BY LATIN AMERICA ADVISOR
Earlier this month, Argentine President Cristina Fernandez announced "Petroleum Plus," a tax-break program for oil companies that the government says will result in $8.6 billion in new investment in the energy sector. Will "Petroleum Plus" be effective in convincing companies to invest in Argentina and increase their production and refining capacity? Are the government's claims that the program won't put a strain on the budget accurate?
José Martínez de Hoz Jr., Partner at Perez Alati, Grondona, Benites, Arntsen & Martinez de Hoz, Jr. in Buenos Aires: Export taxes, export restrictions and other regulations imposed since 2002 produced a huge transfer of wealth from the upstream energy sector to the industries and consumers. The deregulated energy regime of the nineties was strongly affected by increasing government interference. The measures taken since 2002 triggered a huge growth in the domestic demand for natural gas, and strongly discouraged investments resulting in a significant decline of crude oil and gas production and reserves. Certain recent events suggest that the artificially depressed domestic crude oil prices are gradually beginning to fall in line with international prices. Moreover, the use of export taxes to artificially reduce domestic prices will predictably meet an end in the short future if Argentina as expected becomes a net importer of crude oil. The federal government has responded to this scenario by announcing new programs that will allow producers to improve the returns that will be obtained from new investments. The programs include the already existing 'Gas Plus' for natural gas production projects, the recently announced 'Petroleum Plus' for crude oil and 'Refining Plus' for new investments in refining capacity. Although helpful, these new programs may be insufficient for certain high cost projects in the light of the recent collapse of international prices. Further, the programs are still missing the transparency and stability needed to attract long term new investments in the global economy.
Luciano Gremone, Associate Director of Corporate Ratings at Standard and Poor's in Buenos Aires: In an attempt to promote new investments in the oil and gas sector, the Argentine Government has recently announced the 'Petroleum Plus Program.' At this point, we consider the success of this program as uncertain. Although the final details are still pending (no official resolution or decree has been published yet), the mechanics of this new program are expected to be similar to those of the previous 'Energy Plus' and 'Gas Plus.' In a nutshell, the government would offer price and/or tax incentives for companies increasing supply to the market. These incentives are positive because they would probably increase the economics of the industry which would likely result in increasing production in mature basins and the development of some greenfield projects. Nevertheless, we consider that although positive, price incentives would also require a stable and predictable regulatory framework in order to boost investments in the sector. These conditions become more relevant as oil prices are decreasing and financing, particularly for large projects (e.g., new refineries), is very scarce.
Juliette Kerr, Senior Research Analyst at IHS Global Insight: The 'Petroleum Plus' program is unlikely to be as effective in attracting new investment as tackling the underlying distortions in the market would have been. Oil companies would no doubt have preferred to see higher domestic prices and the complete eradication of export taxes. Nonetheless the tax breaks are a step in the right direction and should help to incentivize some new production. The Petroleum Plus program, along with the 'Gas Plus' program and earlier decisions to unfreeze some tariffs, are also a sign that the operating environment for energy investors is finally starting to improve. Meanwhile the government is hoping that the oil tax revenues forfeited through the Petroleum Plus program will be offset by a reduction in the amount it has to pay out in subsidies on imported fuel. Reducing the cost of subsidies has become an increasingly important driver behind energy policy as the government tries to improve its fiscal position ahead of next year's heavy debt service. However the assumption that the impact on the budget will be minimal rests on the expectation that crude oil and refined product production will rise sufficiently to allow for a substantial fall in imports. It is not clear whether this will in fact happen. A more significant reduction in the subsidy bill in the short-term could come from lower commodity prices, although of course they will also contribute to a further drop in fiscal revenues from oil production.