Publish in Special Reports - Wednesday, February 19, 2014
A shale gas drilling facility in Vaca Muerta, the world’s fourth-largest deposit. (Photo: YPF)
YPF CEO Miguel Galuccio and Petronas CEO Shamsul Azhar Abbas on February 18, 2014 signed a memorandum of understanding to jointly develop shale oil at Vaca Muerta. (Photo: YPF)
Unproven shale gas technically recoverably resources as per EIA report. CLICK TO ENLARGE
A guide to shale gas in Argentina.
Baker & McKenzie
In Latin America, attitudes towards shale exploration and production vary by country. (…) Around half of the Latin American countries with shale gas resources welcome shale gas development, with the other half taking a more cautious and reserved approach.
Argentina has the largest technically recoverable shale gas reserves in the region, with Brazil and Venezuela placing second and third, respectively.
America's various waves of nationalisations throughout the 20th and continuing
into the 21st centuries
are barriers to the country achieving its shale gas revolution because they
In 2012, Argentina compulsorily acquired Repsol's majority stake in YPF S.A. ("YPF"),
Argentina's NOC. Argentina has also nationalized its pension funds and
an airline. In addition, the ongoing controversy between Argentina and Britain
Falkland Islands has hindered oil exploration in the region.
Although Venezuela's NOC Petróleos de Venezuela S.A. was nationalized in 1976, the Bolivarian Revolution led by Hugo Chávez and continued by Nicolas Máduro saw the nationalization of Venezuela's energy, mining, construction, telecommunications and other sectors. Chavez' presidency set the stage for Evo Morales' nationalization of Bolivia's hydrocarbon sector when he took office in 2006 and a trend towards nationalizations by Ecuador's Rafael Correa.
Dwindling investor friendly policies
in Latin America's shale has also been challenged by governmental policies in
For example, Argentina's handling of its inflation figures, exchange rate
on its international debt and general regulatory uncertainty are not conducive
to foreign investments.
Brazil's policy focus on offshore pre-salt activities has deterred its shale
its significant domestic content policies are also expected to unnerve some investors.
In addition, some Latin American countries' labor policies and price caps on
market have also deterred potential investors in the shale industry.
Indigenous and environmental protests
Another reason some investors might shy away from investing in Latin American shale is because of the risk of indigenous and environmental protests. For example, in 2011 an Ecuadorean court fined Chevron over US$8 billion for alleged environmental and social damage to Ecuador's Amazon region caused by Texaco, which Chevron acquired in 2001. The lawsuit was brought by around 30,000 Amazonian tribespeople and communities who claimed that above-average cancer rates and other severe problems were due to toxic waste-water/sludge being dumped into rivers supplying their drinking water. Although Chevron awaits a hearing from the international arbitration tribunal in The Hague on the claim, it has lost millions of dollars in production and fees.
Brazil's proposed Belo Monte dam, which is being developed to provide hydroelectric power to the country, has also encountered significant opposition to its construction from indigenous and environmental groups. Indigenous groups protest against the harm they argue Belo Monte will bring to their way of life and environmentalists contend that the dam will unleash irreversible environmental consequences, such as greenhouse gas emissions and deforestation.
order to develop its shale resources, Latin America will need to attract a
significant amount of capital
investment to finance the technology, infrastructure and human capital
necessary to effect
a US-style shale revolution. Investors will likely be attracted to the region's
which is expected to propel natural gas use from 7.6 tcf/d in 2012 to 16 tcf/d
in 2040, and its
vast estimated technically recoverable shale gas reserves (around 1,431 tcf).
The region's coastal
geography, which provides convenient avenues of export to European and Asian markets,
is also attractive to investors. Moreover, some argue that Latin American
companies' prior experience working with extractive industries should lower
barriers to entry for
shale development. However, the aforementioned nationalization trend and
indigenous and environmental
protests in the region throw up obstacles to achieving the investment necessary
develop Latin America's shale gas resources. This means that it will likely
take more time for Latin
America to achieve its shale gas revolution than it did for its North American neighbor.
