The Argentine Gas and Oil Market

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The Argentine Energy Matrix

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, 2018, as there is no available information for the year 2019 as of the date of 2019 Annual Report’s release:

Type of Energy Million ton of oil equivalent %
Natural Gas 40.2 53.2%
Oil 23.4 31.0%
Hydro 3.5 4.6%
Nuclear 1.8 2.5%
Coal 1.2 1.6%
Renewables 0.3 0.3%
Others 5.1 6.7%
Total 75.5 100%

Note: All figures have been subject to rounding, so figures shown as totals may not sum. Source: The former Government Secretariat of Energy (‘SGE’).

 

Natural Gas

In 2019, the total gross natural gas production amounted to 135 million cubic meters (m3) per day, which represents a 5% increase compared to the volumes produced in 2018. This variation is mainly due to the continuous growth of production in the Neuquina Basin (+6 million m3 per day) and, to a lesser extent, in the Austral Basin (+1 million m3 per day), associated with the development of unconventional gas reserves, which was partially offset by the declines in the Golfo San Jorge and Noroeste basins.

However, the domestic supply was not able to meet the demand, a dominant trend since 2003, and, therefore, the Federal Government resorted to natural gas imports, the supply from Bolivia reaching an average of 14 million m3 per day in 2019, a figure 15% lower than the volume recorded in 2018. In this same sense, imports of seaborne liquefied natural gas (LNG) later injected in the national natural gas transportation system at the Escobar port, located in the Province of Buenos Aires, recorded an average contribution of 5 million m3 per day in 2019, 52% lower than the volume recorded in 2018. Moreover, no imports of LNG regasified in Chile were recorded in 2019, whereas in 2018 they totaled 0.6 million m3 per day. Lower imports are mainly due to the drop in the domestic demand resulting from the economic recession, and the higher domestic production of unconventional gas as a result of the Plan Gas incentive to certain blocks.

Based on the last annual information published by the SGE, as of December 31, 2018 total natural gas reserves and resources within the country reached 1,130,799 million m3, of which 33% were proven reserves. Furthermore, 57% of the total reserves and resources were unconventional. In a year-on-year comparison, total reserves and resources have recorded a 7% increase, especially resources, which have increased by 11%, totaling 399,584 million m3.

 

Oil

In 2019, total oil production amounted to 81 thousand m3 per day, a volume 4% higher than volumes produced in 2018 (78 thousand m3 per day), thus reversing, since 2018, the downward trend in oil production recorded in Argentina over the last sixteen years.

Based on the last annual information published by the SGE, in 2019 no oil imports were recorded, whereas in 2018 imports reached 1.2 thousand m3 per day. On the other hand, in 2019 oil exports amounted to 10.4 thousand m3 per day, a volume 6% higher than in 2018. This volume represented 13% of the total domestic production during 2019. The increase in domestic production and the positive oil trade balance are mainly due to the higher unconventional production, encouraged by an increase in international prices.

As of December 31, 2018, total oil reserves and resources within the country totaled 799,402 thousand m3, of which 48% were proven reserves. Furthermore, 27% of the total reserves and resources were unconventional. In a year-on-year comparison, total reserves and resources have recorded a 16% increase. Furthermore, resources totaled 169,501 thousand m3, similar to the levels recorded as of December 31, 2017.

The Argentine Hydrocarbons Law

On October 29, 2014, the National Congress enacted Law No. 27,007 amending Hydrocarbons Law No. 17,319, which considers new drilling techniques in the industry, and also introduces changes mainly related to terms and extensions of exploration permits and exploitation concessions, levies and royalty rates, the incorporation of concepts for the continental shelf and off-shore exploration and exploitation of unconventional hydrocarbons, and a promotion regime pursuant to Executive Order No. 929/13, among other factors. The main changes introduced by Law No. 27,007 are detailed below:

 

Unconventional Hydrocarbons Exploitation

The Law conferred a 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 hydrocarbon exploitation concessions will be entitled to request a hydrocarbon unconventional exploitation concession to the enforcement authority pursuant to 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 the development of a pilot plan aiming at the commercial exploitation of the discovered reservoir pursuant 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 the unification of both blocks 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. Exploration in the continental shelf and the territorial sea: the basic term is divided into two periods of three years each, plus an optional extension of one year each.

