News: “Incremental Hydrocarbons’ Production”

New Access Channels to the Foreign Exchange Market

“Incremental Hydrocarbons’ Production”

On May 28, 2022, by means of Decree 277/2022, the Foreign Exchange Access Regime for the Incremental Production of Hydrocarbons was approved with the objective of promoting production in the hydrocarbons’ sector, generating incentives by granting foreign exchange access channels without prior authorization from the Central Bank of the Argentine Republic (“BCRA”, as per its acronym in Spanish).

In this sense, two regimes of access to the local foreign exchange market (“MLC”, as per its acronym in Spanish) were created to increase investments linked to the production of crude oil and natural gas, which will be subordinated to a third regime to promote employment, work and the development of suppliers in the regional and national hydrocarbons industry:

Foreign Exchange Access Regime for Incremental Oil Production (RADPIP)

Beneficiaries: Those registered with the Registry of Oil Companies of the National State (Registro de Empresas Petroleras del Estado Nacional) that are holders of hydrocarbons exploitation concessions granted by the National State, the Provinces or CABA and that:

1. Join the RADPIP (they may join or associate with duly registered third parties);
2. Obtain incremental crude oil production;
3. Comply with the regime for the Promotion of Employment, Labor, and the Development of Regional and National Suppliers to the Hydrocarbons Industry; and
4. In case of being beneficiaries of that regime, comply with the obligations foreseen in the Plan for the Promotion of Argentine Natural Gas Production (Plan de Promoción de la Producción del Gas Natural Argentino) (Decree No. 892/20).

Baseline calculation: the Baseline will be the total crude oil accumulated by the beneficiary (including its subsidiaries or oil-producing companies of the same economic group within the country), during 2021, in all areas over which it holds a concession, according to official data submitted to the Secretariat of Energy as of May 28, 2022.

Incremental Production Calculation: once the Baseline has been obtained, the Annual Incremental Production and Quarterly Incremental Production data will be obtained:

1. Annual Incremental Production: difference between the actual production of the last 12 months and the Baseline.
2. Quarterly Incremental Production: one quarter (1/4) of the Annual Incremental Production.

Incentives: the beneficiary will enjoy the benefits of the RADPIP on a percentage of its incremental production on a quarterly basis. The base Incremental Production Volume Benefit (“VPIB”) will be 20% of the Quarterly Incremental Production, which may be increased for different circumstances:

1. In the amount of percentage points equivalent to 1/5 of the percentage of the Internal Crude Oil Market Coverage;
2. Up to 5% if the beneficiary is able to counteract the technical decline linked to conventional exploitation;
3. Up to 2% if incremental oil production is obtained from low productivity or previously inactive or closed wells, together with third party retrievers;
4. Up to 2% when the Annual Incremental Production is obtained by contracting at least 10% of the fracturing services from Regional or National Companies;
5. By up to 2% when the beneficiary increases its investment, or initiates a new investment process, in oil exploration and exploitation in marginal areas or in areas with exclusive conventional production with productive decline. The investment must be of USD 5,000,000 within a maximum period of 2 years after joining the RADPIP.

Access to the MLC: Access to the MLC will be granted for an amount equivalent to its VPIB (valued on the basis of the “ICE Brent first line” price of the last 12 months net of export duties but incorporating premiums/discounts for crude quality), for the following uses*:

1. Payment of principal and interest on foreign commercial or financial indebtedness, including debt with non-resident related companies;
2. Payment of profits and dividends corresponding to closed and audited balance sheets; and/or
3. Repatriation of direct investment by non-residents.

*net of export duties, incorporating premiums or discounts for the quality of crude oil, as regulated.

Benefit Transfer: benefits may be transferred to direct suppliers of the beneficiary*.

*subject to regulation.

Regime for Access to Foreign Exchange for Incremental Natural Gas Production (RADPIGN)

Beneficiaries: Those registered with the Registry of Oil Companies of the National State (Registro de Empresas Petroleras del Estado Nacional) that are holders of hydrocarbons exploitation concessions granted by the National State, the Provinces or CABA and that:

1. Join the RADPIGN (they may join or associate with duly registered third parties);
2. Are successful bidders in compliance with base natural gas injection volumes on 365 days per year, in auctions or price tenders under the Plan for the Promotion of Argentine Natural Gas Production (Decree No. 892/20);
3. Achieve incremental injection levels with respect to the injection baseline; and
4. Comply with the regime for the Promotion of Employment, Labor, and the Development of Regional and National Suppliers to the Hydrocarbons Industry.