On the basis of the [reserves], recent regulatory developments and our clients' interests, we have identified Argentina as the country with the best prospect for shale gas development in Latin America. (…)
oil and gas history dates back to the early 20th century when YPF, Argentina's
formed. Oil production in the country peaked in the late 1990s, with natural
gas production starting
to decline in the 2000s. Nevertheless, Argentina's demand for energy has
explanations for the decline in Argentina's oil and gas production exist. The
has attributed the decline to underinvestment and excessive dividends at YPF, which
was privatized in the early 1990s. Argentina relied in part on that rationale
when it compulsorily
acquired Repsol's majority stake in YPF in 2012. This government takeover may have
deterred investment in Argentina's unconventional resources.
the end of 2013, compensation negotiations between YPF and Repsol began. It is
the compensation deal to be negotiated will bolster investor confidence in Argentina's
oil and gas
sector and encourage the billions of dollars necessary to exploit Argentina's
Argentina has estimated reserves of technically recoverable shale gas resources
tcf. These are the second largest reserves of shale gas resources in the world
after China, according
to the EIA Report.
Province of Neuquén, where most of the shale gas activity is taking place, has
not yet amended
its oil and gas law to include specific unconventional oil and gas regulations.
has issued limited regulations on unconventional gas, namely:
Law No. 2,453 of the Province of Neuquén ("Law");
Executive Order No. 3,124 implementing Hydrocarbons Law No. 2,453 of the Province
of Neuquén; and
• Provincial Executive Order No. 1,447.
addition, in September 2013, a National Senator sent a draft bill to the
National Congress to regulate
the extraction of shale oil and gas through the hydraulic fracturing method
("Bill"). The Bill
was sent for debate to the Commission of Environment and Sustainable
Development and the
Commission of Mining, Energy and Fuels of the National Senate. As of January
2014, the Bill has
not been debated.
Ownership of hydrocarbon resources
1994, the National Constitution was amended, transferring eminent domain over
to the provinces. However, the amendment did not make any specific reference to who
(i.e. the provinces or the federal government) had jurisdiction over those
resources. As Article
1 of National Law No. 17,319 ("Hydrocarbons Law") provided
that the ownership of hydrocarbon
deposits belonged to the nation state, this situation caused conflicts between
and the federal government over regulation in relation to natural resources.
Most, but not
all of such conflicts were overcome in 2007 when National Law No. 26,197
("Short Law") was
enacted, which effectively transferred ownership and authority to grant control
of hydrocarbons to the provinces, save for offshore areas beyond the 12 mile
limit of provincial jurisdiction.
In Argentina, at the Federal level, the key players in the oil and gas sector are:
National Secretariat of Energy ("Secretariat"). The Secretariat's role consists of:
the hydrocarbon regime at the federal level;
the national energy policy;
offshore concessions and permits beyond 12 marine miles; and
the inter-provincial and cross-border transportation concessions, the
foreign trade and the liquefied petroleum gas market.
Commission on Strategic Planning and Coordination ("Commission"). The Commission was established by Executive Order No. 1277/2012 and given the following tasks: o establishing a sanction regime;
a plan of minimum budget and investment goals;
the Registry of Hydrocarbon Investments;
and approving investments plans of IOCs and NOCs in the hydrocarbon
o publishing reference
prices for the sale of hydrocarbons and fuels.
Federal Hydrocarbon Council ("Council"). The Council was created
pursuant to National Law
No. 26,741. The Council's functions are to:
coordinated action by stakeholders regarding National Law No. 26,741 (i.e. the law
calling for national self-sufficiency in hydrocarbons and expropriating 51% of
o guarantee compliance with YPF Law's purposes; and
a national hydrocarbon policy
Nacional Regulador del Gas ("ENARGAS"). Established under
National Law No. 24,076
("Gas Law"), ENARGAS is a regulatory authority whose functions
are to regulate the transportation,
distribution, commercialisation and storage of gas.
