Cablegate: Argentina's "Gas Plus" Natural Gas Production Incentives:

VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #0356/01 0791908
ZNR UUUUU ZZH
R 191908Z MAR 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 0543
INFO RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE

UNCLAS BUENOS AIRES 000356

SIPDIS

SIPDIS
SENSITIVE

E FOR INTL ENERGY COORDINATOR U/S JEFFERY, GREG MANUEL
EEB/ESC for DAS HENGEL, MMCMANUS, JIZZO
WHA/EPSC FOR FCORNEILLE

E.O. 12958: N/A
TAGS: EPET ENRG ECON PGOV AR
SUBJECT: Argentina's "Gas Plus" Natural Gas Production Incentives:
Non-Substantial Plan With A Catch

Ref: (A) Buenos Aires 284
(B) Buenos Aires 230
(C) 07 Buenos Aires 1819
(D) 07 Buenos Aires 1456
(E) 07 Buenos Aires 1415

This cable contains sensitive information - not for internet
distribution.

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Summary
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1. (SBU) GoA Planning Minister Julio De Vido has announced a series
of measures designed to avert looming energy shortages in the
upcoming (austral) winter heating season. These include the
extension through year-end 2008 of the GoA's "Total Energy" liquid
fuel subsidy program and a "Gas Plus" plan seeking to incent new
natural gas exploration by authorizing higher prices for natural gas
obtained through new or untapped, hard-to-reach gas reserves.
Current GoA-set price controls hold domestic wellhead prices for
natural gas at around $1.4 per million BTUs, a limit so far below
world market prices that much-needed domestic gas exploration and
production investment has been stalled.

2. (SBU) Sources queried in U.S. companies involved in the
exploration and development of Argentina's natural gas resources,
including Apache, Chevron and Occidental, see the GoA's heavily
conditioned "Gas Plus" announcement as not enough to satisfy their
desires for price liberalization but as a positive sign that the GoA
is finally beginning to understand the need to employ market
incentives to encourage production. A senior official at Pan
American Energy, which is partnered with BP, says he believes the
GoA will slowly increase natural gas prices for new discoveries and
his company has pledged to invest $800 million over the next 20
years, much of it in offshore exploration for natural gas. While
the GoA continues to publicly state that new domestic oil and gas
discoveries and new domestic generating capacity coming on line will
see Argentina comfortably through the coming winter's heating
season, the potential recurrence of domestic energy shortages of the
same magnitude as Argentina experienced last austral winter raises a
question mark on the performance of Argentina's industrial sector at
leas for the potential months of shortfalls. End Summary

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GoA Outlines Plans to Avert Winter Energy Shortages
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3. (SBU) On March 10, GoA Planning Minister Julio De Vido announced
a series of measures designed to avert looming energy shortages in
the upcoming (austral) winter heating season (Refs D,E). Detailed
terms of both programs were published in the Official Gazette March
13. The "Gas Plus" plan, outlined in Energy Secretariat Resolution
24/2008, authorized higher prices for natural gas obtained through
new or untapped, hard-to-reach gas reserves. Planning Ministry
Resolution 121/2008 authorizes the extension through year-end 2008
of the "Total Energy" program, initiated in July 2007, under which
the GoA subsidizes the replacement of scarce natural gas by
significantly more expensive liquid fuels. In addition, the GoA
will raise taxes on natural gas exports (primarily to Chile - see
para. 9) by an as yet unspecified amount and, according to
statements by Minister De Vido, seek to provide Chile sufficient
natural gas to meet capital Santiago's residential and commercial
needs. Also according to De Vido, the increase in natural gas
export taxes will be used to finance higher imports from Bolivia.

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"Gas Plus" Exploration Incentive Program
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4. (SBU) Gas Plus program benefits apply to new discoveries and to
"tight gas" fields, where gas that is harder and more expensive to
reach has so far been left unexploited. Further, the incentive
program is only open to producers enrolled in current government
accords for gas supplies and prices who continue to meet supply
levels spelled out in those accords. To apply for the new program,
producers must provide the Energy Secretariat details about their
plans, including a reserves estimate and a timeline for estimated
daily production until the reserves are fully exploited or the
concession ends. Additionally, for "tight" gas projects, the Energy

Secretariat wants companies to provide breakdowns of investment and

SIPDIS
work needed to tap the gas.

5. (SBU) Current GoA-set price controls hold domestic wellhead
prices for natural gas at around $1.4 per million British thermal
units (MBTU), a limit that industry players, including sources in
local upstream affiliates of U.S. majors Chevron, Occidental and
Apache, say has put the brakes on much-needed domestic gas
exploration and production investment. In contrast, Argentina
currently pays $7 per MBTU for gas imported from Bolivia. A senior
official of Argentina's Bridas Energy, which partners in Pan
American Energy with British Petroleum, says his company has pledged
to invest $800 million over the next 20 years in oil and gas
exploration and development, including significant offshore gas
exploration off of Chubut and Santa Cruz provinces. This official
had previewed price liberalizations for new natural gas discoveries
to the Ambassador in January and told him last week that he believes
the GoA is really committed to letting prices rise gradually,
pressured by market realities.

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Fine Print: Open Door for Further Price Controls
--------------------------------------------- ---

6. (SBU) Although the Gas Plus plan provides an exemption from the
GoA price and supply accords that ongoing natural gas projects are
subject to, local analysts say that actual prices for gas produced
from new Gas Plus projects will be subject to after-the-fact GoA
intervention. The Gas Plus resolution requires that new gas must be
sold on the domestic market and mandates a sale price "that must
contemplate costs and a reasonable profit," code words the GoA has
used in the past to justify price controls (Ref A). Another possible
conflict with the new plan is that it usurps the power of provincial
governments which, under a 2006 law, were given control of
hydrocarbons resources following the expiration of existing
federally held contracts.