Upon the expiration of the basic term’s first period, the exploration permit holder will decide whether to continue exploring the block or to 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 properly 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 extension 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. Continental shelf and offshore exploitation concession: 30 years.

Furthermore, the holder of an exploitation concession may, with a minimum one-year notice before the expiration of the concession, request the granting of indefinite extensions, for a 10-year term each, provided it has properly met its obligations as exploitation concessionaire, is actually producing hydrocarbons in the blocks in question, and files an investment plan consistent with the development of the concession.

The ban on simultaneously holding more than five exploration permits and/or exploitation concessions (whether directly or indirectly) has been lifted.

 

Concessions Extension

Law No. 27,007 grants the provinces having already started the concession extension process a 90-day term to finish it based on the conditions established for each of them. All subsequent extensions will be governed by the Argentine Hydrocarbons Law.

 

Awarding of Blocks

Law No. 27,007 proposes the drafting of a standard bid form that will be jointly made by the former Secretariat of Energy (SE) and the provincial authorities, to which all calls for tenders launched by law enforcement authorities should adjust, and introduces a specific criterion for the awarding of permits and concessions by incorporating the specific parameter of ‘greater investment or exploration activity’ as tie-breaker, at the National Executive Branch (PEN or Poder Ejecutivo Nacional) or the Provincial Executive Branch’s duly supported discretion, as applicable.

 

Levy and Royalties

The amended Argentine Hydrocarbons Law updated the values related to the exploration and exploitation levy established by Executive Order No. 1,454/07; such values may, in turn, be generally updated by the PEN based on variations in the domestic market’s crude oil price. The updated values for each levy and royalty are detailed below.

 

Exploration Levy

The holder of the exploration permit will pay the levy on an annual basis, in advance, for each square kilometer (km2) or its fraction based on the following scale:

  • First period: AR$250 per km2 or fraction;
  • Second period: AR$1,000 per km2 or fraction; and
  • Extension: during the first year of the extension, AR$17,500/km2 or fraction, with a 25% annual cumulative increase.

In this case, offsetting mechanisms remain in place: the amount that the exploration permit holder should pay for the second period of the basic term and for the extension period may be readjusted by offsetting it with exploration investments actually made within the block, until reaching a minimum levy equivalent to 10% of the applicable levy according to the period per km2, which will be payable in all cases.

 

Exploitation Levy

The holder of the exploitation permit will pay a levy which will consist of an annual advance payment of AR$4,500 per km2 or its fraction.

 

Royalties

Royalties are defined as the only revenue the jurisdictions holding title to the hydrocarbons will collect, in their capacity as grantors, from the production of hydrocarbons.

The percentage the exploitation concessionaire should pay on a monthly basis to the grantor as royalty remains at 12% of the proceeds derived from liquid hydrocarbons production extracted at wellhead. The production of natural gas will bear a like percentage of the value of extracted and actually used volumes and will be payable on a monthly basis.

Cash payment of the royalty will be made based on the value of crude oil at wellhead less freight costs up to the base location for the definition of its commercial value. Payment in kind of this royalty will only apply when the concessionaire is assured a reasonably permanent reception. The possibility to reduce the royalty up to 5% taking into consideration productivity, conditions and wells location remains in place.

In case of extension, additional royalties for up to 3% of the royalties applicable upon the first extension and up to a total maximum of 18% of royalties for the following extensions will be payable.

For the conduction of hydrocarbon conventional exploitation complementary activities, as from the expiration of the granted concession and within the hydrocarbons unconventional exploitation concession, the enforcement authority may fix additional royalties of up to 3% above the current royalties, up to a maximum 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 amount corresponding to royalties applicable to the production of hydrocarbons 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 term of 36 months as from Law No. 27,007’s effective date.

Finally, with the Hydrocarbon Investments Committee’s prior approval, royalties may be reduced to 50% for tertiary production projects, extra-heavy oil and offshore products in view of their productivity, location and other unfavorable economic and technical characteristics.

