Hydrocarbons: Government Pegs Oil Barrel Price

1. Background of the “barril criollo”

On May 19, 2020, Decree No. 488/2020, issued by the Argentine Executive, was published in the Official Gazette. The Decree was issued within the context of a drop in the oil price in the international market, which reached historical lows as a consequence of two main factors: the conflict within OPEC between Russia and Saudi Arabia, and the Covid-19 pandemic-led deep plunge in demand. In Argentina, the drop in the price and the plunge in demand -variables that are now recovering with the progressive opening of industries worldwide as confinement ends- seriously affected the domestic market, generating a significant decrease in the activity of the hydrocarbons industry.

As stated in the recitals of the Decree, the international context generated by the Covid-19 pandemic “has caused an abrupt drop in the price level of crude oil and its derivatives worldwide, which has an impact on crude oil prices commercialized in the local market”. In this context, the drastic drop in the international price caused a detriment to the hydrocarbons industry, leading to a sharp decrease in production levels and an increase in the risk of shortages in the domestic market. The set of measures approved by means of the Decree pursued the following goals: to reduce the negative effect of the pandemic and its consequences on the investment and activity levels, to maintain the volumes of production at 2019 levels to ensure self-sufficiency in hydrocarbons nationwide, and to ensure that regional economies and the workforce associated to the industry are not affected.

In its recitals, the Decree highlights the authority granted to the Argentine Executive to regulate the conditions for the commercialization of hydrocarbons to the benefit of the internal market, and the power to design the energy policy at a national level. It also emphasizes the principles set forth in Law No. 26,741, which declared achieving self-sufficiency in hydrocarbons’ supply as public national interest and as a main goal of Argentina. It also refers to the Hydrocarbon Sovereignty Regime, regulated by Decree No. 1277/12, which provides -among other regulations- the duty of companies of the sector to establish and comply with an Annual Investment Program, the lack of compliance of which may trigger the application of the penalties set forth therein.

The recitals also mention the request made by the Federal Organization of the Hydrocarbon Producing Provinces (the “OFEPHI”, after its Spanish acronym) –which brings together the producing provinces– requesting from the Government for a comprehensive solution that allows the development of private investments and the balance of the domestic fuel prices. One of the aims of the Decree is that the provinces maintain their income derived from the collection of royalties.

Finally, the Decree refers to the “Households with Gas Canisters Program" (“Programa Hogares con Garrafa”), which concerns the industry and commercialization of Liquefied Petroleum Gas (LPG), and sets the goal of ensuring the regular supply of LPG canisters to the sectors that need them and controlling their sale prices.

The Decree was issued within the framework of Law No. 27,541 on Social Solidarity and Productive Reactivation in the context of the Public Emergency, which, among other provisions, declared the public emergency in economic and energy matters, as well as subsequent regulations issued within the framework of the emergency.

The Decree was issued by the Argentine Executive subject to the provisions of Section 76 of the Argentine Constitution –which considers the legislative delegation– and in the regulatory power set forth in Section 99, subsections 1 and 2, and must be reviewed by the Permanent Bicameral Committee of the Argentine Congress and later approved by both Houses.

2. Main provisions of the Decree

Although the main purpose of the Decree is to regulate the price of the oil barrel for the domestic market, it also provides new obligations and restrictions on the different players in the hydrocarbons and derivatives sector, which implies an increase in the intervention of the Argentine Executive in this industry. The Decree also updates the amounts of the fines provided under Hydrocarbons’ Law No. 17,319.

a. Regulation of the price of the barrel at USD 45 and an adjusting mechanism due to an international price increase

The Decree sets the barrel price for the domestic market, providing that the deliveries of crude oil made in the local market must be invoiced by the producing companies and paid by the refiners and trading companies, taking the “Medanito-type” crude oil as a reference, at a price of USD 45 per barrel (USD 45 / bbl). This price will be adjusted for each type of crude oil by quality and by port of loading, and it is the one that will be applied to the settlement of royalties.

The price set by the Decree will be in force until December 31, 2020, but will be no longer in effect in the event that the price quote of the "Brent first line - ICE" exceeds USD 45 per barrel for ten days in a row.

b. The Decree provides that the fixed price of USD 45 per barrel can be modified quarterly by the Secretariat of Energy –as described in point (d) below. Provisions related to producing companies: new obligations and foreign exchange restrictions

The Decree provides the following new obligations on production companies:

i. to sustain activity and production levels registered during 2019, taking into account the current situation of decrease in local and international demand as a consequence of the Covid-19 pandemic; and

ii. to keep contracts in force with the regional service companies and the workforce that they had as of December 31, 2019.

