Argentina's government and the oil industry have hammered out a preliminary agreement to cut the country's artificially high domestic crude prices, but with a commitment to maintain a price floor to ensure a minimum level of revenue for producers.
Although the details are still not fully resolved, the plan foresees a gradual decline in crude prices in the first half of 2017 to align with international levels around the middle of the year, energy minister Juan Jose Aranguren said on the sidelines of the industry's annual Oil Day lunch.
Even after the convergence is achieved, the agreement would stipulate a minimum price of $55/bl for 34°API Medanito and $47/bl for heavier Escalante, he said.
The government has faced strong headwinds in its effort to eliminate what is in effect an upstream subsidy, even though a firming of international crude prices following the recent Opec and non-Opec accord has narrowed the margin.
Mixed signals from the government in recent months have sown market chaos, with producers and refiners haggling over a broad range of prices for domestic supply.
In effect, many producers have been accepting prices that are lower than the minimum prices the upcoming agreement is expected to stipulate.
"Right now we are seeing instances of the crude being sold below international prices," Aranguren said. "There are producers that have been selling Medanito crude for $53/bl."
After years of above-market prices aimed at encouraging production, the year-old government of President Mauricio Macri has been seeking a formula to gradually converge the prices with global levels.
Earlier this year, Buenos Aires fixed the price for Medanito at $67.50/bl and heavier Escalante at $54.90/bl until August, when 2pc/month adjustments began to take effect for three months.
"We have to reach international prices and no longer diverge from them," Aranguren said in a speech to a room packed with senior oil executives in which he dismissed persistent industry demands for price support, particularly for natural gas.
"It is no longer enough that prices on the demand side are increasing, they want certainty and if this certainty comes in the form of a resolution, even better," Aranguren said. "But I think it is best to compete, and that applies to both fuel and gas. It is the only way to reward efficiency and render an industry that is stronger and more competitive."
Independent oil and gas producers are seen as particularly vulnerable in the uncertain price environment.
Aranguren's words appeared directed at advocates of an extension of a gas subsidy program that pays as much as $7.50/mn Btu for new production.
The minister declined to say whether the subsidy program would not be renewed when it expires at the end of 2017.
"We still have a year until 2017 ends, what we will do is move toward a system in which the price is not determined by an official but rather the capacity that market participants have to be efficient," Aranguren said.
The current morass in prices partly reflects the government's reluctance to allow another increase in retail fuel prices, which have already risen by 31pc this year, far less than the 45pc inflation rate registered in the 12 months ending in November, according to statistics from the Buenos Aires municipal government.
Refiners have been resorting to imported crude to avoid paying inflated domestic prices, but this trend may ease if the current international price rally is sustained into next year.
Prices at the pump are not expected to increase again this year, but would likely to rise as part of the broader agreement on crude prices.