 

Extension Bond

For exploitation concession extensions, Law No. 27,007 empowers the enforcement authority to establish the payment of an extension bond, the maximum amount of which will result 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.

 

Exploitation Bond

The enforcement authority may establish the payment of an exploitation bond, the maximum amount of which will result 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 prior to the granting of the hydrocarbon unconventional exploitation concession.

 

Transportation Concessions

Transportation concessions (which had so far been granted for 35 years) will be granted for the same term than that granted for the originating exploitation concession, with the possibility of receiving subsequent extensions for up to 10 years each. Thus, transportation concessions originating in a conventional exploitation concession will have a basic 25-year term, whereas those originating in an unconventional exploitation concession will have a basic 35-year term, each plus any granted extension term. After the expiration of these terms, title to the facilities will be transferred back to the Federal or Provincial Government, as applicable, by operation of law and without any charges or encumbrances whatsoever.

 

Uniform Legislation

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 will seek to establish a uniform environmental legislation primarily aiming to apply the best environmental management practices to hydrocarbon exploration, exploitation and/or transportation with the purpose of furthering the development of the activity while properly 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 in order to structure investment projects, guarantee and/or warrant investments; and
  • The commitment by the provinces and its municipalities not to impose new taxes —or increase the existing ones— on permit and concession holders, except for service compensation rates, improvement contributions and general tax increases.

 

Restrictions on the Reservation of Blocks to 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 provincial companies for the exploration and development of reserved blocks before this amendment are safeguarded.

Regarding blocks that have already been reserved in favor of public companies and that have not yet been awarded under joint venture agreements with third parties, associative schemes may be used, in which case the participation of such companies 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 with. 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— with the purpose of encouraging investments destined to the exploitation of hydrocarbons, and the concept of hydrocarbons unconventional exploitation concession.

Law No. 27,007 extends 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 3 years. Before the amendment, the Promotion Regime benefits reached investment projects denominated in foreign currency for a minimum US$1,000 million amount during a term of 5 years.

Holders of exploration permits and/or hydrocarbons exploitation concessions, and/or third parties associated with such holders and registered with the National Registry of Hydrocarbon Investments submitting this kind of projects will enjoy the following rights as from the third year of their respective projects’ execution:

i. 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 in offshore projects, respectively, with a 0% export duty, if applicable; and

ii. The 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 production of hydrocarbons is insufficient to meet domestic supply needs pursuant to 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 export duties) from the exportable liquid and gaseous hydrocarbon percentage produced under such projects.

Pursuant to these investment projects, Law No. 27,007 provides for two contributions payable to the producing provinces where the investment project is developed:

i. The first one, payable by the project holder, for an amount equivalent to 2.5% of the investment amount undertaken to be committed to corporate social responsibility projects; and

ii. The second contribution, payable by the Federal Government, which amount will be determined by the Hydrocarbon Investments Committee based on the size and scope of the investment project, and which will be destined to infrastructure projects.

Regulations Specifically Applicable to the Gas Market
Encouragement Programs for the Increase in Domestic Natural Gas Production
Plan Gas

In February 2013, Resolution (Res.) No. 1/13 was published establishing the Plan Gas for a term of five years with the purpose of offsetting projects contributing to the domestic gas self-supply. The Federal Government had undertaken to pay a monthly compensation resulting from:

i. The difference between the Surplus Injection price (US$7.5/million BTUs (MBTU)) and the price collected from the sale of the Surplus Injection; plus

ii. The difference between the Base Price and the price collected from the sale of the Adjusted Base Injection.

Petrolera Pampa S.A. (PEPASA), later merged into Pampa, joined Plan Gas in August 2013, with retroactive effects as of March 2013 and until December 2017. As regards the compensation accrued in fiscal year 2017, the Natural Gas Program Bond was received in April 2019.

In November 2013, the Hydrocarbon Investments Committee included by Res. No. 60/13 more beneficiary companies under Plan Gas. Petrobras Argentina, later merged into Pampa, joined the plan on January 30, 2015, effective until June 30, 2018. As regards the compensations accrued in fiscal year 2017, the Natural Gas Program Bond was received in July 2019, whereas compensations corresponding to the first semester of 2018 were collected in cash in April 2019.