Federal Organisation of United Oil Products ("OFHEPI"). OFHEPI is an organization composed of the federal government and the oil producer provinces. OFHEPI jointly represents the common interests of the oil producer provinces in respect of the exploration and exploitation of the hydrocarbons reserves located within their territories.
Energía Argentina Sociedad Anónima ("ENARSA"). Created pursuant to Law No. 25,943, ENARSA is a partially state-owned company (53% national state, 12% provincial governments and 35% traded on the stock market). ENARSA has ownership of all offshore concessions and permits, which are located within 12 to 200 nautical miles and that were not subject to a concession at the time of their creation. ENARSA calls for bids in these offshore areas and is also in charge of the LNG program.
YPF S.A. YPF is an NOC (51% national states and 49% provincial governments). YPF currently is the sole holder of exploration and production rights and is also associated with provincial owned companies ("POCs") and IOCs. YPF is in a privileged situation as it is the right holder of most of the areas with unconventional potential in the Province of Neuquén.
In Argentina the provincial governments perform the following functions:
exploration and exploitation concessions and permits;
and collecting royalties and taxes;
transportation concessions within their territory; and
hydrocarbons exploration and production within their territory.
The sections below will concentrate on Federal regulations and the regulations of the Province of Neuquén.
KEY CONTRACTUAL ISSUES
distinction is drawn between the following categories of areas (Articles 10 and
• Proven - These are areas which reflect sedimentary or stratigraphic traps where the existence of potentially commercially exploitable hydrocarbons has been established. No exploration permits are granted in these areas.
secondary interest - This category deals with areas that contain oil and
gas reserves but:
reverted to the provincial government; or
from abandoned tenders.
exploration permits are granted in these areas.
- These are areas not included in the "Proven" and "Of
Exploration permits are granted as follows:
period, up to four years;
period, up to three years; and
period, up to two years.
means that a permit can be granted for a total of nine years in possible areas.
• High-risk exploratory - This category contains areas that present significant geological complexity. Exploration permits are granted as follows:
period, up to six years;
period, up to four years; and
period, up to three years.
can therefore be granted for a total of 13 years in high risk exploratory
extension period of up to one year is available at the election of the permit
holder, who must justify it on
minimum exploration permit area is 100 km2 (Article 23 Law); and
maximum exploration permit area is 100,000 km2 (Article 24 Law).
Article 25 Law provides that upon completion of:
first period, the permit holder shall relinquish 50% of its permit area;
second period, the permit holder shall relinquish 50% of the remaining permit
third period, the permit holder shall return the entire remaining area, unless
it exercises the
right to use the extension period. In this case, the permit holder shall
relinquish 50% of the
concessions are granted for 25 years (Article 34 Law), plus any unelapsed
period of the
exploration permit (Article 22 Law). Article 34 Law further provides that
can be extended for up to 10 years.
Delineation exploitation concession
to Article 32 Law, "To the extent possible, each of the parcels covered
by a concession should match up with all or part of the commercially
exploitable oil and gas productive traps".
32 further states that the boundaries of each block may not exceed the area
the exploration permit.
exploitation concession does not result from an exploration permit, the
area may not exceed 250 km2 (Article 33 Law).
NOC participation and carry
for the de facto compulsory participation of ENARSA in offshore
exploration permits and concessions
licences, there is no requirement as to a compulsory minimum state
participation at the
Federal level. However, pursuant to Article 12 Law, the Province of Neuquén
shall, if it so determines,
receive a participatory share (payable in cash or, exceptionally, in kind) of
of the exploitation activity.
addition, Article 114 Law provides that some areas may be reserved for
by state-owned companies (i.e. at the provincial level, these are
the POCs). Private companies can associate with state-owned enterprise to work
areas reserved for state-owned companies. The state-owned company percentage participation
interest will be determined in the association contract (Article 118 Law). In
led by YPF were awarded most of the areas offered for hydrocarbon exploration
in association with Neuquén's POC (Gas y Petróleo de Neuquén). Therefore, IOCs
will need to
enter in a JV with YPF and Gas y Petróleo to conduct exploitation for
Water resources rights
that need to use large quantities of water to develop a project (for example,
hydrocarbons project) must obtain a permit from the relevant provincial hydrologic
authority. In the Province of Neuquén, the authority in charge of granting such
permits is the Hydrologic
Resources General Office.
