2020-2024 Gas Plan

Through Executive Decree No. 892, published in the Official Gazette on November 16, 2020, the Argentine Executive approved the “Plan de Promoción de la Producción del Gas Natural Argentino – Esquema de Oferta y Demanda 2020-2024” (the “Gas Plan”), with the main objective of increasing Argentina’s natural gas production.

The Gas Plan reiterates some elements from the previous natural gas injection stimulus programs (i.e. Gas Plan I and Gas Plan II). The main change lies in how volume supplies will be procured, which will be via tender awarded by MEG S.A. (the “Tender”).

Also, Executive Decree No. 892 authorizes the Argentine Central Bank (the “BCRA” after its acronym in Spanish) to facilitate access to the Free Exchange Market to companies that adhere to the Gas Plan in order to repatriate direct investments and their revenues and/or the attention of income services or principal indebtedness from foreign financial institutions. Such authorization has already been implemented by the BCRA through Communique “A” 7168.

Below, we will briefly outline the new Gas Plan’s main features.

 

Objectives

Gas Plan objectives include the following: (i) facilitating investments in the production of natural gas in order to satisfy the country’s hydrocarbon needs; (ii) generating long-term certainty in the sector; (iii) replacing liquefied natural gas (LNG) imports and the consumption of liquid fuels by the national electrical power system; (iv) achieving a surplus of energy balance in line with the government’s fiscal objectives; and (v) achieving predictability with respect to the supply of priority demand and the thermal generation segment.

 

General Criteria

           

1. Commencement. The Gas Plan is expected to begin in December 2020, with the aim of increasing production as of May 2021.

 

2. Price. The Gas Plan provides a maximum price for each basin.  In no case may the price calculated applying Net Present Value (NPV) of the income corresponding to the proposed volumes for the Base Period (as defined in the Gas Plan), adjusted for the applicable fuel retention rates, exceed 3.21USD/MMBTU.
3. Term. The Gas Plan is expected to run for four years and can be extended up to 8 years for offshore projects.

 

4. Commitments. Suppliers must commit to (i) complying with a production curve by basin, an investment plan, a program of proportional and progressive increase in national added value and (ii) delivering the volumes stipulated in the contracts with the Licensees of Distribution and/or Sub-distribution of natural gas services (“Licensees”) and with CAMMESA.

 

5. Tenders. The Gas Plan will rely on tenders to ensure competition between suppliers, which will be awarded by the Secretariat of Energy (the “SEN” after its Spanish acronym). Blocks of 70 MMm³/d will be subject to tender, distributed among the following basins: (i) Neuquén aera (47.2 MMm³/d); (ii) Austral area (20 MMm³/d); (iii) Northwest area (2.8 MMm³/d). The awarded prices will determine the priority for dispatch and possible exports.

 

6. Uninterruptible exports. If the volumes committed under the Gas Plan exceed local demand, uninterruptible exports during the summer period may be authorized for up to a volume of 11 MMm³/d (through pipelines or as LNG). During the winter period, this benefit is only available if suppliers can demonstrate verifiable surpluses in their supply.

 

7. Rates and subsidies. The SEN will define, with ENARGAS’s assistance, (i) the gas price resulting from the Tender at the Point of Entry to the Transportation System (the “PIST” after its acronym in Spanish); (ii) its transfer to tariff tables; and, (iii) the levels of subsidy in the gas price, which will be determined by the national government.

 

Functionality

Bid results will determine the price of gas in the PIST. Said price will be paid, under respective contracts, both by the Licensees and by CAMMESA (without prejudice to any eventual subsidy from the national government for the percentage of the price in the PIST that is not transferred to tariff). The national government may pay suppliers for the spread that arises between the price of the Gas Plan for each basin determined by the SEN, with the assistance of ENARGAS, and the prices awarded for the natural gas delivered to the Licensees within the framework of the Tender.

 

Adherence to the Gas Plan

Suppliers interested in participating in the Gas Plan must submit their offers, which must contain: (i) the volume to be injected; (ii) the price of the volume offered for each basin; (iii) the committed production curve; (iv) if applicable, their decision regarding the program developed under Resolution No. 46-E/2017, as amended, of the former Ministry of Energy and Mining; and, (v) an investment plan and program to increase the national added value, under the conditions that the SEN will set.

Likewise, suppliers may submit a complementary proposal that includes a production curve that requires longer development times. Said proposal will depend on the entire awarded volumes as a result of the offers mentioned in the previous paragraph.

 

Penalties regime

The Gas Plan provides for a double penalty regime. On the one hand, failure to comply with the Deliver or Pay commitments under the contracts means facing contractual penalties. On the other hand, non-compliance with the injection commitments will be addressed on the basis of the average quarterly injection levels. Depending on the percentage of non-compliance, the spread to be paid by the national government will be adjusted. Moreover, if the failure to comply extends for a period of 6 consecutive months and a series of other factors occur, non-compliers will automatically be withdrawn from the Gas Plan.