 

Unconventional Plan Gas

On March 6, 2017, Res. No. 46/17 of the former Ministry of Energy and Mining (MEyM) was published creating the Encouragement Program to further investments to produce natural gas from unconventional reservoirs in the Neuquina Basin, effective from its publication to December 31, 2021. This program provided for a compensation mechanism for the unconventional gas volume —either tight or shale— produced in the Neuquina Basin, which was calculated based on a minimum guaranteed price and the total weighted-average gas sales price by each company to the domestic market, including both conventional and unconventional gas. The minimum price was fixed at US$7.5/MBTU for calendar year 2018 and would be later decreased by US$0.5/MBTU per year until reaching US$6.0/MBTU for calendar year 2021.

Later, on November 2, 2017, MEyM Res. No. 419/17 was published amending the terms and conditions, and classifying projects into pilot and developing, the latter having an initial unconventional gas production equal to or higher than 500,000 cubic meters (m3) per day between July 2016 and June 2017.

Pilot projects could obtain the minimum price for their whole unconventional production provided they reached an annual average production equal to or higher than 500,000 m3 per day during a twelve-month period by December 31, 2019. Developing projects could only benefit for the incremental portion on top of the defined initial production. The reference price for calculating the incentive was the domestic market’s weighted average reported by the MEyM’s Subsecretariat of Hydrocarbon Resources (SRH). Furthermore, permanence in the program was conditional upon compliance with the investment plan informed to the provincial authority; otherwise, collected amounts, adjusted by the Argentine National Bank’s (BNA or Banco de la Nación Argentina) interest rate, should be returned.

On November 17, 2017 MEyM Res. No. 447/17 was published in the Public Gazette (BO or Boletín Oficial), which extends the application of the Unconventional Plan Gas to the Austral Basin. Additionally, on January 20, 2018, MEyM Res. No. 12/18 was issued, which introduced the applicable amendments to the Unconventional Plan Gas to apply the incentives provided therein to adjacent concessions operated on a unified basis and meeting all other applicable conditions.

Pampa repeatedly requested before the SGE (former Government Secretariat of Energy) for the inclusion under this program for Río Neuquén, El Mangrullo and Sierra Chata blocks, previously approved by the provincial enforcement authority. However, on January 30, 2019, the SGE informed gas producers affected by the Unconventional Plan Gas, including the Company, that no new projects would be approved under the Unconventional Plan Gas.

Natural Gas for the Residential and Compressed Natural Gas (CNG) Segment
Priority Demand and Emergency Executive Committee (‘CEE’ or Comité Ejecutivo de Emergencia)

Pursuant to Res. No. 599 of 2007, the agreement between the Federal Government and natural gas producers, known as Producers’ Agreement, was ratified, the main goals of which were to secure supply of the domestic demand for gas and the gradual recovery in prices through all market segments. The last residential supply commitment expired in December 2011.

In October 2010, Res. I-1410 of ENARGAS (National Gas Regulatory Entity or Ente Nacional Regulador del Gas) established certain modifications to the natural gas dispatch mechanism, placing a priority on the supply to the Priority Demand, with volumes exceeding those stipulated under Res. No. 599/07 of the former Secretariat of Energy (SE). Moreover, in December 2011, the terms of the Producers’ Agreement were temporarily and unilaterally extended, allowing ENARGAS to continue using gas producers’ shares stipulated in the previous agreement (SE Res. No. 172/11).

In June 2016, MEyM Res. No. 89/16 was published in the BO, which established the criteria for the normalization of natural gas purchase agreements within the Transportation System Entry Point (PIST) by distribution service providers in order to meet the Priority Demand. Additionally, criteria were established to guarantee the meeting of the Priority Demand through the CEE in case of operational emergencies which may affect its normal operation.

Finally, in June 2017 ENARGAS Res. No. 4502/17 was issued, which approved the procedure for dispatch administration in the CEE. In case the CEE did not reach an agreement, ENARGAS defines the required supply taking into consideration 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.

