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Oil-patch IOU: Argentina's late subsidy payments hurt gas producers

Published 21/09/2017, 06:26
© Reuters. A police vehicle is seen past the entrance of the Fvta Xayen Mapuche comunity during a demonstration against oil companies that they claim use their territory to access oil wells near Anelo

By Luc Cohen

BUENOS AIRES (Reuters) - Argentina is behind on at least $700 million (519 million pounds) in promised subsidy payments to natural gas producers, hurting oil companies at a time when the government is trying to woo more investment in the nation's energy sector.

The incentives have cost cash-strapped Argentina more than $7 billion since they were implemented in 2013 by former leftist President Cristina Fernandez. The programme, unique in Latin America, is aimed at attracting investment to help boost the country's declining output and reduce its reliance on imported liquefied natural gas.

Payment delays have plagued the programme from its inception, but they have lengthened under President Mauricio Macri, Fernandez's business-friendly successor. He took office in December 2015 vowing to jumpstart Argentina's struggling economy and cut a primary fiscal deficit equivalent to more than 5 percent of gross domestic product.

"The state does not have the money," said Daniel Gerold of G&G Energy Consultants in Buenos Aires. "The companies are being patient, but they are clearly concerned because they know perfectly well that there is a significant fiscal problem."

Hardest hit is state-owned YPF SA (BA:YPFD), which produces a third of Argentina's natural gas. It was owed $551 million in unpaid subsidies at the end of the second quarter.

The government is supposed to pay the gas subsidies quarterly. But payments to YPF are now 10 months in arrears, YPF Chief Financial Officer Daniel Gonzalez said in an earnings call last month. That is up from a delay of four to five months that Gonzalez reported to investors in August 2015.

The lag forced YPF to raise debt in July, Gonzalez said. And it could upend the goal of the heavily-indebted company to become cash-flow neutral this year, according to an analyst covering the company.

Argentina's Pampa Energia (BA:PAM) is feeling the squeeze as well. In the second quarter of 2017, the firm recorded 2.4 billion pesos, or $140 million, in uncollected payments, financial statements show. That is up from 1.6 billion pesos (74.2 million pounds) at the end of last year. Pampa did not respond to a request for comment.

Two multinational oil majors are also experiencing delays of between four and eight months in receiving their subsidies, two industry sources told Reuters on the condition that the companies not be named.

(For a graphic on Argentine gas subsidies, see http://tmsnrt.rs/2xLGZuC)


The tardy payments underscore the difficult balancing act Macri faces as he tries to shore up Argentina's shaky finances and polish the nation's image after a decade of populist, interventionist rule that spooked foreign investors.

While he has cut back energy subsidies to families, he has retained the so-called Plan Gas incentive programme for producers. Macri's administration views the payouts as crucial to attracting oil majors to Argentina, whose high labour costs and difficult logistics are a tough sell in an era of low energy prices.

Natural gas producers would be hard-pressed to find a better deal in terms of price. Argentina's guaranteed floor of $7.50 per million British thermal units (mBtu) for new production above a set base level is more than double the current price (NGc1) of $3.13 per mBtu for October natural gas futures.

But the late payments are causing unease among producers already wary of political uncertainty. In a recent letter to Argentina's Energy Ministry, the Hydrocarbon Exploration and Production Chamber, an industry trade group whose members include Chevron Corp (N:CVX) and BP Plc’s (L:BP) Pan American Energy, said the delays "cause great harm" to members and are putting exploration and production activity "at risk", according to a copy of the document viewed by Reuters.

Argentina's Energy Ministry declined to comment about the letter or the subsidy delays. A spokesman for Macri's office did not respond to a request for comment.

The subsidies were set to expire at the end of 2017. But Macri in January extended them, with some changes, through 2021. The government called the payments "indispensable" to attracting investment in Vaca Muerta, a Belgium-sized shale formation that is critical to Argentina's aim of closing its energy deficit and becoming a net oil and gas exporter. [nL1N1F00W0]

Gustavo Garcia, an economist who has published a paper on the fiscal impact of the programme, said the late payments complicate the government's goal to boost production.

"This programme was created so that companies would invest, to give them liquidity," Garcia said. "Obviously if it is delayed, it is not meeting that objective."


The lengthening delays come as the government seeks to cut spending and lower Argentina's fiscal deficit to 3.2 percent of gross domestic product in 2018, down from an expected 4 percent this year and 4.6 percent last year.

Next year, companies will continue to receive a minimum price of $7.50 per mBtu for increased unconventional production in the western Patagonian province of Neuquen, where Vaca Muerta is located. That price will gradually fall to $6 per mBtu by 2021.

The subsidies have led to a modest increase in gas production. The country's total output rose gradually from as little as 112 billion cubic meters per day in 2014 to 122 billion this year.

But it has come at a steep price for taxpayers. The government's 2016 budget initially included 11.5 billion pesos for the programme ($891 million at the December 2015 exchange rate), but it ended up paying out 43 billion pesos ($2.8 billion). Macri's government says it inherited 16 billion pesos in unpaid subsidies from the Fernandez administration. Rather than paying those debts in cash, last year it gave oil companies $1.1 billion in bonds at 8 percent annual interest.

Economist Garcia said the 2016 subsidy bill was more than the government spent on a popular cash transfer programme for children.

"For Argentina, it is a lot," he said. "They are paying more to oil companies than to the most humble families."

© Reuters. A police vehicle is seen past the entrance of the Fvta Xayen Mapuche comunity during a demonstration against oil companies that they claim use their territory to access oil wells near Anelo

For a graphic, click http://fingfx.thomsonreuters.com/gfx/rngs/ARGENTINA-SHALE-SUBSIDIES/010050VW1ZY/index.html

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