In addition, the Bill includes regulations on the use of water. In particular, it prohibits the use of groundwater that could be destined for human consumption and/or soil irrigation during the drilling and closure of wells stages in unconventional hydrocarbons projects.
is regulated both at the Federal (Resolution No. 236/1993 and Resolution No.
the Secretariat of Energy) and provincial levels.
In the Province of Neuquén, the flaring and venting of gas is regulated by Law No. 2,175 and Executive Order 29/2001. In essence, these regulations provide the following:
release of gas must always be authorised by the Sub-Secretariat of Energy of
gas is released into the atmosphere, such gas must be flared;
release of gas into the atmosphere at gas wells is prohibited;
oil and gas wells, as from January 1st, 2000, only one cubic meter of gas per
cubic meter of
oil can be released into the atmosphere;
and flaring of gas at oil and gas wells in excess of the limit indicated above
is highly restricted
and exceptionally allowed on a case by case basis and for a limited period of
provided the operator or concessionaire of the relevant deposit files a
presentation with the
Sub-Secretariat of Energy of Neuquén justifying the need to release and flare
gas in excess
of such limit;
oil and gas wells, the gas released in excess of the legal limit is subject to
the payment of a fee
for atmospheric contamination equivalent to 500% of the average sale price of
at well heads in the Province of Neuquén;
release of gas at oil and gas wells requires the filing of a monthly sworn
statement with the
Sub-Secretariat of Energy of the Province of Neuquén providing information on
of gas released from the wells; and
• release and flaring of gas activities must comply with the national and provincial environmental protection regulations (e.g. National Environmental Law No. 25,675 and
Environmental Law No. 1,875).
laws do not provide for stability provisions. However, in the Province of
Neuquén, Article 58
Law provides that for the duration of the permits and concessions, the holder
of exploration permits
and exploitation concessions shall pay all of the provincial and municipal
taxes and duties
that are in force on the date of the award. It further provides that the
Province of Neuquén may
not tax titleholders with new taxes or increase existing ones, except for
overall increases in provincial
taxes, those collected by the national government or taxes that replace the
OTHER ISSUES TO CONSIDER
Domestic market obligations
the Province of Neuquén, subject to Article 12 Law (right of the Province of
Neuquén to receive
a share of the hydrocarbons produced), owners of exploitation rights are free
to dispose of the hydrocarbons they
extract. These hydrocarbons may be transported, processed, and marketed,
along with their derivatives, notwithstanding compliance with the regulations
issued by the
Provincial Executive Branch (i.e. the Governor of the Province of Neuquén) on technical/economic
bases that seek a reasonable degree of fluidity in the supply and profitability on
the domestic market and stimulate exploration and exploitation of hydrocarbons
(Article 6 Law).
are DMO at the Federal level in Argentina:
to Article 6 Hydrocarbons Law:
the domestic production of liquid hydrocarbons is not sufficient to cover
all hydrocarbons of domestic origin shall be made available for use in the
market, save when technical reasons make this unadvisable;
production of natural gas may be used, firstly, for the exploitation of the
which it is extracted and of others in the area, whether or not they belong to
Secondly, any state-owned company that provides a gas distribution
has a preference right to acquire, within acceptable periods of time, any
excess of the first use at agreed prices, provided that such prices shall
ensure a fair rate
of return on the investment involved and taking into account the special characteristics
and conditions of the reservoir; and o the
marketing and distribution of gaseous hydrocarbons is subject to regulations
the National Executive Branch. Currently, natural gas exports can only be made
demand is satisfied.
there are no specific restrictions on crude oil exports, export taxes (e.g.