 

New Natural Gas Prices within the PIST

In early January 2018, the extension period set forth by Law No. 27,200 to the public emergency declared in 2002 terminated and, 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. As a result, natural gas distributors executed an agreement with the country’s main natural gas producers, including Pampa, effective for a year as from January 1, 2018. Prices were differentiated based on the source basin, the user category, and whether the tariff was full or differential, with periodic increases, and ranged from US$1/MBTU to US$6.5/MBTU.

However, on account of the significant devaluation of the AR$ and the impossibility by distributors to pass this new exchange rate (FX) on to final users’ tariff schemes, in early October 2018, this agreement was rendered ineffective and pricing agreements with distributors started to be governed by the price range recognized by ENARGAS in tariff schemes.

Nevertheless, as regards the FX’s difference between the price of gas purchased by distributors and that recognized in final tariffs, on November 15, 2018, Executive Order No. 1053/18 of the National Executive Branch (PEN or Poder Ejecutivo Nacional) was passed, which established, on an exceptional basis, that the Federal Government would bear such difference for the April 2018 – March 2019 period, in 30 monthly consecutive installments payable as from October 2019.

In mid-February 2019, a tender was launched for the supply of natural gas to distribution companies on a firm basis to take or pay (ToP) and deliver or pay (DoP) up to 70% of the maximum daily volume, for a term of 12 months with seasonality terms, and effective as from 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 of US$4.35/MBTU. For the rest of basins, 36.1 and 14.4 million m3 per day were assigned for the winter and the summer, respectively, at an average tender price of US$4.62/MBTU. Pampa submitted and was awarded. Producers would bill to distribution companies in AR$ pursuant to ENARGAS Res. No. 72/19, considering BNA’s average currency FX 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. 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. With the entry into effect of the Solidarity Law (Law No. 27,541), the FX freeze was subjected to a maximum term of up to 180 days.

ENARGAS Res. No. 193-199, 201-202 and 205-207 /19 established gas tariff schemes effective as from April 2019, considering an average PIST price of gas as a raw material for the following 6 months ranging between US$2.14/MBTU and US$4.69/MBTU, including the differential tariff(1). Later, 27% and 12% discounts in the price of natural gas within the PIST were set for the months of April and May 2019, respectively, by means of subsidies and, with the purpose of smoothing monetary expenses for seasonal consumption, a 22% deferral on bills issued during the July – October 2019 period was approved, to be recovered in five installments as from December 2019.

The tariff scheme update corresponding to October 2019 was deferred until February 1, 2020 pursuant to SGE Res. No. 521, 751 and 791 /19 and, with the entry into effect of the Solidarity Law, effective as from December 23, 2019, it was provided that tariffs under federal jurisdiction would remain unchanged and a process for an extraordinary review of the Integral Tariff Review (RTI) would be initiated for a maximum term of 180 days.

Note: (1) Tariff schemes contemplate a FX of AR$41.003/US$.

Natural Gas for Electric Power Generation
In November 2018, thermal power plants were authorized to procure their own fuel. Pampa opted to exercise self-supply for the dispatch of its thermal units, with the allocation of a significant portion of its gas production. In January 2019, the maximum gas prices for gas within the PIST set by SGE Note No. 66680075/18 continued to be used as a reference: for the June – August 2019 period, it was fixed at US$4.95/MBTU for the Neuquina Basin, US$5.15/MBTU for the Noroeste Basin, US$5.10/MBTU for the Golfo San Jorge Basin, US$4.90/MBTU for the Santa Cruz Sur Basin, and US$4.85/MBTU for the Tierra del Fuego Basin; whereas for the rest of the year they were fixed at US$3.70/MBTU for the Neuquina Basin, US$3.60/MBTU for the Noroeste Basin, US$3.55/MBTU for the Golfo San Jorge Basin, US$3.35/MBTU for the Santa Cruz Sur Basin, and US$3.30/MBTU for the Tierra del Fuego Basin.

