 8%, the cap to be recognized when the Brent equals or exceeds US$60/bbl. As of this date, the rate amounts to 8%.
In June 2016, OldelVal (Oleoductos del Valle S.A.) requested the performance of the RTI (Integral Tariff Review) to the MEyM (former Ministry of Energy and Mining) as tariffs were insufficient to develop a maintenance and investment plan that may guarantee the integrity, efficiency and reliability of the facilities and transportation service. Consequently, on March 10, 2017, a new US$-denominated tariff scheme was published, providing for an average 34% increase, effective for a term of 5 years as from March 2017 (MEyM Resolution No. 49/17).
In November 2018, Pampa divested 21% of Oldelval’s capital stock to ExxonMobil Exploration Argentina S.R.L., keeping a 2.1% equity interest in OldelVal.