The Decree provides new foreign exchange restrictions for producers: they will not have access to the foreign exchange market for foreign portfolio investments, nor will they be able to acquire securities in Pesos for their subsequent sale in foreign currency through a transaction known as a “blue chip swap” (or “contado con liquidación”, in Spanish)-. The rest of the concepts for the access to the foreign exchange market will be governed by the foreign exchange regulations issued by the Argentine Central Bank.

a. Provisions related to refining, trading and integrated companies

The Decree obliges the refining and trading companies to acquire the aggregate demand for crude oil from local producers, considering the quality of crude oil required by their refining processes.

Regarding integrated companies, the Decree provides that if they need to make purchases beyond their own production and of their partners, they must make such purchases in parameters similar to those of 2019.

The Decree prohibits these three types of companies (refiners, trading and integrated companies) from importing products that are available for sale in the domestic market and / or for those in which there is local processing capacity.

b. Powers of the Secretariat of Energy and the Labor Ministry

The Decree grants the Secretariat of Energy the following powers:

i. to modify crude oil prices established by the Decree on a quarterly basis;

ii. to periodically review the effect of the regulation based on parameters of volume production and levels of activity and investment;

iii. to control that production companies comply with their Annual Investment Program (required by the Hydrocarbon Sovereignty Regime, regulated by Decree No. 1277/12);

iv. to control that producers, refiners and trading companies do not carry out monopolistic, collusive and / or abuse of dominant position behaviors, and report to the competent authorities to intervene in order to safeguard the antitrust enforcement in the sector; and

v. to request assistance from the Secretariat of Domestic Trade and from the mayors of all the municipalities of the country to carry out the control and inspection of the maximum sale prices for LPG canisters of 10, 12 and 15 kg..

To control the compliance of the obligations related to the maintenance of the workforce, the Decree instructs the Argentine Ministry of Labor, Employment and Social Security to monitor the evolution of the levels of activity, efficiency and labor productivity of the hydrocarbons sector, taking into account the entire value chain. This must be informed on a monthly basis to the Ministry of Energy.

c. Other provisions

The Decree contains provisions related to the following: taxes, rates of export duties for the hydrocarbon industry goods, facilitation of exportable balances and updating of the amount of the fines set forth in the Hydrocarbons’ Law, which are described below.

i. Liquid fuel tax: It is expected that the increases in the amounts set for this tax resulting from the updates of the first and second quarter, will be effective with respect to the unleaded gasoline, leaded gasoline and diesel oil as from October 1, 2020.

ii. Rates of export duties from 0% to 8%: An Annex to the Decree includes a list of goods from the hydrocarbon industry (the “Goods”) that will pay export duties from 0% to 8%. The 8% cap matches the provisions of the Social Solidarity and Productive Reactivation Law No. 27,541 on such matter. The setting of the applicable rate will depend on the quote of the barrel price "Brent first line- ICE" (the "International Price" or "IP"). If the IP is equal to or lower than USD 45 (which is set as “Base Value” or “BV”), the rate will be 0% (that is, no export duties will be paid for the Goods). If the value of the IP is equal to or higher than USD 60 (which is set as “Reference Value” or “RV”), 8% of export duties will be paid for the Goods. If the IP is higher than the BV and lower than the RV, an intermediate value between the BV and the RV will be paid, as calculated based on a formula provided by the Decree. Even when the Decree ratifies the 8% as a cap, it does not clarify or instruct the Customs Authority to stop charging a rate of 12% for this concept, as is currently happening in practice.

iii. Facilitation of exportable balances: The Secretariat of Energy may implement measures to simplify the process of the Registry of Agreements of Gas Oil Export Transactions regulated by Resolution No. 241/17 regarding those products with a shortage of demand in the domestic market, if a significant increase in requests for export is verified.

iv. Updating the fines provided by the Hydrocarbons’ Law: The Decree regulates Section 87 of the Hydrocarbons’ Law No. 17,319 and abrogates Decree No. 2271/94 that established the previous amounts. The Decree sets the amounts of such fines between a minimum equivalent to the price of 22 m3 of national crude oil in the domestic market, and a maximum of 2,200 m3 for each infringement, according to the severity and effect of such non-compliance. For its calculation, the average price for sales in the domestic market published on the website of the Secretariat of Energy the month in which the infringement occurred will be considered. The fines must be paid in pesos at the seller exchange rate of the Banco de la Nación Argentina.

3. Closing remarks

It should be considered that pursuant to Decree No. 566/19 the price of gasoline and diesel oil destined to be commercialized in service stations is currently frozen at the price of August 9, 2019.

The Decree confirms the tendency of government intervention in the determination of prices. It will be interesting to see whether it will have significant effects on the activities of the sector during this period of very low consumption due to the quarantine imposed as a result of Covid-19.