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Gas Production Business Opportunities

26 October, 2022

Oil and gas business opportunities – Highlights

Argentina oil and gas resources:

♦  The country has proven large reserve of oil (worldwide 4 th largest unconventional resources 27 bill bbls) and gas (worldwide 2 nd largest unconventional resources with 802 tcf), divided in 3 basins: 1) Neuquén (70%), 2) San Jorge Gulf and, 3) Austral.

♦  Almost unexplored offshore reserves.

♦  Prices and demand will change favouring investments in the country as the result of the energy transition (replacement of coal power generated by
natural gas) and geopolitical changes (replacing from Russian oil and gas offer).

♦  Main international oil and gas players and services providers have operations in Argentina.

♦  Potential output will exceed local demand, which, in turn, has supply priority (Law 17,319, section 6).

♦  Efficiency gained in the exploitation of unconventional oil and gas resources reaching equivalent international production costs (Permian basin).

Argentina oil and gas legal system:

♦ Sound oil and gas legal system, granting exploration permits and exploitation concessions by provincial and national authorities (Law 17,319):

»  Hydrocarbon fields located 12 nautical miles from the baselines up to the outer limit of the continental shelf belong to the National State.

» Hydrocarbon deposits located in their territories, including those located in the sea adjacent to their coasts up to 12 nautical miles measured from the baselines, belong to the provincial States and the City of Buenos Aires.

»  Exploration permit holders and exploitation concessionaires have the ownership of the lifted hydrocarbons and derivatives and are entitled to transport, sell, industrialize them.

» Local supply takes priority over hydrocarbons exports, authorizing the export of all hydrocarbons once the local supply is covered.

»  Exploration permits:

    • Conventional: 2 periods of 3 years each, extension for 5 additional years.
    • Unconventional and offshore: 2 periods of 4 years each, extension for 5 additional years.
    • After the first period: reversal or continuation.

»  Exploitation concessions:

    • Conventional 25 years.
    • Unconventional 35 years.
    • Offshore 30 years.
    • Extension for up to 10 additional years provided the concessionaires: 1) has complied with their obligations, 2) be producing hydrocarbons in the concession under consideration and, 3) submits an investment plan for the development of such areas as requested by the competent authorities up to a year prior to the termination of each term of the concession.

»  Royalties:

    • 15% under exploration permits and 12% under exploitation concession.
    • Reductions to 5% in case of “Enhanced Oil Recovery” or “Improved Oil Recovery”.
    • In case of extensions, a 3% increase up to 18% and an extension bond, which maximum amount shall result from multiplying the remaining proved reserves at the end of the concession by 2% of the average basin price, for the two-year period prior to the extension.
    • Royalties are payable on the value at the wellhead (equal to the price upon delivery of the product, less transportation, treatment
      costs and other deductions) of crude oil production and natural gas volumes sold.

»   Exploration fee, per square meter: 1) 1st Basic period: Arg$250, 2nd Basic period Arg$1.000, 2) Extension: Arg$17.500 increasing it by 25% per year.

»   Transportation concessions under the hydrocarbons law 17,319:

    • exploitation concessionaires are entitled to receive transportation concessions, which will be granted by national executive branch in those cases exceeding one province or 50 km
      or 12 inches (except if declared part of a  Capture System, setting forth the bases for its tariff and service conditions to third parties),
    • those transportation facilities exceeding the limit of the exploitation concession shall be registered as transportation concessionaires while those within such limits are not obligated
      but are entitled to request so,
    • the term of the transportation concession will be the same of the exploitation concession,
    • while technically possible and after satisfying their own needs, transportation concessionaires shall transport third party hydrocarbons under non-discriminatory bases, applying the tariffs approved by the authority,
    •  exploitation concessionaires may partner up into jointly develop transportation facilities as well as assign their right to receive the transportation concession to a third party which will hold it.

♦  Decree 892/2020 -issued by the Federal Executive Branch as with the same hierarchy as law passed by the Argentine Congress- approved Argentina’s Gas Plan 2020-2024 (a programme that promotes investment in gas production):

»  Declares of national public interest and as a priority objective the promotion of Argentine natural gas production.

»  Sets a competitive contracting system between producers and gas distributors and sub-distributors and Electrical Dispatch Operator (which hires the natural gas consumed by power
generation plants).

»  Seeks to improve the balance of payments by avoiding imports of Liquefied Natural Gas and other liquid fuels for electricity generation, which costs has increased as from the geopolitical shift.

»  The volume of gas to be contracted is 70 million m3 per day for each year of the program, which started on December 1, 2020, of which 11 m3 per day may be exported during the so-called
Summer Seasonal Period (October – April of each year).

»  The Plan will have a term of 4 years, which may be continued for annual periods. In the case of offshore projects, the 4-year term will have an additional term of 4 years, totalizing 8 years.

