ARGENTINA PETROLEUM ROUNDTABLE: U.S. PLAYERS

C O N F I D E N T I A L BUENOS AIRES 002598

SIPDIS

SIPDIS

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E.O. 12958: DECL: 11/20/2016
TAGS: ECON OECD AR
SUBJECT: ARGENTINA PETROLEUM ROUNDTABLE: U.S. PLAYERS
INVESTING BUT WARY OF REGULATORY AND LABOR ISSUES

REF: BUENOS AIRES 2556

Classified By: ECONCOUNS D.P.CLIMAN. REASONS 1.5 (B,D)

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Summary
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1. (C) Representatives of U.S. upstream and downstream
hydrocarbon players Apache, Chevron, Esso, Occidental and
Pan-American briefed Ambassador on regulatory, tax and labor
issues they face. Key concerns include (1) the immediate
impact of an oilfield work stoppage that threatens to disrupt
nationwide gas-fired electricity generation; (2) the GoA's
mandate that refiners import diesel fuel at a substantial
loss; (3) a GoA "invitation" to upstream producers to take
proportional equity participations in a new multi-billion
dollar refinery project; and (4) looming gas shortages due to
delays in the construction of a new Bolivian gas pipeline.
They commented that the government is responding to current
energy shortages with a very short term perspective, which
could easily lead to more problems. U.S. company reps
responded cautiously to Planning Minister De Vido's earlier
proposal to have the Ambassador host regular meetings of U.S.
petroleum players with De Vido to review their problems and
concerns. They noted the GoA's penchant for identifying and
branding energy sector "troublemakers" and recommended the
Ambassador privately represent sector concerns to De Vido.
End Summary


2. (SBU) Ambassador met November 16 with representatives of
U.S. upstream and downstream hydrocarbon players in the
Argentine market to review regulatory, tax and labor issues
they face, better understand specific concerns and to develop
a consensus advocacy strategy to support these companies'
efforts here. Participants included Apache Country Manager
Rob Johnston, Chevron San Jorge General Manager Ian
Partridge, Esso Country Manager Daniel Risso, Occidental
Argentina President Mike Kyle, and Pan American CEO Felipe
Bayon.


3. (C) Upstream (exploration and development) and downstream
(refining) participants reviewed how the GoA,s menu of
export tariffs, export restrictions, variable tax
concessions, and cascading explicit and implicit price
controls have affected their business strategy, profitability
and investment decisions. They contrasted current critical
concerns -- including oilfield worker stoppages in their
Patagonia production fields and recent sudden changes in tax
regulations -- with chronic problems that derive from broad
micro-economic inefficiencies imposed by the GoA's
interventionist managed price regime.

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Diesel Shortages, GoA Push for New Refinery
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4. (C) Esso highlighted the impact of current diesel
shortages on downstream refiners: As a result of GoA
upstream and downstream regulation and aggressive GoA
pressure to control retail prices, gasoline prices at the
pump remain approximately 50% below those of neighboring
countries. Refinery capacity limitations and supply/demand
imbalances have resulted in rolling diesel fuel shortages and
GoA demands that refiners import diesel fuel at world market
prices to be sold at an approximately $0.20/liter loss on the
domestic markets. Esso explained that the GoA effectively
demands that refiners cross subsidize diesel imports in order
to provide below cost supplies to Argentina's burgeoning and
diesel-dependent agricultural sector.


5. (C) Largely as a consequence of these politically
sensitive diesel shortages, Internal Commerce Secretary
Moreno "invited" 25 Argentine upstream producers and
downstream refiners in early November to invest in a new 150
million barrel per day (MBD) refinery that will require a
total capital investment of $2.25 billion. Under the GoA,s
proposal, producers would put up $1.65 billion in fiduciary
fund equity, with participation proportionate to current
production market share. Private Argentine pension funds
would contribute the remaining $600 million. Participants
explained that this GoA initiative has been presented to them
by the GoA as a "private" project, one in which they would
have the right to sell their participations once a secondary
market for fiduciary fund shares develops.


6. (C) Upstream producers called the GoA's refinery project
assumptions unrealistic, particularly its baseline projection
of sustained 10% GDP growth for the next 20 years. Key
initial concerns producers expressed to the GoA centered on
the GoA,s projection of adequate future crude availability
to supply the refinery: Crude production in Argentina has
been declining steadily since its 1998 peak of 916,000 bb/day
to 660,000 bb/day in 2005 as producers failed to bring enough
new capacity on line to replacing declining production from
mature fields. Chevron estimated that that Argentina would
require a major new field discovery every 18 months in order
to justify refinery construction. Apache estimated that $3.5
billion of annual new upstream investment would be required
to prospect and produce sufficient new crude supplies to
allow a new refinery to operate at reasonable capacity.


7. (C) Initial upstream producer reaction to the GoA,s
proposal was polite. Repsol YPF, Petrobras, Pan American,
Chevron and the pension funds volunteered to do engineering
and feasibility studies of the GoA,s proposal and return
with conclusions and proposals. Participants Chevron, Esso
and Pan American made clear they did not think the project
would go forward and, in any case, they were not inclined to
consider participation under duress. They noted that Energy
Secretary Cameron, quietly told them that such an uneconomic

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project would not go forward while he remained energy
secretary. Occidental noted their intent to re-invest its

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Argentina cash flow in new upstream exploration and
production activities here rather than in downstream refining
projects in which the company has no expertise and no
strategic interest.

