Argentina Caps Oil Prices By Decree

Instant Max AI

(Argus, 16.Aug.2019) — Argentina implemented a three-month freeze on fuel and crude prices through an emergency decree, eschewing an earlier plan to apply a decades-old law that was designed to avoid shortages.

The decree specifies that refiners and hydrocarbon producers must fulfill all existing domestic demand during the period when the measure is in place, effectively prohibiting any supply from being diverted to the export market.

The use of a decree to impose the freeze means the congress could technically overturn the measure, but lawmakers are unlikely to vote for what would effectively be a price increase in the run-up to October elections.

In a measure of local reaction to the price controls, the government of the southwestern province of Neuquen, where most of Argentina’s Vaca Muerta shale formation is located, said it would file a lawsuit against the national government.

The decree specifies that all retail gasoline and diesel prices must stay at the level they were at on 9 August for 90 days.

Sales of crude between producers and refiners must be conducted at the same price that had been agreed to before that date, setting as a reference a Brent price of $59/bl and a currency exchange rate of 45.19 pesos per US dollar.

The measures take effect for 90 days starting today.

“The current economic situation signals substantial increases in the price of crude and liquid fuels in the local market, causing harmful effects for different sectors of the economy,” the decree states.

The Neuquen government expressed anger that President Mauricio Macri’s administration seemed unwilling to discuss a measure that would have a significant impact on the Patagonian province’s tax revenue.

“As a producing province, we accompany the decision of the national government to keep the fuel price fixed at the pump because the economic and financial situation requires it. But we propose to work on a joint proposal between the federal government, provinces and companies,” Neuquen’s energy minister Alejandro Monteiro said.

The measure would cause a 15pc drop in the tax revenue that Neuquen generates from oil companies, according to Monteiro.

State-controlled YPF and other oil companies have also registered objections to the price caps. In a call with investors this morning, YPF said it will cut capital expenditures by around $100mn-$120mn per month to make up for the expected losses.

At the current exchange rate, the freeze implies a crude price of around $40/bl, according to YPF chief executive Daniel Gonzalez.

That artificially low crude price poses a deeper challenge for smaller, non-integrated companies. Gaston Remy, chief executive of the Argentinian branch of Vista Oil and Gas, said “with these values you cannot cover the costs of production, much less keep growing.”

Beyond the financial hit that the companies will take, the measure also implies a “change of rule that above all affects our credibility to keep seeking out that capital that is so important to develop a platform like Vaca Muerta,” he said.

The decree was published at the end of a week that saw a large sell-off of Argentinian assets and a sharp currency depreciation after populist presidential candidate Alberto Fernandez scored a 16-point advantage over business-oriented sitting president Macri in a nationwide open primary on 11 August.

Alberto Fernandez is running on a ticket with former president Cristina Fernandez de Kirchner as his vice president. The two are not related.

The sell-off began to ease and the peso strengthened slightly yesterday after the two candidates conferred on the telephone to try to calm the jittery market.

The peso depreciated 17pc against the US dollar this week amid concern that a victory for Fernandez would mark a return to the interventionist policies that marked the back-to-back terms of Cristina Fernandez, who left office in 2015.

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