394/2007), which vary according to international oil prices, effectively set a
"ceiling" on the
producers' share of export income.
below sets out how the Federal law addresses some of the issues to be
considered by IOCs
if DMO are applicable:
Issues Argentinian Regime
The Executive Branch has the discretion to require that all hydrocarbons of domestic origin shall be made available for use in the domestic market (Article 6 Hydrocarbons Law).
Shale gas exports
The Executive Branch shall allow the exportation of any hydrocarbons or products not required for the adequate satisfaction of domestic needs, provided that these exports are made at reasonable commercial prices (Article 6 Hydrocarbons Law).
Sale price of gas sold in thedomestic market
During any period in which the domestic production of liquid hydrocarbons is not sufficient to cover internal needs, the Executive Branch can set the prices for the marketing of crude oil in the domestic market. If it does so, such prices shall be equal to those established for the respective state-owned company that charged in
with third parties, but not less than the price levels for imported
oil on similar terms and conditions. However, if the prices for
imported oil increase significantly because of exceptional circumstances,
they shall not be considered in setting prices for marketing
in the domestic market, and in such event, they may be set
based on the state-owned company's actual costs of exploitation,
any depreciation that is technically appropriate, and a reasonable rate of
return on any investments that such state-owned company
may have made, adjusted for inflation and depreciated (Article 6 Hydrocarbons
Repatriation of proceeds and profits
October 2011, Executive Order No. 1722/2011 established the
obligation to repatriate 100% of export proceeds for companies producing
crude oil and any by-products, natural gas and liquefied gas.
Definition of domestic market
is no definition of "domestic market" provided in the legislation.
Fiscal regime and tax incentives
the Province of Neuquén, Article 61 Law provides that once a month, the holder
exploitation concession shall pay to the provincial government, as a royalty on the production of the liquid hydrocarbons extracted from the wellhead, a percentage consisting of 12%. The Provincial Executive Authority may reduce such percentage to 5%, taking into consideration the productivity, conditions and location of the wells.
Argentina there are no tax breaks or investment incentives to incentivise
investments in depleting
Third party and state access to infrastructure
to Article 42 Law, subject to the satisfactions of the concessionaire's needs,
• facilities have excess capacity; or
are no technical reasons that would prevent it, the
concessionaire is obliged to transport oil and gas for third parties without
any persons, at the same price under identical circumstances.
42 Law further states that should the provincial government opt for payment of
the royalty in
kind (as per Article 67 Law), the concessionaires will have to provide the
with the transmission capacity needed for the purposes of transporting the
volumes to be delivered as
payment of the royalty in kind.
there is no shale gas project in production in Argentina. However, there are
in relation to the "Vaca Muerta" shale gas project located in
the Province of Neuquén.
This project has one of the largest estimated shale gas reserves in the
country. YPF (the
holder of the project's rights) is executing several agreements with different
as Chevron, Dow Chemical and Petronas) to
perform exploration activities in the "Vaca Muerta" deposit. (…)
The following companies
are currently involved in shale gas operations in Argentina:
Agreement to explore in Neuquén. YPF had drilled 60 wells by November 2012.
ExxonMobil, Apache, Chevron, EOG, Royal Dutch Shell, Total, Americas Petrogas and Madalena Venture
an interest in the Vaca Muerta field in Neuquén.
YPF/Cnooc Ltd/Bridas Corp
Agreement to explore in Neuquén.
Agreement to explore in Neuquén.
Wintershall/Gas & Petróleo de Neuquén
Agreement to explore and develop a block in the Vaca Muerta field.
This column is based on an excerpt
from the report “Shale Gas: An International Guide” from Baker & McKenzie. Republished
To request the complete guide, please click this link.