Injection Baseline Calculation: the Injection Baseline will be the annual average daily injection volume of natural gas for the year 2021, with measurement approved by the Application Authority and ENARGAS, and effectively injected, including off system production, all from its own areas, including that of its subsidiaries or producing companies of the same economic group within the country.

Incremental Injection Calculation: once the Baseline Injection has been obtained, the Incremental Injection data will be obtained, being the average daily excess, with respect to the Baseline Injection, of the volume of natural gas effectively injected by the beneficiary. The volume effectively injected shall be the average daily injection of the last 12 preceding months.

Incentives: the beneficiary will enjoy the benefits of RADPIGN on a percentage of its Incremental Injection on a quarterly basis. The base Incremental Injection Volume Benefit (“VIIB”, as per its acronym in Spanish) will be 30% of the Incremental Injection multiplied by the number of days in the quarter, which may be increased for different circumstances:

1. In the amount of percentage points equivalent to 1/5 of the percentage of Domestic Natural Gas Market Coverage;
2. Up to 5% if the beneficiary can counteract the technical decline linked to conventional exploitation*;

*subject to regulation

Access to the MLC:* Access to the MLC will be available for an amount equivalent to its VIIB (valued at the weighted average export price of the last 12 months**) of the whole system), for the following uses***:

1. Payment of principal and interest on foreign commercial or financial liabilities, including liabilities to non-resident related companies;
2. Payment of profits and dividends corresponding to closed and audited balance sheets; and/or
3. Repatriation of direct investment by non-residents.

* the Incremental Injection destined to supply, as final destination the production of by-products benefiting from free application of foreign exchange regimes may not be imputed for the calculation of the benefit.

** the price may not be lower than the weighted average award price for base natural gas volumes on 365 days per year as defined by Resolution 391/2020 nor higher than twice this value, as regulated.

*** net of export duties

Benefit Transfer: benefits may be transferred to direct suppliers of the beneficiary*.

* subject to regulation.

Regime for the Promotion of Employment, Labor and the Development of Regional and National Suppliers to the Hydrocarbons Industry (RPEPNIH)

To access and maintain the benefits of the RADPIP and RADPIGN, beneficiaries must simultaneously comply with the specific requirements of each regime to which they adhere, the principle of full and successive, regional and national use of the facilities in terms of employment and recruitment of workers, and direct provision of services by SMEs and regional companies, and also:

1. They shall submit their Regional and National Suppliers Development Plans to the Ministry of Productive Development (Ministerio de Desarrollo Productivo) and the Secretariat of Energy of the Ministry of Economy (Secretaría de Energía del Ministerio de Economía) for approval.
2. They shall comply with a program in which they shall be granted the possibility of re-signing or matching the best offer, with priority given to offers for the provision of goods and/or services of regional and national origin, when the price of the offers of national origin is equal to or lower than those of non-domestic origin, increased by 10% when the national offers are from a regional supplier, and by 5% when they are from a national supplier outside the region.

Enforcement Authority

The Authority of Application of the RPEPNIH shall be the Secretariat of Energy, except for the provisions regarding RADPIP and RADPIGN, where the Authority of Application shall be the Secretariat of Energy and the BCRA.

Relationship with Complementary Exchange Regulations

The benefits introduced by the RADPIP and RADPIGN relating to access to the MLC will be considered and deducted in due course from the benefits accruing to beneficiaries who:

A. Have applied to join sectoral promotion programs providing benefits in terms of access to the MLC; and

B. Are covered by any of the MLC access benefits defined in:

1. Decree No. 234/21 “Regime for the Promotion of Investments for Exports” and BCRA Communication “A” 7259 and supplementary BCRA communications;
2. Decree No. 836/21 “Modifications to the Export Investment Promotion Regime” and Communication “A” 7420 and supplementary BCRA communications;
3. Decree No. 892/20 “Plan Gas.Ar” and Communication “A” 7168 and supplementary BCRA communications;
4. Communication “A 7123 and supplementary BCRA communications;
5. Communication “A” 6869 and supplementary BCRA communications;
6. Communications “A” 7301, “A” 7416 and supplementary BCRA communications;
7. Other rules with benefits in terms of access to the MLC, to be set out in regulations.