Argentinian government decree sets fixed crude price
Jose Panameño, a Senior Loss Adjuster in our Houston TX office, writes that the Argentinian government recently issued Decree 488/2020 to provide a ‘lifeline’ to the oil and gas industry, as they seek to protect the potential of Vaca Muerta, one of the world’s biggest shale plays.
In exchange for this fixed price protection, oil producers are expected to sustain the levels of activity and/or production registered during 2019, fulfil their contractual obligations with service providers, and maintain the staffing levels they had in place as of 31 December 2019. In the case of refineries, they are to source crude oil feedstock from domestic producers and are prevented from supplanting this with potentially cheaper imports.
It seems clear that this Decree primarily benefits upstream players by enabling production at a price close to or better than break-even for most fields across the country, whilst also supporting service providers engaged in the sector. On the other hand, the downstream sector is now required to pay higher prices for its raw materials than it would under a free market system.
While the barril criollo might help some local producers and service companies survive in the short term, their ability to succeed over the long term is very much dependent on demand recovery. Without a recovery in hydrocarbon-based energy consumption, which is very much tied to the country overcoming COVID-19, the barril criollo will likely be unable to fulfil its goal of sustaining production. To exacerbate problems for producers, the low demand from downstream consumers and artificially supported oversupply in the market has resulted in crude oil storage in the country being at close to 100% utilization. The government is, therefore, betting on upstream players remaining afloat so that they are ready to meet the gradual increase in energy demand as COVID 19-related restrictions are eased. This eagerly awaited recovery will have to wait a little longer, however, as the lockdown in Buenos Aires, the largest energy consumption centre in the country has now been extended until 17 July at the earliest.
This Decree should lead to a deferral of any significant staff reductions, at least for the foreseeable future, thus mitigating the potential risk of a loss in industry knowledge and experience, as is being experienced in other countries around the world during the downturn. At the same time, with companies looking to cut costs wherever possible, firms in Argentina will have to look to other areas beyond reductions in headcount. In addition to potential CAPEX spending cuts, firms may elect to postpone maintenance-related projects, thus increasing the likelihood of equipment failures.