7. (SBU) EconCouns' inquiry to Energy Secretariat Undersecretary for
Hydrocarbons Rodriguez on how the GoA plans to calculate
"reasonable" profits was referred to Planning Ministry Under
Secretary for Coordination Roberto Barata, who declined to provide a

SIPDIS
detailed answer. A well placed official in U.S. Apache Energy's
local affiliate, which develops natural gas wells in Tierra del
Fuego and Neuquen provinces, echoed sentiments of his Chevron and
Occidental colleagues, saying "Any natural gas price would be better
than the current one, so this measure is positive. But it will not
satisfy the industry, especially given the potential for continued
GoA price intervention."

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Argentine Natural Gas Production, Consumption
---------------------------------------------

8. (U) The Oil and Gas Journal reports that Argentina had 15.8
trillion cubic feet (Tcf) of proven natural gas reserves in January
2008, the third-largest reserves in South America behind Venezuela's
166.3 Tcf and Bolivia's 26.5. (Local analysts note that Bolivian
reserve figures are disputed and could be as low as half of this
amount). While Argentine natural gas production has steadily
increased over the last decade (Argentina produced 1.80 Tcf of
natural gas in 2007, according to the Argentine Petroleum and Gas
Institute, nearly double 1996 levels), local analysts note that new
gas discoveries have not kept pace with consumption that has risen
significantly in the past decade: Natural gas is currently the
country's dominant fuel source, accounting for over 50% of primary
energy consumption. The provinces of Neuquen, Salta, Tierra del
Fuego, and Santa Cruz contain most of Argentina's natural gas
production, with the Neuquen basin alone accounting for over half of
Argentina's total natural gas production.

9. (SBU) In 2007, according to Argentine Petroleum and Gas Institute
statistics, Spanish-owned Repsol-YPF (in which Argentina's Santa
Cruz province e entrepreneur and Kirchner family confidant Enrique
Eskenazi recently purchased a 15% share) is Argentina's top natural
gas producer, with about 28% of all production, followed by France's
Total with about 25%, UK/Argentine Pan American Energy with about
12%, Brazil's Petrobras with 10%, Argentina's Pluspetrol with 9%,
and U.S. Apache Energy with 6%.

10. (SBU) Argentina is a net exporter of natural gas, principally to

Chile. However, this relationship has been strained since 2004,
with Argentina repeatedly reducing natural gas exports to Chile to
compensate for domestic shortages. Argentina is Chile's sole source
of natural gas imports, and the continuing supply disruptions have
caused Chile to pursue alternative energy sources, including the
in-progress construction of an LNG receiving terminal. Despite
being a net exporter of natural gas, Argentina also imports natural
gas from Bolivia through the 270-mile, 230- million cubic ft/day
(Mcfd) Yacimientos-Bolivian Gulf (Yabog) pipeline. Argentina began
importing natural gas again from Bolivia in 2004 to cover a domestic
shortfall, which it had not done since 1999.

11. (SBU) In October 2006, Argentina and Bolivia signed an agreement
for Argentina to import natural gas for an additional 20 years.
Under the terms of the deal, Argentine imports from Bolivia are to
eventually reach one billion cubic feet per day (Bcfd), a fourfold
increase from current levels. The price that Argentina pays for the
natural gas will also increase and eventually become linked to
market rates. To facilitate this increase in volume, Argentina and
Bolivia have agreed to build a new US $1.5 billion, 710 Mcfd
capacity pipeline system connecting the two countries, the Gasoducto
del Noreste Argentino (GNEA). However pipeline construction has
been delayed, as have expanded Bolivian deliveries. To cover
anticipated winter shortfalls, at a Buenos Aires energy summit last
month between the Argentine, Brazilian and Bolivian presidents (Ref
B), Argentina asked Brazil to cede a small share of its gas
deliveries from Bolivia in order to increase Argentina's Bolivian
gas imports by a third to roughly 140 million cubic feet a day. But
Brazil, which buys 1.1 billion cubic feet a day from Bolivia -
roughly half the natural gas consumed by Brazil's 190 million
consumers - declined and instead offered to sell Argentina.

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Comment
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12. (SBU) While officials of U.S. companies involved in the
exploration and development of Argentina's natural gas resources and
local hydrocarbon sector analysts tend to see the GoA's heavily
conditioned "Gas Plus" announcement as economically insignificant,
they agree that it is an overall positive sign that the GoA is
finally beginning to understand that multinational energy firms
respond more readily to the carrot of market incentives than to the
sticks of public harangues on their "social obligation" to invest.
However, these initial Gas Plus measures are not viewed as tackling
the root of Argentina's energy crisis - the fact that low, regulated
prices of natural gas and electricity charged to residential and
industrial consumers have boosted consumption and discouraged
private investment in the energy sector. Residential Argentine gas
tariffs remain among the lowest in the world and have cost the GoA
hundreds of millions of dollars. On the one hand, inexpensive
energy has helped fuel economic expansion and consumer spending. On
the other, Argentina has faced seasonal natural gas shortages since
early 2004 and opinion polls show the Argentine public doesn't get
the connection between low energy bills and energy shortages. While
the GoA continues to publicly state that new domestic oil and gas
discoveries and new domestic generating capacity coming on line will
see Argentina comfortably through the coming austral winter's
heating season, the potential recurrence of domestic energy
shortages of the same magnitude as Argentina experienced last
austral winter raises a question mark on the performance of
Argentina's industrial sector, at least during the peak energy use
months in 2008.

WAYNE

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