Argentina renews unconventional gas price subsidy

Argentina's government launched a four-year subsidy program for unconventional natural gas in a bid to encourage investment in the Vaca Muerta shale formation.

The four-year program will kick off on 1 January 2018 by paying $7.50/mn Btu for approved tight and shale gas projects that are carried out in the Neuquen basin, home to Vaca Muerta. The subsidized price will then decrease by $0.5/yr until reaching $6/mn Btu in 2021.

The upstream support mechanism is similar to a current program put in place by the previous government in 2013, although this one focuses exclusively on Vaca Muerta. The existing mechanism ensures that producers of new gas receive up to $7.50/mn Btu and is scheduled to expire at the end of this year. As in the current program, companies will have to submit investment plans to the energy ministry for approval in order to receive the new gas price subsidy.

The new program effectively maintains a key component of the country's widespread energy subsidies that the market-oriented government of President Mauricio Macri had pledged to dismantle after he took office in December 2015.

Since then, Macri has been forced to partially backpedal in the face of staunch resistance from gas producers and labor unions, and threats of mass layoffs.

Earlier this year, the government, oil companies and labor unions forged an agreement that would maintain artificially high wellhead gas prices in exchange for reducing labor costs as a way to jumpstart investment in Vaca Muerta.

Under the agreement, companies that already have a presence in Vaca Muerta—mainly state-controlled YPF, BP-controlled Pan American Energy, France's Total, Shell, Chevron and US chemical company Dow— pledged to invest a combined $5bn this year in the shale formation with a goal of reaching $15bn/yr in 2018.

Up to now, large-scale development in Vaca Muerta has been carried out mostly by YPF. Other oil companies remain cautious in the face of Argentina's relatively high development cost structure and concerns about energy policy fluctuations.

The government is hoping the higher wellhead prices will persuade companies to take current projects out of the pilot stage and move them into production.

Argentina's gas production increased by 5pc to 123mn m3/d (4.3bn ft3/d) in 2016 compared with the year before, according to the energy ministry.