The Argentine Gas and Oil Market

Holders of hydrocarbon exploration permits and/or exploitation concessions may request an 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 a 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 and 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 a request should be based on the development of a pilot plan.

• 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, reducing exploration permits’ maximum time from fourteen to eleven years;
• 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
• 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 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 if the obligations arising from the permit have been appropriately met. If the exploration permit’s holder exercises the right of extension at the expiration of the basic term, the reversal will be limited to 50% of the remaining block.

Exploitation concessions will be granted for the following terms, which will be computed from the granting resolution’s date:

• Conventional exploitation concession: 25 years;
• Unconventional exploitation concession: 35 years; and
• On and off-shore exploitation concession: 30 years.

Moreover, the holder 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 an investment plan consistent with the concession’s development is submitted.

Law No. 27,007  sets 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, the following values will apply for the exploration permit: 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 basic term’s second and the extension periods may be readjusted by offsetting it with exploration investments 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 this province from 2020. As a result, the exploitation levy was set at AR$22,410. The exploration levy was 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 on the last business day before payment. This scheme is applicable nationwide (including the Province of Neuquén, which adhered to it through Provincial Executive Order No. 1656/20). The exploitation concession amounts to 8.28 barrels, whereas the exploration permit equals 0.46 barrels in the basic term’s first period and 1.84 barrels in the second period; and 32.22 barrels during the extension period.

Note: ⁽¹⁾ Corresponding to the first semester of the year prior to settlement.

Royalties

Royalties are defined as the only revenue the jurisdictions holding title to the hydrocarbons will collect from hydrocarbon production in their capacity as grantors. The percentage the exploitation concessionaire should pay monthly to the grantor as royalty remains 12% of the proceeds derived from liquid hydrocarbons extracted at wellhead. Natural gas production will bear a like percentage of the value of extracted and used volumes and will be payable monthly. In case of extension, up to 3% additional royalties payment is applicable upon the first extension but limited to an 18% rate.

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 the 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.

Extension bond

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 extension grant.

Exploitation bond

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

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 charges or encumbrances.

Uniform legislation

Law No. 27,007 provides for non-binding commitments between the Federal Government and the provinces:

• It provides for establishing uniform environmental legislation, primarily aiming to apply the best environmental management practices to hydrocarbon exploration, exploitation, and/or transportation activities.
• It provides for the adoption of a uniform fiscal treatment encouraging the development of hydrocarbon activities in their corresponding territories based on adherence to 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.

Unconventional hydrocarbons exploitation concession (CENCH) in the Province of Neuquén

Given the unique features of unconventional reservoirs due to their low permeability and the productivity reached over the last few years, the Ministry of Energy and Natural Resources of the Province of Neuquén set certain parameters for granting CENCH in this province, instrumented through Resolutions No. 53/20 (July 2020) and No. 142/21 (November 2021), later ratified by Provincial Executive Order No. 2183/21 (December 2021).

Companies may request a CENCH based on a development project comprised of a Pilot Plan for up to five years to demonstrate its technical and economic feasibility, with parameters additional to the national regulation regarding the operation, actual productivity assessments, costs and investment. Once the CENCH request is filed, if it includes a surface larger than the pilot area, the payment of a block extension bond is incorporated. Considering the basin’s average price over the last two years, its value will be associated with the resources expected to be recovered in the extended block.

While the CENCH is in effect, holders should submit on an annual basis continuous development plans and investment commitments to be executed during the concession period, considering that obligations for the following year will be deemed firm.

On November 16, 2020, Plan Gas.Ar was created to promote the production of Argentine natural gas and manage the impact of gas cost on the Priority Demand’s tariff through the tender of long-term supply agreements (Necessity and Urgency Decree or Decreto de Necesidad y Urgencia No. 892/20). Beneficiaries of Unconventional Plan Gas opting to participate in this program should previously file their waiver.

Initially, the term for onshore production was four years, with an additional four years for off-shore production, computable from January 2021. Later, Executive Order No. 730/22 from the PEN (National Executive Branch or Poder Ejecutivo Nacional), issued on November 4, 2022, extended the term until December 31, 2028 for the 70 million m³/day base volume already awarded under rounds 1 and 3.

Agreements are executed between producers (as sellers) and CAMMESA (Compañía Administradora del Mercado Mayorista Eléctrico or the Argentine Wholesale Electricity Market Clearing Company), gas distributors and ENARSA (Energía Argentina S.A.) (as purchasers), with a 100% daily DoP and a 75% monthly ToP for CAMMESA and quarterly ToP for gas distributors and ENARSA.

Moreover, the awarded price is adjusted by the following factors: 0.82 in the summer period (October – April), and 1.25 (May -September) for the base volume and 1.30 for the additional volume in the winter period. Regarding purchasers, CAMMESA and ENARSA will pay the awarded price, whereas gas distributors will pay the price set in the effective tariff scheme, and the Federal Government will offset the difference. Moreover, the Federal Government created a system to secure the compensation payment based on tax credit certificates, notwithstanding other applicable mechanisms.

Rounds 1, 2 and 3

In December 2020, round 1 was awarded for an annual base volume⁽¹⁾ of 67.4 million m³/day at US$3.5/MBTU, and an additional winter volume of 3.6 million m³/day at US$4.7/MBTU (Resolutions No. 391/20 and 447/20 from the SE (Secretariat of Energy)). Pampa was awarded a base volume of 4.9 million m³/day at US$3.6/MBTU and an additional winter volume of 1.0 million m³/day at US$4.7/BTU.

Round 2 was awarded on March 8, 2021, with an increasing daily DoP and a 75% quarterly ToP, for a base volume of 3.3 million m³/day during the winter period at US$4.7/MBTU from June 2021 (SE Resolution No. 169/21). Pampa was awarded 0.8 million m³/day at US$4.7/MBTU.