On the other hand, seeking that the Wholesale Electricity Market (WEM) should bear the costs of imported gas and, consequently, reflect them in the variable costs the electric dispatch is based on, on October 4, 2018 SGE Res. No. 25/18 was issued, which provided that, in case the supplier is IEASA (Integración Energética Argentina S.A.), CAMMESA (Argentine Wholesale Electricity Market Clearing Company or Compañía Administradora del Mercado Mayorista Eléctrico S.A.) should adopt the acquisition and commercialization cost, effective as from October 1, 2018.

On December 27, 2018, a tender was launched for the supply of gas to power plants effective for the year 2019, in which Pampa took part. At CAMMESA’s tender, indicative prices were received for a total 222 million m3 per day on an interruptible basis, at seasonal PIST prices with a maximum of US$5.2/MBTU and a minimum of US$3.2/MBTU for the June – August 2019 period, and with a maximum of US$3.7/MBTU and a minimum of US$2.2/MBTU for the rest of the year. This tender considered the maximum PIST seasonal reference prices established by SGE Note No. 66680075/18 described in the previous paragraph.

However, SGE Note No. 07973690/19 instructed CAMMESA to recognize in the Variable Production Costs (CVPs) declared as from February 18, 2019 the maximum price for gas equivalent to the weighted average per basin which would have resulted if all the fuel had been acquired under contracts entered into under CAMMESA’s tender for the year 2019. Therefore, gas reference prices within the PIST decreased significantly, and were set in ranges of approximately US$3.70/MBTU during the months of June through August 2019, and US$2.70/MBTU for the rest of the year for the Neuquina Basin.

For 2020 consumption, as of this date CAMMESA launched successive tenders for monthly coverages. On December 27, 2019, CAMMESA’s tender for the January 2020 period took place, and offers for a total 260 million m3 per day were received, with an average PIST price of US$1.73/MBTU in the Neuquina Basin. However, on January 29, 2020, a tender for gas was launched for the month of February 2020, but on a partially firm basis, where the producer commits to deliver a minimum volume equal to 30% (DoP). Offers were received for a total 84 million m3 per day at an average PIST price of US$2.59/MBTU for the Neuquina Basin. CAMMESA replicated this methodology for the March 2020 tender, receiving offers for a total 78 million m3 per day at an average PIST price of US$2.42/MBTU for the Neuquina Basin.

Moreover, as from December 30, 2019, the supply of fuel for power plants was again centralized in CAMMESA (except for generators under the Energía Plus Program).

Natural Gas Export
Res. No. 104/18 of the former Ministry of Energy (MinEn) and SGE Res. No. 9/18, later superseded by SGE Res. No. 417/19 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. In the case of projects covered by the Unconventional Plan Gas, the exported volume does not qualify for such incentive. In this sense, in December 2018 and January 2019, Pampa was authorized pursuant to SGE Res. No. 252/18 and 12/19 to export natural gas on an interruptible basis to Chile and Uruguay, respectively.

Moreover, Provision No. 168/19 of the Subsecretariat of Hydrocarbons and Fuels (SHC) of August 2019 approved the export of gas from September 2019 to May 2020, for a maximum aggregate volume of 10 million m3/day, 65% from the Argentine central-western area, 25% from the south, and 10% from the northwest area. In that sense, Pampa obtained a permit to export gas on a firm basis from its production in the Neuquina Basin to Refinerías ENAP in Chile.

In case higher costs are incurred by the Federal Government as a result of the use of alternative fuels for electric power generation by the WEM (imported liquefied natural gas (LNG), coal, fuel oil or gas oil), exporting companies should pay a compensation to CAMMESA. SGE Res. No. 506/19 issued on August 29, 2019 set a minimum value of US$0.1/MBTU and a maximum value of US$0.2/MBTU for the exported volume, which may be offset by receivables from the sale of gas in the domestic market each exporter holds against CAMMESA. This compensation would be included in the cost of electricity within the WEM.

Finally, pursuant to PEN Executive Orders No. 793 and 865/18, a gas export duty of AR$4 per each exported US$ is in effect as from September 2018, with a maximum 12% rate; this rate was later amended by the Solidarity Law, which provided, effective as from December 23, 2019, that it may not exceed 8% of the taxable value or the FOB (Free on Board) price (pending regulation).

