Argentina: Nine Provinces Compete For Investments In Hydrocarbons

Last Updated: 28 November 2006
Article by Juan Sonoda

In a context of soaring prices for crude oil and the awakened interest of international investors in commodities and emerging markets, six Argentine provinces are in the process of awarding exploration permits over hydrocarbon areas, and three more have announced bidding contests during this year (see table below). This is the result of a process that began more than 14 years ago with the privatization of YPF, the former state-owned oil company.

Background of the provincialization of hydrocarbons

In 1992, Argentine Law No. 24,145 for the privatization of YPF transferred to the Argentine provinces the ownership of several hydrocarbon areas, although it conditioned such a transfer to a reform of the Hydrocarbons Law that was never carried out. This process continued developing with the amendment of the Argentine Constitution, whose Section 124 granted to the provinces the ownership of the natural resources located in their territories.

Between 2001 and 2003, and based on Section 124 of the Federal Constitution, the province of Neuquén called for bidding contests over 26 hydrocarbon areas, 19 of which were awarded to private companies. Last, in August 2003, the Federal Executive acknowledged the provinces’ power to grant exploration permits and exploitation concessions by means of an emergency Decree.

Characteristics of the bidding contests

The bidding contests consist in the presentation of two envelopes: An "A" envelope containing the bidder’s information, and a "B" envelope with the economic offer. The criteria for the award favor those companies that undertake to perform the highest number of exploration works in the shortest time.

Also, according to the province, the economic offer may include proposals on matters such as the participation of provincial companies in the venture or a higher percentage of royalties.

Terms and conditions of the permits to be awarded

  1. Subject matter of the bidding contests
  2. The subject matter of the present bidding processes is to grant exploration permits under the Argentine Hydrocarbons Law No. 17,319. In general, the term of the permit is six years, divided into three periods of three, two and one year each, although some provinces provide for shorter terms. Upon expiration of each period, 50% of the area must revert to the province. The exploration permit allows the company to request an exploitation concession (generally for 25 years) over hydrocarbons discovered in the area.

    The province of Neuquén followed a different procedure, consisting in the grant of these permits to Hidrocarburos del Neuquén S.A. (HIDENESA) a company owned by the provincial state, and awarding contracts with HIDENESA to private companies.

  3. Royalties
  4. Companies must pay a percentage of their production as royalties. An important point is that the basis for calculation of the royalties will be, in all cases, the price obtained for the sale of the hydrocarbons. This criterion avoids uncertainties such as the one generated by the province of Neuquén when it claimed the assessment of royalties pursuant to international prices.

    The amount of the royalties varies in each jurisdiction, and depends also on the risk inherent to the area. For example, in the bidding process of the area "Medanito Sur" in the province of La Pampa, in the exploitation period, the royalty starts at 12% during the first year and increases by 1.5% per year until it reaches 18 in the sixth year. From then on, an additional percentage (offered by the bidder) is added to said 18%.

    A different situation occurs in provinces like Salta or San Juan, where royalties are set forth at fixed percentages (12%) during the exploitation term. Besides, San Juan grants to the awardee promotional benefits consisting in a 50% exemption from payment of royalties, canon and stamps tax.

  5. Association with provincial companies
  6. If a field is discovered in their territories, provinces such as San Juan or Río Negro grant to the provincial hydrocarbons company (EPSE in San Juan and EDHIP S.A. in Río Negro) the option to enter into an association with the private company. The minimum association percentage is 5% and the bidders must propose an additional percentage in their bids. The association must be implemented by means of a joint operating agreement. The state-owned company must pay a price for such participation, equal to the pro-rata share of exploration costs.

  7. Right to freely dispose of extracted hydrocarbons

In 1989, the Federal Executive started the deregulation of the hydrocarbons industry by means of the issuance of Decrees No. 1055/89, 1212/89 and 1589/89, which guaranteed private companies the ownership of the hydrocarbons they produced, the right to sell and export such production without restrictions or additional taxes, and an exemption from the duty to repatriate up to 70% of the export prices.

Although these decrees were not expressly repealed, they have been repeatedly ignored since 2002 economic emergency, when several laws and administrative regulations limited the right to freely dispose of hydrocarbons. Among these rules, we can mention the creation of a duty on the export of hydrocarbons by the Economic Emergency Law (the present rate for crude oil is 45%) and the prohibitions to export crude oil in force during 2002.

The framework of the new provincial regulations grants to awardees the right to freely dispose of the hydrocarbons they extract, pursuant to decrees Nos. 1055/89, 1212/89 and 1589/89. However, it also sets forth that the violations of these guarantees will entitle the awardees to file claims against the authorities who conduct such violations. In other words, provinces will not answer for breaches of this framework by the federal government.

Conclusion

The bidding contests of provincial hydrocarbon areas announced for this year show a uniform criterion regarding the procedure and the terms of future contracts that favors legal certainty. Legal certainty is also promoted by the enactment of rules about the assessment of royalties, which prevent doubtful situations that arose after the experience of other provincial states. At the same time, there is a healthy competition between the provinces, evidenced in the benefits offered and the different economic terms according to the risk and importance of each investment. In the future, however, the framework of free disposal of extracted hydrocarbons should be clarified through collaboration between the federal and provincial governments.

Table

Province

Stage of the Bidding Process

La Pampa

Envelopes of "Medanito Sur" opened in June 2006, 4 more areas announced

Chubut

5 areas undergoing bidding processes, economic offer to be opened in August 2006

Salta

6 areas undergoing bidding processes (total: 16), economic offer to be opened in August 2006

Mendoza

4 areas undergoing bidding processes (total: 13), economic offer to be opened in late August 2006

Río Negro

5 areas undergoing bidding processes (total: 18), economic offer to be opened in September 2006

San Juan

7 areas undergoing bidding processes, economic offer to be opened in November 2006

Neuquén

Bidding processes to be held in 2006, 19 areas available

T. del Fuego

Bidding processes to be held in 2006, 3 or 4 areas available

Santa Cruz

Bidding processes to be held in 2006, 14 areas available

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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