Argentina lobbied to restore crude export subsidy

OREANDA-NEWS. January 14, 2016. Argentina's largest oil-producing province, oil companies and labor unions are notching up pressure on the government to restore subsidies on crude exports, warning of looming job losses and production declines.

The new government of president Mauricio Macri, who took office on 10 December, has maintained domestic wellhead oil prices above international levels, but allowed subsidies on production and exports to expire at the end of last year.

Without higher prices "there will be a significant drop in activity, with the social consequences that implies," notes a letter signed by government officials, oil companies and unions that was sent to the administration this week. "That is why we request equitable treatment for crude exports as an indispensable tool to maintain social peace."

The parties are engaged in negotiations that could yield a compromise, as exposed companies grapple with falling international oil prices and unions caution of imminent strikes if workers are laid off.

"Historically, when the barrel was at \\$110, \\$120 there was a great benefit for the government, and now we are asking for some help in return," says Leandro Moyano, a director at the Chubut province oil workers union.

Operations in Chubut, which accounts for about a third of Argentina?s crude production, are particularly affected by the oil price collapse, because most production there is 24°API Escalante crude, which is too heavy for most local refineries and is largely exported.

Local firm Tecpetrol has been especially hard-hit because it exports almost all of its production in the province. The firm has idled two drilling rigs and six workover rigs, according to the provincial government.

"Current prices are not even enough to cover operating costs," a Tecpetrol executive said. Tecpetrol declined to comment.

Other companies that are involved in the negotiations because they have production in Chubut are state-controlled YPF, Chile's state-owned Enap unit Sipetrol and BP-controlled Pan American Energy (PAE).

Yet Tecpetrol is seen as the most affected because YPF and PAE are integrated, and Enap has an agreement with YPF to refine some of its production.

"As it stands now, Tecpetrol's business model is simply not viable," an executive from another oil company said.

YPF has idled 10pc of its oil rigs across the country. Its board of directors will meet tomorrow to discuss this year's budget and decide whether more equipment should be brought down. In Chubut alone, YPF has idled two drilling rigs and two workover rigs.

"We are waiting to see what kind of signal YPF sends to the market as a whole," one oil executive said.

PAE has idled 15 drilling rigs and 26 workover rigs in Chubut, according to provincial data. PAE operates Cerro Dragon, the country's largest oil field.

YPF declined to comment. PAE was not immediately available to comment.

Last week, the Macri administration trimmed artificially high wellhead crude prices by 10-12pc as part of a wider move toward market-based policies. As of 6 January, producers of 34°API Medanito crude receive \\$67.5/bl from local refiners, a 12.3pc decrease from a previous \\$77/bl, while Escalante crude is now pegged at \\$54.9/bl, down 10pc. Both prices still exceed international levels by a growing margin.

Under a subsidy program implemented in 2014 by the previous administration, the government provided an additional \\$3/bl to companies that maintained or increased output when compared to the last quarter of 2014. Exporters received an additional \\$2/bl for crude sold abroad, which rose to \\$3/bl for companies that expanded the export volume. Macri's administration allowed the subsidies to expire at the end of the year.

Argentina produced 533,000 b/d of crude in 2015, flat with the previous year. The country exported 35,300 b/d in the first 11 months of 2015, marking an 18pc decline from the 43,122 b/d sold abroad in the January-November period of 2014, according to the latest data from the newly established energy ministry.