Vaca Muerta: call for bids for the new gas pipeline

On July 31, 2019, Resolution No. 437/2019 (the “Resolution”) enacted by the Secretariat of the Government of Energy (“SE”) was published in the Official Gazette by means of which the SE calls for a national and international public bid to grant a new license to provide natural gas transport services.

The new licensee will be required to design and construct the new pipeline to transport the natural gas production from the Neuquina basin as provided by Decree No. 465/2019 (the “Decree”) issued by the Argentine Executive (for more information about the Decree please see https://www.marval.com/publicacion/vaca-muerta-nuevo-gasoducto-13381).

The Resolution also approves the terms and conditions of the bid (the “Bidding Terms”), which include the natural gas transport license to be granted, the technical requirements of the transport system, the technical assistance agreement (to be entered among the technical operator and the licensee), and the firm transport agreement to be entered between the licensee and CAMMESA for a volume of 10 million m3/day.

The Bidding Terms provide that the licensee must obtain financing by its own means, although it would be able to apply for financing granted by the Sustainability Guaranty Fund of the Public Pension Regime (“Fondo de Garantía de Sustentabilidad” or “FGS”), subject to the terms set forth in the Bidding Terms.

The Bidding Terms provide for the construction of the new transport system in two phases and its operation under the Special Temporary Regime (Régimen Especial Temporario or “RET”, after its acronym in Spanish) for the initial term of 17 years. The RET comprises a particular form of compensation for the licensee and the allocation of transport capacity. Upon expiration of the RET period, the operation will be conducted under the general regime.

The Resolution provides that the offers shall be submitted and opened on September 12, 2019. We outline below the main features of the Bidding Terms:

1. Bidders

Bidders should be registered as interested parties and pay a fee of $400,000,000.

Foreign companies will be able to bid without the need of registration pursuant to Sections 118 or 123 of the General Companies Law No. 19,550 (“LGS”, after its acronym in Spanish), but if they are awarded the license they will need to comply with such requirement to become shareholders of the local company that would act as licensee (see Section 6 below).

When the bidder is comprised by two or more parties, the offer must include the agreement among the parties, which shall include, among other requirements: (i) the commitment of incorporating the company which will act as licensee if the license is awarded to them, indicating the shares and votes to be subscribed and integrated by each party; (ii) the joint and several liability of all its members with respect to all the obligations arising from the Bidding Terms; and (iii) the appointment of one representative acting on behalf of all the parties.

2. Financial requirements

The bidder –or jointly its members in accordance with their participation percentages- shall comply with the following parameters:

2. 1. Net equity: (i) minimum net equity of US$ 500,000,000 according to the last annual financial statements, and (ii) minimum average net equity during the last 3 fiscal years of US$ 400,000,000.
   2. Total assets: (i) for at least US$ 1,000,000,000 according to the last annual financial statements, and (ii) average of US$ 900,000,000 during the last three fiscal years.
3. Technical requirements and technical assistance agreement (TAA)

The technical operator –which could be the bidder, one of its members or a third party- must have experience in the operation and maintenance of natural gas transportation systems by pipelines of at least 500 km length and a 30 inches diameter, with operating pressure of at least 60 bar, for at least 10 years, 5 of them uninterrupted, in the last 15 years.

The bidder –or its members jointly- shall have experience in the administration, management or direction of gas pipeline projects of at least 250 km length, a 24 inches diameter and at least 28,000 HP of installed compression capacity, from the engineering studies to the commercial operation, during the last 15 years.

A technical assistance agreement (TAA) shall be entered between the technical operator and the licensee as a condition precedent for the granting of the license, which shall be effective at least during the first 8 years of the term of the license.

4. Offer: technical and economic proposal

The offers will comprise a technical proposal and an economic proposal.

The technical proposal must include the documentation evidencing the bidder’s compliance with the Bidding Terms. In addition, this proposal shall contain a technical project for the “Gas Transport System of the Center” to be implemented during the Phase 1 (Tratayén-Salliqueló).

The economic proposal must specify the price offered for the firm transport agreement to be entered with CAMMESA, stating in US dollars the daily fee per cubic meter of 9,300 kcal/m3 natural gas transportation capacity reserved, excluding VAT, turnover tax and credits and debits tax, between the sub-zone of Neuquén, in the surroundings of the City of Tratayén, Province of Neuquén, and the City of Salliqueló, Province of Buenos Aires.

Bidders shall submit a maintenance guarantee of US$ 5,000,000 in any of the following ways: (i) a stand-by letter of credit issued by a local or international bank, (ii) a bank guarantee issued by a local or international bank, or (iii) a private surety bond issued by an insurance company authorized by the Argentine Superintendency of Insurance.

5. Opening and assessment of offers

The opening of proposals will be conducted in two stages: analysis of the technical proposal and, afterwards, analysis of the economic proposal. In the first stage, technical proposals of each offer will be opened reserving the economic proposal for the next stage.