Additionally, if the injection during the months of June, July and/or August of each year is below the agreed level, suppliers may resort to one of the following alternatives to compensate for the insufficient volume: (i) compensate between basins with their own production; (ii) acquire the remaining volume from another Gas Plan-participating producer; (iii) import natural gas; and, (iv) pay an equivalent to twice the volume to be compensated, valued at the price offered by an adjustment factor of 1.25.

 

Non-compliance by the national government

If the national government fails to comply with its payment obligations for a period of 6 consecutive or alternate months, or for amounts equivalent to 3 times the average monthly compensation received, the affected supplier may choose to: (i) continue with the Gas Plan under the same conditions; (ii) unsubscribe from the Gas Plan, which results in the consequent termination without fault of existing contracts; or, (iii) continue with the Gas Plan but without the obligation to comply with the injection volumes and receive only the base price and/or that of the respective tariff tables. Additionally, in the event of breaches by the Licensees and CAMMESA, the supplier will have the right to adjust and/or reduce the committed injection volume on the count of the termination of those contracts, in proportion to the maximum contractually-stipulated daily amounts.

 

Special clauses

In the respective contracts to be signed with both the Licensees and CAMMESA, the Gas Plan provides for the application of a 75% per month Take or Pay clause and a 100% per day Deliver or Pay clause, with a possible limited-in-time Carry Forward for the takers.

 

Suppliers with projects adhered to Resolution No. 46-E/2017 as amended of the former Ministry of Mining and Energy

The Gas Plan does not foresee an automatic connection with the projects currently adhered to Resolution No. 46-E/2017 as amended (the “Res 46 Program”).

 

SEN’s Resolution No. 317/2020 approved a model form for the waiver of the Res 46 Program benefits for those producers who are a party to it and choose to participate in the Gas Plan. It provides that:

 

1. payments of the amounts that may correspond in the framework of the Res 46 Program be made for volumes delivered as of the Plan Gas’ effectiveness, only up to the monthly projection of the production included (original curve) and considered in the approval of the projects adhered to the Res 46 Program;

 

2. as of the beginning of the Gas Plan and due to the volumes committed and delivered therein, the producers that entered into the Res 46 Program must waive all claims —at any forum and jurisdiction— related to any matter associated with payment requests under the Res 46 Program, for volumes of natural gas delivered as of the date of the first delivery of natural gas under the Gas Plan contracts that exceed the monthly projection of production included and considered in the approval of the Res 46 Program adhesion. Moreover, they must hold the national government harmless for such claims and disputes.

 

Additionally, the above-mentioned resolution 317/2020 provides that the waivers and indemnities do not include those claims and rights for issues related with payment requests under the Res 46 Program for volumes of natural gas delivered up to the date of the first delivery of natural gas under the Plan Gas contracts that exceed the monthly projection of production included under the Res 46 Program.

 

Access to the Free Exchange Market (Fx Market)

Executive Decree No. 892 provides that the BCRA must provide suitable mechanisms to facilitate access to the Fx Market for the repatriation of direct investments and their revenues and/or the attention of income services or principal indebtedness from foreign financial institutions, when the funds have been transferred through the Fx Market since November 16, 2020 and constitute genuine operations assigned to finance projects within the framework of the Program.

 

The BCRA issued Communique “A” 7168, which provides that the Fx Market may be accessed without the prior authorization of the relevant authorities in the following cases:

 

1. Transfer of dividends abroad: Non-resident shareholders may transfer currencies abroad for profits and dividends corresponding to closed and audited balance sheets, provided that (i) the total amount does not exceed that in local currency approved at the shareholders' meeting for distribution, (ii) access occurs no earlier than 2 years counted as from the received funds date of settlement, and (iii) the operation is duly reported in the last expired presentation of the “Survey of external assets and liabilities,” if applicable.

 

2. Withdrawal of foreign indebtedness: The Fx Market may be accessed for the cancellation of maturities capital services and interest on foreign indebtedness provided that the debt has an average life of no less than 2 years and the other requirements applicable to the payment of financial indebtedness abroad are verified.

 

3. Repatriation of direct investments by non-residents: The repatriation of direct investments by non-residents is also allowed up to the amount of the direct investment contributions settled in the Fx Market provided that: (i) there is documentation proving the income of direct investment in the resident company, (ii) access occurs no earlier than 2 years from the funds date of settlement, and (iii) in the event of capital reduction and/or return of irrevocable contributions, compliance with the established legal mechanisms and the corresponding foreign liability in pesos is duly declared and certified in the last due submission to the “Survey of external assets and liabilities,” if applicable.

 

Final thoughts

The circumstances that the hydrocarbon sector is facing at the local and international level required the implementation of a new stimulus plan to produce natural gas. The effectiveness of these types of plans depend of their implementation. Its success will depend on how it is regulated by the SEN (by delegation of the Argentine Executive) and on the effective and timely compliance of its terms. Once the current emergency situation is overcome, whose effects this new Program aims to mitigate, we would expect a return to market rules that in the past allowed achieving and maintaining energy self-sufficiency.