Regulations Specifically Applicable to the Crude Oil Market

Crude Oil Commercialization in the Domestic Market

In January 2017, the Federal Government executed the Agreement for the Transition to International Prices of the Argentine Hydrocarbon Industry with producers and refineries of crude oil with the purpose of generating a gradual convergence of the price of the crude oil barrel traded in Argentina towards the international price. This agreement was suspended in October 2017 as the Brent crude oil price exceeded US$55/barrel (bbl) for 10 consecutive days and, since then, the domestic price for the barrel of crude oil to be used as raw material for refining and gas pump prices were determined based on the domestic supply and demand.

However, following the exchange rate (FX) volatility experienced in August 2019, Necessity and Urgency Decree (DNU or Decreto de Necesidad y Urgencia) No. 566/19 was issued on August 16, 2019, which fixed the barrel price agreed between producers and refiners in the domestic market as of August 9, 2019, and valid until November 13, 2019, considering a reference Brent price of US$59/bbl and a FX of AR$45.19/US$, being updated until reaching AR$51.77/US$.

 

Liquid Hydrocarbons Export Duty

As from September 2018, Executive Orders No. 793 and 865/18 of the National Executive Branch provide for an oil export duty of AR$4 per exported US$, with a maximum 12% rate. However, the Solidarity Law (Law No. 27,541) established that this rate (pending implementation) should be lower than or equal to 8% of the taxable value.

Regulations Specifically Applicable to Gas Main Pipeline Transportation

Integral Tariff Review (RTI)

Public Emergency and Exchange Rate Regime Reform Law No. 25,561, enacted in January 2002 and extended on several occasions until January 2018, provided for the turning into pesos of utility service tariffs; consequently, the transportation tariff remained 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).

With the purpose of normalizing the segment, on February 24, 2016 TGS entered into a transitory agreement with the Federal Government and, consequently, on March 29, 2016, the former Ministry of Energy and Mining (MEyM) issued Resolution (Res.) 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 grant a transitory tariff increase to be charged against the RTI. Within this framework, on March 31, 2016 ENARGAS passed Res. 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 Republic of Argentina (CSJN) established the obligation to perform a public hearing for setting tariffs and prices without market intervention, and declared the nullity of MEyM Res. 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, and, consequently, ENARGAS approved a 200.1% transitory tariff increase effective as from October 7, 2016, the execution of the investment plan and restrictions on the distribution of dividends (Res. No. 4054/16).

In December 2016, the public hearing required for the RTI process took place. On March 30, 2017, pursuant to ENARGAS Res. 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 from April 1, 2017. The RTI contemplates a semiannual non-automatic tariff adjustment mechanism subject to the Wholesale Domestic Price Index (IPIM) 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 with the purpose of implementing the tariff update; to such effect, ENARGAS Res. 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 income necessary 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 face the operation and maintenance of the main gas pipelines under TGS’s concession, as well as to 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 took place on November 14, 2017, and pursuant to ENARGAS Res. 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 established 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 Comprehensive Renegotiation Memorandum of Understanding was ratified by the Federal Government on March 28, 2018 (Executive Order No. 250/18 of the National Executive Branch (PEN or Poder Ejecutivo Nacional)), thus concluding the RTI process initiated in the month of 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 Res. No. 310/18 approving, effective as from April 1, 2018, the last installment of the tariff increase established by Res. 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 calculation of costs variations for the February – August 2018 period applicable as from October 2018, TGS requested an approximate 30% tariff increase based on the IPIM variation; however, on September 27, 2018 ENARGAS issued Res. No. 265/2018 setting 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 regulatory entity alleged that, according to the RTI, under certain macroeconomic conditions and circumstances, such as the significant devaluation which took place in April 2018, and taking into consideration that the semiannual update is a non-automatic adjustment mechanism, it may use other indexes different from the IPIM to determine tariff increase.

ENARGAS Res. No. 192/19 determined a 26.0% increase on account of costs variations 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 amount of bills issued during the July – October 2019 period was deferred, to be recoverable in five installments as from December 2019, pursuant to Res. No. 336/19 of the former Government Secretariat of Energy.

