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OO RUEHWEB

DE RUEHBU #2598/01 3242139
ZNY CCCCC ZZH
O 202139Z NOV 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6544
INFO RUEHAC/AMEMBASSY ASUNCION PRIORITY 5752
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C O N F I D E N T I A L BUENOS AIRES 002598 
 
SIPDIS 
 
SIPDIS 
 
WHA FOR WHA/BSC AND WHA/EPSC 
E FOR THOMAS PIERCE, 
PASS NSC FOR JOSE CARDENAS 
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE 
EX-IM BANK FOR MICHELE WILKINS 
OPIC FOR GEORGE SCHULTZ AND RUTH ANN NICASTRI 
PASS USTR FOR SUE CRONIN AND MARY SULLIVAN 
TREASURY FOR ALICE FAIBISHENKO 
USDOC FOR ALEXANDER PEACHER AND JOHN ANDERSEN 
USCINCSO FOR POLAD 
 
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. 
 
------------------------------------------- 
Diesel Shortages, GoA Push for New Refinery 
------------------------------------------- 
 
¶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 
 
SIPDIS 
project would not go forward while he remained energy 
secretary.  Occidental noted their intent to re-invest its 
 
SIPDIS 
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. 
 
--------------------------------------------- 
Gas Shortages and Bolivian Supply Constraints 
--------------------------------------------- 
 
¶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 
 
---------------------------------------- 
Hydrocarbon Labor Issues: Union Leverage 
---------------------------------------- 
 
¶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. 
 
-------------------------------------------- 
Participants Request Low Key Embassy Advocacy 
-------------------------------------------- 
 
¶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 
------- 
 
¶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