Argentina Could Know Its Oil, Gas Output Potential by 2011

BUENOS AIRES (Dow Jones Newswires), December 2, 2008

Argentina should have a much better understanding of its proven reserves and overall potential to produce newly found oil and gas by 2011, a top Argentine official said.

"We are exploring right now and we should know by then how much we will be able to produce," Planning Minister Julio De Vido said late Thursday after a meeting with oil companies and industry labor unions.

Argentina's oil production peaked at around 45.4 million cubic meters in 1998, according to Energy Secretariat data.

This year production seems to be on track to total around 37.6 million, according to the Argentine Oil and Gas Institute, or IAPG.

Gas production peaked at about 51 billion cubic meters in 2004, according to the Secretariat. This year production is on track to total about 51 million.

Argentina's proven oil reserves totaled 415 million cubic meters by the end of 2007 while proven gas reserves were 441 billion cubic meters, Secretariat data show.

"There's a lot of potential to discover new oil and gas reserves," said IAPG analyst Gerardo Rabinovich.

Rabinovich said Argentina shares some of the same geological traits as Brazil, which has recently made big offshore discoveries, and that it may have similarly impressive production potential.

"There's a need to implement aggressive exploration policies," he said. "All you have to do is create the legal and financial incentives necessary to get there."

De Vido said that's just what the government has done.

Last month De Vido announced a tax rebate program aimed at boosting the reserves, production and refinement of crude oil. He said this would "give companies an incentive to explore for and produce more oil."

The incentives are part of a so-called Petroleum Plus program that will boost crude output by 13% over the next five years, he said.

De Vido said the program will lead companies to invest $8.5 billion in crude exploration and production. He didn't say which companies would invest or what exactly they would invest in. Meanwhile, it's unclear if any of this amount includes plans that have already been announced.

Under the program, the government will compare future production and refinement levels with current levels to determine who qualifies for the rebates.

If companies increase reserves and production, they will get tax breaks on the new output. The higher the increase, the higher the rebates will be.

But not everyone is convinced that's enough.

"This is a step in the right direction," said an executive at one of the world's leading oil and gas companies. "We're going to take a wait-and-see approach."

In August, De Vido announced that companies from Argentina, Chile and Spain would explore Argentine waters for oil. Argentina's state-run energy firm, Enarsa, Chile's state-owned oil company, Enap Sipetrol, and Spain's Repsol-YPF have since started exploring offshore.

The firms plan to invest $150 million in the project, which entails the first perforation in local waters in 30 years.

Even Argentina's president hailed the announcement.

"After 30 years Argentina will have platforms exploring for oil off its coast," President Cristina Fernandez said. "It's a pity that Argentina abandoned such important exploration for so long."

Argentina's oil and gas reserves have been declining in recent years. Oil reserves appeared to rebound in 2006, but Rabinovich said that's mainly because the government changed the way it measures them.

"That was basically a matter of accounting," he said. "There have been no new major discoveries."

Executives at oil and gas companies say they haven't invested much because of price controls that have made such investment unappealing.

The government froze energy prices after the country's 2002 economic meltdown, and it has only recently begun letting rates rise. But energy prices here are still well below global market values.

Moreover, high taxes on oil exports have led to a strange situation in which producers here actually lose money when international prices go up. Alternatively, they tend to make more from exports when global prices fall.

"This is completely absurd," said another executive at another major oil producer.

In private, industry executives almost unanimously voice frustration with government officials, whose policies, they say, have discouraged investment by reducing and in some cases eliminating the potential for profit.

Most executives don't openly voice their concerns because they fear angering officials. They cite the case of Shell Argentina President Juan Jose Aranguren who was threatened with jail time by Commerce Secretary Guillermo Moreno for allegedly violating a 1974 "Supply Law."

Aranguren is unique as a top executive who has openly questioned the wisdom of energy policies.

In any case, both executives and analysts say that while Argentina will know more about its production potential by 2011, it's unlikely to have all the answers by then.

"Three years is a reasonable amount of time to know something about our overall potential," said Rabinovich. "But there's only one platform offshore now. If that's the extent of our exploratory program, it's not very ambitious. We need four or five offshore platforms to do this. At this rate there isn't enough exploration going on for us to know our full potential by 2011."

Copyright (c) 2008 Dow Jones & Company, Inc.