Round 3 was awarded on November 10, 2021 for an annual base volume of 3 million m³/day at US$3.43/MBTU (SE Resolution No. 1091/21) from May 2022. Pampa was awarded 2 million m³/day at US$3.347/MBTU.

Note: ⁽¹⁾ 49.0 million m³/day is from the Neuquina Basin. Round 1’s base volume represents 70% of the total production commitment (96.3 million m³/day), and the remaining 30% is sold at market price.

Rounds 4 and 5

Under Transport.Ar program to increase gas transportation capacity, on December 22, 2022, rounds 4 (Neuquina Basin) and 5 (Austral Basin) were awarded (SE Resolution No. 860/22). Rounds 4.1 and 5.1 extended a large part of the annual base volume until December 2028. Pampa managed to extend both rounds under the original conditions (for a total of 6.9 million m³/day).

Round 4.2 awarded new flat and winter peak volumes until December 2028. Awardees may limit up to 30% of the volume committed with ENARSA for industrial customers and/or CNG, subject to SE’s approval. Under this round, Pampa was awarded a 4.8 million m³/day flat volume at US$3.485/MBTU, deliverable from July 2023.

Finally, round 5.2 awarded the incremental winter volume for the 2023 – 2028 period. The customer is CAMMESA, with an 80% daily DoP and monthly ToP.

For natural gas, the benefit equals 30% of the incremental injection valued at the weighted average price of national exports over the last 12 months, net of export duties. This price may not be lower than Plan Gas.Ar’s weighted average awarded price or higher than twice that value.

For oil, the benefit equals 20% of the quarterly incremental production at the average Brent quotation defined by the enforcement authority over the last 12 months, net of export duties and adjusted by the crude oil’s quality.

The benefit percentage may be increased in both cases based on the situations contemplated in the respective provisions (i.e., domestic market coverage and whether the technical decline could be counterbalanced). Moreover, benefits may be transferred to direct suppliers, associated third parties and/or operators holding concessions.

On February 9, 2023, Pampa applied to opt into both systems, requesting the benefits for the third and fourth quarters of 2022. As of this date, the SE (Secretariat of Energy) has not rendered its decision in this respect.

In case of operational emergencies that may affect its regular operation, in June 2016, criteria were established to guarantee Priority Demand’s supply through the CEE (MEyM Res. No. 89/16, as amended). In June 2017, the procedure for administering dispatch in the CEE was approved (ENARGAS Res. No. 4502/17). If the CEE does 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)

As of January 2021, gas volumes for the priority demand are contracted under Plan Gas.Ar. Gas distributors must pay the price stated in the effective tariff scheme and the difference with Plan Gas.Ar’s awarded price is compensated by the Federal Government. In turn, ENARSA must pay 100% of Plan Gas.Ar’s awarded price.

It is worth mentioning that since 2021, new reference prices at the PIST have been set for the production out of Plan Gas.Ar (Resolution No. 354/20 from the SE (Secretariat of Energy)) at US$2.3/MBTU in the off-peak period (October – April) and US$3.5/MBTU in the winter period (May – September) for the Neuquina Basin.

Therefore, in addition to Plan Gas.Ar, CAMMESA continued calling for tenders with a maximum price equivalent to the one awarded under Plan Gas.Ar, and with a 30% DoP clause for the other maximum prices mentioned above. However, the involved volume is not significant.

Executive Order No. 730/22 from the PEN (National Executive Branch or Poder Ejecutivo Nacional), issued on November 4, 2022, allows exports on a firm basis even in winter, prioritizing producers with the most competitive prices and/or contributing with a higher volume under Plan Gas.Ar, once the domestic market is fully supplied.

Therefore, on November 16, 2022, SE Res. No. 774/22 was issued, which superseded SE Res. No. 360/21 and provided, among other measures, that: (i) no producer may export more than 30% of the authorized export quota or more than 50% of the commitment under Plan Gas.Ar; (ii) there are basin export quotas on a firm basis, based on the higher volume (45%) and price (55%) tendered; (iii) the exported volume will reduce Plan Gas.Ar commitment only in the summer; and (iv) the minimum price will be the higher of a Brent percentage determined by the authority and the seasonal-adjusted Plan Gas.Ar price.

In the summer period, quotas are 9 million m³/day in the Neuquina Basin and 2 million m³/day in the Austral Basin for the October 2023 – April 2024 period. Producers under Plan Gas.Ar will have priority in the allocation of the first 4 million m³/day in the Neuquina Basin and 2 million m³/day in the Austral Basin for the October 2023 – April 2024 and October – December 2024 periods.

For the winter period, a 3 million m³/day quota was set for the Neuquina basin during May – June 2023, to be apportioned among round 4.2’s awardees. Additionally, 3 million m³/day may be granted in the Neuquina Basin as of July 2023, but on an interruptible basis.

Pampa is authorized to export gas to Chile on a firm basis for a maximum volume of 1.5 million m³/day (Oct-21 – Apr-22), 1.22 million m³/day (Jan-22 – Apr-22), 1.5 million m³/day (Oct-1-22 – May-1-23) and 1.31 million m³/day (May-1-23 – Jul-1-23). Besides, prior applicable authority’s authorization, we could export to Chile, Brazil and Uruguay on a spot basis.

It is worth highlighting that a natural gas export duty has been in effect since May 2020. PEN Executive Order No. 488/20, issued on May 19, 2020, established an export duty while the international Brent price equals or below US$45/bbl. The rate would rise with the international reference price until reaching 8%, the cap to be recognized when Brent equals or exceeds US$60/bbl. In 2022, the rate remained at 8%.