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Argentina strikes deal to attract Vaca Muerta investors

Agreement between labour, oil companies and gov't could lead to $5bn spend on giant shale play this year

Argentina announced on Tuesday the outline of a new deal aimed at boosting investment in the Vaca Muerta shale, winning backing from organised labour, the government and the oil companies, although a key union leader withheld his signature at the last minute.

The package was announced by President Mauricio Macri on Tuesday and included promises to maintain price support for investments in unconventional gas production on the giant shale bed in Neuquen province.

Macri softened his earlier commitment to do away with subsidies and agreed to keep the price floor of $7.50 per million British thermal units, phasing this out gradually.

A government statement on Tuesday described the price floor as "indispensable for attracting long-term investment".

Macri said the new deal would make sure that state-run YPF and international oil companies would invest about $5 billion in the region in 2017, rising to $15 billion subsequently.

YPF plans to invest $2.3 billion in Vaca Muerta in 2017, between 20% and 30% higher than would have been the case without the deal, YPF chairman Miguel Gutierrez said afterwards.

The agreement was supported by state-run YPF and key international players in the region, including Chevron, Total, Pampa Energia and Pan American Energy.

Macri and his energy minister Juan Jose Aranguren have been working hard to lay the foundation for a tripartite agreement that will boost oilfield productivitity in Argentine unconventionals.

The provincial government also agreed to stabilise taxes as part of the deal with unions.

The Vaca Muerta shale has been billed as potentially one of the most prolific tight formations in the world, but development has been sluggish due to high production costs and inflexible union-dominated labour regulations.

Unions have, in principle, agreed to more flexible working conditions. The pact, aimed at boosting investment, growth and jobs, would do away with a forest of job demarcation and overtime rules.

Argentina has a history of troubled labour relations in the oil sector and alarm bells rang today when Neuquen oil workers union leader Senator Guillermo Pereyra decided not to sign the agreement at the last minute.

Union consent is seen as crucial for the new deal to work, raising concerns that all the dialogue might come to nothing. Advances have been such that most sources consulted by Upstream said they remained confident that the final document will be signed "within days".

"This is a demonstration of what we can achieve as an industry when we all work together with the same objective," Gutierrez said, optimistically.

YPF, which owns about half of the currently licensed Vaca Muerta, saw its New York-listed American Depositary Receipts leap 13% on Tuesday.

Macri's attempt to return Argentina to a more orthodox economic policy base has come under pressure from high inflation and recession.

He is relying on oil sector investments to help breathe new life into the economy, with legislative elections looming in October.

Argentina also suffers from an energy shortage, despite bountiful unconventional resources. The country recently surpassed Brazil as the number one market for exported Bolivian gas.