»  The Energy Secretariat will call interested parties to indicate the volume they will commit per basin, production curve, gas price for each basin and investment plan and will make the allocation
based on an increasing order of prices offered for each basin. In case of low demand, the proposals with the lowest price for each basin will have priority in the nomination. In the case of exports,
the most competitive prices will be those with priority for export in firm condition.

»  Based on the price of the offers, the natural gas distributors may request the tariff adjustment for variation in the price of gas purchased under the Plan. In case there are differences between the prices established in the tariffs and the prices of the offers, such difference will be compensated to the producers.

»  Producers will have the right of first refusal to export in firm condition both through the pipeline system and Liquefied Natural Gas (“LNG”) once the volume of 70 million cubic meters has been covered, having been assigned by basin the distribution of the volumes assigned for export.

»  The BCRA (Central Bank of the Argentine Republic), in case of restrictions, shall establish suitable mechanisms to facilitate access to the free foreign exchange market to repatriate those funds that have been invested through it, as from the entry into force of the decree and destined to the financing of projects framed in the scheme referred to herein.

♦   Liquified Natural Gas (“LNG”) exportation regime:

»  The Executive Branch will allow the export of hydrocarbons or derivatives not required for the adequate satisfaction of domestic needs.

»  Such authorization is not required when the export contract establishes the supply is interruptible in case of local shortage without compensation.

»  Last year the Energy Secretariat approved a regimen for LNG exportation (Res. 706/21) which requires:

    • registration as exporter in the LNG Operators Registry,
    • demonstrate that domestic market players who may be interested in this fuel have been given the opportunity to purchase this product,
    • the Energy Secretariat may issue firm LNG export permits up to a maximum term of 20 years, after evaluating the security of domestic natural gas supply based on the characteristics of the project and the impact on the capacity of the natural gas transportation system that requires,
    • clarifies that the LNG export authorization will be final “without being revoked or interrupted at a later date due to the security of supply of the domestic market”, even-though it is not clear how said condition will be interpreted in case of local shortage.

♦   Decree 277/2022 -issued by the Federal Executive Branch as with the same hierarchy as law passed by the Argentine Congress- established the new Foreign Exchange Access Regime for the Incremental Production of Hydrocarbons, promoting investments in the sector.

»  Incentives:

    • covers 20% of the quarterly incremental production of oil, and 30% of the quarterly incremental production of gas,
    • and implies having access -for those volumes- to the Free Foreign Exchange Market (“MULC”) to pay abroad the principal and interests of executed  loans and/or profits and dividends corresponding to closed and audited balance sheets and/or the repatriation of direct investments of non-residents.

♦   Strong political commitment by oil and gas provinces which own the reserves, to develop and exploit the resources in a sustainable manner.

♦   No restrictions regarding foreign investments and ownership of mineral resources.

♦   Environmental worldwide state of the art requirements through Environmental Impact Assessment before the provincial authority to obtain Environmental Impact Declaration.

Business opportunities:

♦   Onshore and offshore exploration and production:

»  Onshore unconventional (8.65Bn acres): 4% in development phase, 23% unconventional concession granted and, 73% not granted.

»  Offshore conventional: Austral basin represents 20% of the gas production (23MMm3/d):

    • large unexplored areas (500M km2), limited infrastructure, competitive legal framework (5% royalties, well drilled is not required in the first 4-year exploration period,
    • 13-year exploration period before deciding on commercialization,
    • in which case the concessionaire is entitled to the free availability of 60% of the hydrocarbons produced from wells drilled in the Exploitation Concession in locations where the average water depth exceeds 90 m, and 20% of the hydrocarbons produced in locations where the average depth of the water does not exceed 90 m, as well as the free availability of 100% of the foreign exchange originated in the export of said hydrocarbons. in which case the concessionaire is entitled to the free availability of 60% of the hydrocarbons produced from wells drilled in the Exploitation Concession in locations where the average water depth exceeds 90 m, and 20% of the hydrocarbons produced in locations where the average depth of the water does not exceed 90 m, as well as the free availability of 100% of the foreign exchange originated in the export of said hydrocarbons.
    • The export of freely available hydrocarbons in accordance with this article will not be subject to export duties.

♦   Gathering (associated to the development of new wells) and transport infrastructure (linking production locations with consuming areas and exporting facilities). Argentina has an extended network of natural gas transportation and distribution, with strong knowledge in its construction and operation (28,900 km of pipelines).

♦   LNG plants and export facilities. Advantages: 1) positive seasonal dynamic with Asian markets (Japan, China and Korea), 2) gas breakeven below 3U$S/MMBTU, 3) gas production incentive plan: stability and competitive prices.

O’Farrell and Oil & Gas: our team and knowledge.