Argentina to allow higher prices for new gas discoveries

Kirchner administration: Will hike price paid for new gas discoveries to $7.5 per million Btu

Argentina will let oil and gas companies such as the state-run YPF charge much more for new natural-gas production as the country seeks to boost output and spur investment, reports said.

YPF chief executive Miguel Galuccio hailed the news, unveiled Wednesday by Argentine President Cristina Fernandez de Kirchner, saying it will help fund the company's ambitious five-year exploration and production plan as well as make YPF more attractive to foreign investors, Dow Jones reported.

"This opens a new perspective for developing gas in Argentina. All the gas projects that we plan to launch this year now become very attractive for investors," Galuccio told reporters according to the news wire.

The government will begin paying YPF $7.5 per million British thermal units, more than three times what YPF charged for its gas last year.

The new price is much higher than prices granted under Argentina's older "Gas Plus" plan that attracted investment from firms such as Apache and paid around $4 or $5 per million Btu.

YPF shares surged more than 5% in New York trading Thursday on the news.

Analysts at Tudor, Pickering Holt said in a note Thursday that the change was positive for YPF and other players like Apache and Americas Petrogas, but said it did not fundamentally alter the substantial risks of operating in the country.

"Somebody probably worked out that importing gas at $14/mcf is an exercise in futility," the company wrote in a note.

"It will require more than an increase in the gas tariff to draw industry and the investment required to fully exploit the potential of the Vaca Muerta."

Roberto Baratta, who helps oversee energy policy at Argentina's planning ministry, said the higher price is good news for everyone in the energy industry.

"This is very good news for all companies interested in the sector," Baratta said in an interview. "It's good news for the country."

Kirchner said she wants "all energy companies in Argentine to formalize contracts similar to the contract the federal government signed with YPF."

She said raising prices will help Argentina reduce an energy deficit of around $3.5 billion by encouraging companies to explore and extract more.

The government currently pays around $14 per million Btu for imported gas, Galuccio said.

Indeed, Kirchner said it was the rising import bill that "obligated" her government earlier this year to expropriate 51% of YPF from its majority shareholder, Repsol.

Shortly after the expropriation, Galuccio announced an ambitious investment plan aimed at reverting the country's declining oil and gas output and putting Argentina back on the track toward energy self-sufficiency.

At the time, Galuccio said YPF would be able to invest $24.7 billion from its own pocket through 2017, with that figure rising to $40.4 billion if the company could sign onto joint ventures and obtain outside financing.

The plan assumed a gas price of around $6 per million Btu, Galuccio said Wednesday, meaning the even higher $7.5 price should make it easier for YPF to carry out its initial investment plan.

So far this year, Galuccio has met with executives from innumerable potential investors, including Chevron and Russia's Gazprom to gauge support for joint ventures. Chevron has already signed a memorandum of understanding with YPF.

Argentina ranks third in the world, behind China and the US, in potentially recoverable shale-gas reserves, with 774 trillion cubic feet, according to a study by the US Energy Information Administration. Argentina also has large quantities of shale oil.

Experts in unconventional energy say Argentina's oil and gas resources are extraordinary but that for them to be tapped the government will have to allow companies to make a profit and assure them that their investment contracts will be honored. Many say the way the government expropriated YPF, without compensating Repsol, will deter investment.

The Argentine government is "facing the reality that they have to put more money into the gas industry," Nicolas Shumway, a professor of Latin American history at Rice University in Houston, told Upstream.

But how far the decision would go and what changes it could effect on the investment climate is still uncertain, he said. Even if conditions become more friendly, investors would have the country's history of "erratic" policy shifts on their minds, he added.

Kirchner said Argentina's unconventional gas resources are sufficient not only to satisfy domestic demand but also to supply export markets.

But for now, the more urgent goal is to reverse declining output that has combined with rising consumption to force Argentina into importing rising volumes of gas from Bolivia and Trinidad & Tobago.

Argentina stopped exporting gas in 2004 to ensure it had enough gas to meet domestic demand that was rising alongside booming economic growth.

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