The semiannual update which, according to the RTI, should have been applied since October 1, 2019, was deferred pursuant to several regulations. Finally, the tariff increase was suspended for a maximum term of up to 180 days since the entry into force of the Solidarity Law (Law No. 27,541) on December 23, 2019. Moreover, this Law contemplates the possibility of performing an RTI review for a term of up to 180 days.

 

Public Tender for the Litoral Main Gas Pipeline

SGE Res. 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 town 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 provides for a Temporary Special Regime (RET) 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 will be in effect. Moreover, the license agreement provides for an irrevocable transportation offer of 10 million cubic meters (m3) per day to CAMMESA (Argentine Wholesale Electricity Market Clearing Company or Compañía Administradora del Mercado Mayorista Eléctrico S.A.) for a 15-year period.

The date for the opening of tenders was successively postponed until March 31, 2020. As of the issuance of Pampa’s 2019 Annual Report, although the new Government has not expressed itself on this matter, TGS (Transportadora de Gas del Sur S.A.) is analyzing the bid terms and its participation.

Regulations Specifically Applicable to the Liquefied Petroleum Gas (LPG) Business

Household Gas Bottles’ Program and Propane for Grids Agreement

Currently, it is in force the program for the supply of butane for gas bottles at subsidized prices, created by Executive Order No. 470/15 of the National Executive Branch (PEN or Poder Ejecutivo Nacional) and encompassed under the Household Gas Bottles’ Program (Resolution (Res.) No. 56/17 of the Subsecretariat of Hydrocarbon Resources (SRH), as amended), providing for the supply of a defined quota of LPG by producers 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$5,416/metric ton (ton) for butane and AR$5,502/ton for propane as from April 2018 (Provision No. 5/18). Later, prices were updated to AR$9,154/ton for butane and AR$9,042/ton for propane effective as from February 1, 2019 (Res. No. 15/19 of the former Government Secretariat of Energy), to AR$9,327/ton of butane and AR$9,213/ton for propane as from May 10, 2019 (Provisions No. 34/19 of the Subsecretariat of Hydrocarbons and Fuels (SHC)), and to AR$9,895/ton for butane and AR$9,656/ton for propane as from July 1, 2019 (SHC Provisions No. 104/19). Consequently, the participation in this program forces TGS (Transportadora de Gas del Sur S.A.) and Refinor (Refinería del Norte S.A.) 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 (Propane for Grids Agreement), a set of resolutions regulating the price of propane. 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. As of the date of release of Pampa’s 2019 Annual Report, this program has not been extended. However, on January 14, 2020, TGS was instructed by the former Secretariat of Energy (SE) to proceed with the propane deliveries pursuant to the conditions of the 16th extension to the Propane for Grids Agreement, indicating that this entity is performing all necessary works to extend the term of the Agreement until at least June 30, 2020.

Both the Household Gas Bottles’ Program and the Propane for Grids Agreement provide for the payment of a 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 on a monthly basis, although with significant delays in collection terms.

 

Natural Gas Import Financing Charges

As regards Res. 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 above-mentioned provisions. 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 October 29, 2019, the judge hearing the case resolved, taking into consideration the ruling and in view of 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.

 

Export Duty

Pursuant to PEN Executive Orders No. 793 and 865/18 and effective as from September 2018, a duty applies to exports of natural gas, propane, butane and natural gasoline, among other products, equivalent to AR$4 per each exported US$, with a maximum 12% tax rate. However, as from December 23, 2019, with the implementation of the Solidarity Law (Law No. 27,541), the rate may not exceed 8% of the taxable value or the FOB (Free on Board) price (pending regulation).

Regulations Specifically Applicable to Crude Oil Transportation

In the month of June 2016, the performance of the Integral Tariff Review (RTI) was requested to the former Ministry of Energy and Mining (MEyM) as the tariffs were insufficient to develop a maintenance and investment plan that may guarantee the integrity of facilities, minimize wastages, prevent and detect fraud, and improve energy efficiency towards the evolution of the transportation service in terms of reliability and efficiency. 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 closed the sale of 21% of Oldelval’s (Oleoductos del Valle S.A.) capital stock to ExxonMobil, keeping a 2.1% equity interest in OldelVal.