<article><p>Argentina's influential oil-producing provinces are defending a government-controlled domestic crude price even though it now exceeds the declining global price of crude. </p><p>"Faced with the current volatility in the international oil price…it is wrong to change the domestic prices on which investment plans are based in order to increase production, achieve self-sufficiency and maintain jobs," the governors of the oil-producing provinces said after a meeting in Buenos Aires yesterday.</p><p>The new paradox in Argentina´s oil price follows years of stringent controls that the government of President Cristina Fernandez de Kirchner has defended as a way to protect domestic consumers from international fluctuations.</p><p>Producers of 34˚API Medanito crude receive around $83/bl from local refiners, which industry executives have said is just about enough to break even on costly shale exploration and production.</p><p>A sustained period of low oil prices could undermine efforts to tap the country's shale reserves, which are critical to reviving domestic production and cutting imports.</p><p>YPF chief executive Miguel Galuccio yesterday brushed off the concerns, emphasizing that the price decline can be offset by increased upstream efficiency to cut costs.</p><p>"I don't think Vaca Muerta is at any risk," Galuccio said, referring to Argentina´s premier shale formation.</p><p>By keeping the domestic price above the global price, Argentina could stimulate much-needed investment. But it is not clear for how long this artificial price can be sustained because refiners can import cheaper crude as an alternative. YPF and other refiners already imported light West African crude this year to complement their domestic slates.</p><p>Under a broad amendment to the country's oil legislation that became law in October, companies can export a certain amount of production—20pc for onshore and 60pc for offshore—after three years of investing at least $250mn. Before the reform, export of light quality Medanito was largely restricted because it is used by local refiners, although medium quality Escalante could still be shipped abroad.</p><p>The oil industry had long sought to loosen government limits on exports. Ironically, plunging oil prices now mean that producers get a better price at home. </p><p>"So far we have not seen any decline in investments, but we know decisions are tied to international prices even if our domestic price is higher," said an energy official with Chubut province, the country's top oil producer.</p><p>Argentina also controls the wellhead natural gas price, but with a subsidy to stimulate development. Producers receive as much as $7.5/mn Btu for new output.</p><p>Beyond shale-rich Neuquen, provinces that are focused on conventional production may end up benefiting from a scenario of lower prices in anticipation of reduced investment in higher-cost unconventionals. </p><p>Neuquen province, which covers most of Vaca Muerta, appears to be weathering the uncertainty for now. Provincial oil company GyP says it plans to invest a total of $550mn with partners Shell and France's Total to develop Vaca Muerta acreage in two separate projects.</p><p>GyP and Shell will invest $250mn in pilot projects in the Sierras Blancas and Cruz de Lorena blocks in Vaca Muerta. The investment will include the construction of a 10,000 b/d treatment plant, GyP says. Shell holds an 85pc stake in Sierras Blancas. GyP holds 10pc and local firm Medanito the remaining 5pc. In Cruz de Lorena, Shell holds an 80pc stake while GyP has the balance. </p><p>Separately, GyP will invest $300mn with Total and Shell for a pilot project in the Rincon La Ceniza and La Escalonada blocks in Vaca Muerta. Total and Shell each hold 42.5pc in the two blocks, while GyP has the balance. Total is the operator.</p><p>Meanwhile, GyP and Germany's Wintershall plan to launch a joint pilot project in March. In January, Wintershall sealed a $142mn deal with GyP to drill six wells over two years in a Vaca Muerta block.</p><p>dp/pg</p><p> Send comments to <a href="mailto:feedback@argusmedia.com" target="_parent"> feedback@argusmedia.com </a></p><br><br><p> If you would like to review other ArgusMedia.com content options, <u><a href="http://info.argusmedia.com/mailers/News/sectortrial.html?ref=webnews" target="_TOP"> request more information </a></u> about Argus' energy news, data and analysis services. </p><p><i> Copyright © 2014 Argus Media Ltd - <a href="http://www.argusmedia.com/" target="_TOP"> www.ArgusMedia.com </a> - All rights reserved. </i></p></article>