Bidders will be able to review and obtain electronic copies of all the offers submitted. An assessment committee will analyze the technical proposal, request clarifications, additional information and/or amendment of formal errors or omissions. The proposed schedule is the following:

1. Non-binding opinion: Within 10 business days as from the opening date, the assessment commission will issue a non-binding opinion on each offer, indicating if the offer is admissible or not. Such opinion can be challenged by the bidders within 3 business days.
2. Shortlist: Within 5 business days after the non-binding opinion, the SE will issue a resolution with the shortlist of admissible offers.
3. Opening of economic proposals: Within 3 business days as from the date of the resolution, the SE will open the economic proposals of the admitted bidders. The bidders may review and obtain electronic copies of all the proposals.
4. Ties: A tie will be declared when the difference between two or more offers is less than 3%. In such case, the bidders who submitted the tying offers will be able to submit a better offer within 1 business day.
5. Opinion on order of merit: Within 3 business days as from the opening date of the economic proposals, the assessment committee will issue an opinion indicating the order of merit of the admitted offers and its award recommendation based on a lowest price criteria. Such opinion may be challenged by the bidders within 3 business days.
6. Award: The award resolution will be issued within 5 business days as from the date of the opinion on the economic proposals. Such resolution will decide on any challenge against the assessment committee’s opinion.

6. Main terms of the license of Transportadora de Gas del Centro S.A.: RET and general regime

Before the execution of the license agreement, the awardee must incorporate a corporation (sociedad anónima) in accordance with the LGS, denominated “Transportadora de Gas del Centro S.A.” (“TGC”), with specific and exclusive purpose, and minimum corporate capital of $100,000,000.

TGC will execute the license agreement within 30 days as from the notification of the award resolution, subject to the conditions set forth by the Bidding Terms, such as the execution of the TAA.

The licensee shall submit a guarantee for an amount of $10,000,000 securing the closing of the financing of Phase 1. Such guarantee shall be replaced for a new guarantee of US$ 40,000,000 securing the beginning of the commercial operation of Phase 1.

The license will be granted for a term of 35 years, with the possibility of extension for an additional 10 year term, as provided by Law N° 24,076 (“Gas Law”).

In line with the provisions of the Decree, the license provides for a Special Temporary Regime (Régimen Especial Temporario or “RET”, after its acronym in Spanish), for 17 years as from the granting of the license –which is half of the initial term of the license-.

During the term of the RET, the provisions of the Gas Law regulating the tariffs (Title IX) will not be applicable if they are in conflict with the Decree regarding the licensee’s compensation (Section 2 of the Decree): (i) prices freely negotiated with the shippers; (ii) no pass-through to tariff of residential users; and (iii) partial direct allocation of the initial transport capacity. In addition, the natural gas transportat service regulations will only be amended with the licensee previous consent, except in case of amendments for security reasons.

Upon expiration of the RET period and until the end of the term of the license, the regime provided by the Gas Law will be applicable, in its entirety.

7. Commercial operation and mandatory investments

Phase 1 of the project (Tratayén-Salliqueló) shall become at least partially operative –construction and authorization of the pipeline- within 18 months as from the granting of the license, and shall become fully operative within 24 months as from the granting of the license. The Enargas (Regulatory Authority) may grant an exceptional extension of the terms.

Within 2 months as from the effective date of the license, the licensee shall submit the final project for the construction and commercial operation of Phase 1, on the basis of the technical project submitted with the offer. In addition, the licensee must provide evidence of closing of the financing within the first 6 months of the term of the license.

Phase 2 of the project (Salliqueló-San Nicolás de los Arroyos) shall become operative within 60 months as from the license’s effective date. In the event of non-compliance, the Enargas will issue an opinion on the convenience or not (i) of calling for a new public bid for granting a new license over the Phase 2 tranche, or (ii) of extending the 60 months term for construction up to a maximum of 3 years.

After the expiration of the RET, the licensee shall comply with the mandatory investments arising from the tariffs determination and the subsequent tariff reviews conducted by the Enargas.

8. Technical specifications of the system

According to the technical specifications of the license, Phase 1 of the gas pipeline -570 km- shall have capacity to transport an initial 9,300 kcal/m3 natural gas volume of 15 million of m3/day and designed and built to allow, through expansions, a minimum volume of 40 million of m3/day of natural gas of 9,300 kcal/m3. The pipeline shall comply with a minimum diameter of 914,4 mm (36 inches) and a maximum 95 bar design pressure.

Phase 2 -470 km- shall comply with a minimum diameter of 762 m (30 inches) and a maximum 95 bar design pressure. The final transport capacity will be of 20 million of m3/day of natural gas of 9,300 kcal/m3.

9. Closing remarks

The new gas pipeline shall increase the available capacity to transport the natural gas produced from the Neuquina basin to the main centers of consumption of Argentina.  Additionally, it will increase the supply of gas to the local market, and upon the construction of capacity to liquify gas, will allow the export of liquefied natural gas (LNG).