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Gas Shortages and Bolivian Supply Constraints
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8. (C) Chevron raised the GoA's policy of controlling the
wellhead price of natural gas sold domestically has
encouraged greater use of existing gas-fired electricity
generating capacity at the expense of developing new hydro
projects. However, the GoA has yet to provide generators
appropriate incentives, promises of secure gas supplies, and
power purchase agreement security to promote the development
of new gas fired generating capacity. Participants
complained that the GoA energy officials have failed to
demonstrate either the vision or a commitment to long term
planning that will bring new capacity on line fast enough.


9. (C) A key concern is whether Bolivia will be able to
supply the promised five-fold increase in natural gas
supplies cubic meters/day from current import levels
averaging 5 million cubic meters. Pan-American joked that
Argentina's next big gas basin is Chile -- referring to the
GoA's penchant to cut off profitably contacted gas supplies
to Chile in order to provide subsidized supplies to domestic
markets.


10. (SBU) Note: Following a re-negotiation of gas supply
prices in June 2006, Argentina currently pays Bolivia in the
$5/million BTU range, a 55% increase above prices previously
paid. Current Bolivian deliveries to Argentina are in the 5
million cubic meters/day range, with plans to increase
imports to an eventual 27 million cubic meters a day
following the construction of additional pipeline capacity
agreed by Presidents Kirchner and Morales in September.
Pipeline project finance has yet to be structured. For its
part, Argentina currently supplies Chile in the range of 15
million cubic meters/day of natural gas per day (roughly
three times the amount imported from Bolivia) at a price that
has risen to the $4.80/MBTU range following an increase in
Argentina,s gas export tax this past summer (austral winter)
from 20 to 45%. End Note

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Hydrocarbon Labor Issues: Union Leverage
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11. (SBU) All hydrocarbon participants complained of lost
production due to recent union-directed work slowdowns and a
full work stoppage that began November 15. The proximate
cause of the work stoppage is a union demand that oil and gas
companies agree to gross-up oil and gas workers' salaries to
compensate them for high taxes they pay under Argentina's
progressive income and asset tax programs. Participants
explained that the work slowdowns not only result in major
production losses but also in permanent mature field reserve
losses. They also noted that a work stoppage of more than a
few days would paralyze national gas-fired generating
capacity and result in blackouts politically embarrassing to
the Kirchner administration.


12. (SBU) Note: With the direct intervention of Planning
Minster De Vido (at the President's direction),Economy
Minister Miceli, Labor Minister Tomada and Energy Secretary
Cameron, a settlement was reached with oilfield workers
November 17. The resolution involved an agreement by the GoA
to exempt certain oilfield worker transportation and living
expense benefits expenses from income tax and an agreement by
upstream companies to pay a monthly bonus ranging from $200 -
$1000 per worker. However, the settlement has set off
additional work stoppages and demands by other unions in the
oil sector as well as in other sectors.

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Participants Request Low Key Embassy Advocacy
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13. (C) Ambassador noted Minister De Vido's recent request
(Reftel) that the U.S. Embassy continue hosting regular
private meetings between the Minister and sector players to
review their concerns. Ambassador also suggested the
possibility of sponsoring sector specific "best practices"
seminars to introduce GoA officials to world class sector
regulatory policies. Participants reacted cautiously, noting
the GoA's penchant for identifying and branding troublemakers
like Shell (for attempting to raise gas pump prices) and
Repsol YPF (for insufficient investment in new exploration
and development). Instead they recommended that the
Ambassador privately represent sector concerns to De Vido,
arguing that he would be better received since he represents
both existing oil and gas players and potential new
investors. They said they would be happy, however, to
participate in a sectoral lunch with the Ambassador and De
Vido.

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Comment
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14. (C) This first of a series of industry sector-specific
briefings for the Ambassador by U.S. company reps was notable
for the level of concern they expressed about the
increasingly heavy hand of the GoA in energy markets and for
their reluctance to directly present these concerns to GoA
officials. The fact remains that U.S. upstream players are
investing heavily in Argentina: Apache has spent almost a
billion dollars purchasing exploration and production
facilities (septel),Occidental has announced a USG 1
billion-plus expansion program over the next four years,
Pan-American has announced it will spend $600 million a year
in exploration, and Chevron is expanding drilling in its
current concession areas. The companies admit they remain
broadly profitable notwithstanding challenges posed by GoA
sector regulation, pricing and tax policies. They emphasize,
however, that the GoA's penchant to alter such regulations on
short notice and to propose uneconomic schemes like the new
refinery project are preventing them from winning home office
approval for still more ambitious investment proposals.


15. (C) The GoA's agreement to cut oilfield worker income tax
payments appears a first step on a slippery slope of
accommodation that could well make it harder for the GoA's
price control czar, Internal Commerce Secretary Moreno, to
control inflationary expectations and prevent a wage/price
spiral. Finally, upstream and downstream player reluctance
to confront GoA officials on bad energy sector policy --
including a web of export tariffs, export restrictions,
variable tax concessions, and cascading explicit and implicit
price controls -- is emblematic of an international investor
community cowed by GoA bullying and intimidation, in part
because they continue to turn a handy profit. This mission
will work to increase GoA awareness of the very real costs
GoA intervention imposes on the Argentine economy, including
the opportunity cost of new investment forgone. We hope this
will prove a compelling argument for a Kirchner
administration committed to attracting new foreign investment
in basic infrastructure development.
WAYNE