VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #0356/01 0791908
ZNR UUUUU ZZH
R 191908Z MAR 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 0543
INFO RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE

UNCLAS BUENOS AIRES 000356 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
E FOR INTL ENERGY COORDINATOR U/S JEFFERY, GREG MANUEL 
EEB/ESC for DAS HENGEL, MMCMANUS, JIZZO 
WHA/EPSC FOR FCORNEILLE 
 
E.O. 12958: N/A 
TAGS: EPET ENRG ECON PGOV AR
SUBJECT: Argentina's "Gas Plus" Natural Gas Production Incentives: 
Non-Substantial Plan With A Catch 
 
Ref:  (A) Buenos Aires 284 
      (B) Buenos Aires 230 
      (C) 07 Buenos Aires 1819 
      (D) 07 Buenos Aires 1456 
      (E) 07 Buenos Aires 1415 
 
This cable contains sensitive information - not for internet 
distribution. 
 
------- 
Summary 
------- 
 
¶1. (SBU) GoA Planning Minister Julio De Vido has announced a series 
of measures designed to avert looming energy shortages in the 
upcoming (austral) winter heating season. These include the 
extension through year-end 2008 of the GoA's "Total Energy" liquid 
fuel subsidy program and a "Gas Plus" plan seeking to incent new 
natural gas exploration by authorizing higher prices for natural gas 
obtained through new or untapped, hard-to-reach gas reserves. 
Current GoA-set price controls hold domestic wellhead prices for 
natural gas at around $1.4 per million BTUs, a limit so far below 
world market prices that much-needed domestic gas exploration and 
production investment has been stalled. 
 
¶2. (SBU) Sources queried in U.S. companies involved in the 
exploration and development of Argentina's natural gas resources, 
including Apache, Chevron and Occidental, see the GoA's heavily 
conditioned "Gas Plus" announcement as not enough to satisfy their 
desires for price liberalization but as a positive sign that the GoA 
is finally beginning to understand the need to employ market 
incentives to encourage production.  A senior official at Pan 
American Energy, which is partnered with BP, says he believes the 
GoA will slowly increase natural gas prices for new discoveries and 
his company has pledged to invest $800 million over the next 20 
years, much of it in offshore exploration for natural gas.  While 
the GoA continues to publicly state that new domestic oil and gas 
discoveries and new domestic generating capacity coming on line will 
see Argentina comfortably through the coming winter's heating 
season, the potential recurrence of domestic energy shortages of the 
same magnitude as Argentina experienced last austral winter raises a 
question mark on the performance of Argentina's industrial sector at 
leas for the potential months of shortfalls.  End Summary 
 
--------------------------------------------- ------ 
GoA Outlines Plans to Avert Winter Energy Shortages 
--------------------------------------------- ------ 
 
¶3. (SBU) On March 10, GoA Planning Minister Julio De Vido announced 
a series of measures designed to avert looming energy shortages in 
the upcoming (austral) winter heating season (Refs D,E).  Detailed 
terms of both programs were published in the Official Gazette March 
¶13.  The "Gas Plus" plan, outlined in Energy Secretariat Resolution 
24/2008, authorized higher prices for natural gas obtained through 
new or untapped, hard-to-reach gas reserves.  Planning Ministry 
Resolution 121/2008 authorizes the extension through year-end 2008 
of the "Total Energy" program, initiated in July 2007, under which 
the GoA subsidizes the replacement of scarce natural gas by 
significantly more expensive liquid fuels.  In addition, the GoA 
will raise taxes on natural gas exports (primarily to Chile - see 
para. 9) by an as yet unspecified amount and, according to 
statements by Minister De Vido, seek to provide Chile sufficient 
natural gas to meet capital Santiago's residential and commercial 
needs.  Also according to De Vido, the increase in natural gas 
export taxes will be used to finance higher imports from Bolivia. 
 
---------------------------------------- 
"Gas Plus" Exploration Incentive Program 
---------------------------------------- 
 
¶4. (SBU) Gas Plus program benefits apply to new discoveries and to 
"tight gas" fields, where gas that is harder and more expensive to 
reach has so far been left unexploited.  Further, the incentive 
program is only open to producers enrolled in current government 
accords for gas supplies and prices who continue to meet supply 
levels spelled out in those accords.  To apply for the new program, 
producers must provide the Energy Secretariat details about their 
plans, including a reserves estimate and a timeline for estimated 
daily production until the reserves are fully exploited or the 
concession ends.  Additionally, for "tight" gas projects, the Energy 
 
Secretariat wants companies to provide breakdowns of investment and 
 
SIPDIS 
work needed to tap the gas. 
 
¶5. (SBU) Current GoA-set price controls hold domestic wellhead 
prices for natural gas at around $1.4 per million British thermal 
units (MBTU), a limit that industry players, including sources in 
local upstream affiliates of U.S. majors Chevron, Occidental and 
Apache, say has put the brakes on much-needed domestic gas 
exploration and production investment.  In contrast, Argentina 
currently pays $7 per MBTU for gas imported from Bolivia.  A senior 
official of Argentina's Bridas Energy, which partners in Pan 
American Energy with British Petroleum, says his company has pledged 
to invest $800 million over the next 20 years in oil and gas 
exploration and development, including significant offshore gas 
exploration off of Chubut and Santa Cruz provinces.  This official 
had previewed price liberalizations for new natural gas discoveries 
to the Ambassador in January and told him last week that he believes 
the GoA is really committed to letting prices rise gradually, 
pressured by market realities. 
 
--------------------------------------------- --- 
Fine Print: Open Door for Further Price Controls 
--------------------------------------------- --- 
 
¶6. (SBU) Although the Gas Plus plan provides an exemption from the 
GoA price and supply accords that ongoing natural gas projects are 
subject to, local analysts say that actual prices for gas produced 
from new Gas Plus projects will be subject to after-the-fact GoA 
intervention.  The Gas Plus resolution requires that new gas must be 
sold on the domestic market and mandates a sale price "that must 
contemplate costs and a reasonable profit," code words the GoA has 
used in the past to justify price controls (Ref A). Another possible 
conflict with the new plan is that it usurps the power of provincial 
governments which, under a 2006 law, were given control of 
hydrocarbons resources following the expiration of existing 
federally held contracts. 
 
¶7. (SBU) EconCouns' inquiry to Energy Secretariat Undersecretary for 
Hydrocarbons Rodriguez on how the GoA plans to calculate 
"reasonable" profits was referred to Planning Ministry Under 
Secretary for Coordination Roberto Barata, who declined to provide a 
 
SIPDIS 
detailed answer.  A well placed official in U.S. Apache Energy's 
local affiliate, which develops natural gas wells in Tierra del 
Fuego and Neuquen provinces, echoed sentiments of his Chevron and 
Occidental colleagues, saying "Any natural gas price would be better 
than the current one, so this measure is positive. But it will not 
satisfy the industry, especially given the potential for continued 
GoA price intervention." 
 
--------------------------------------------- 
Argentine Natural Gas Production, Consumption 
--------------------------------------------- 
 
¶8. (U) The Oil and Gas Journal reports that Argentina had 15.8 
trillion cubic feet (Tcf) of proven natural gas reserves in January 
2008, the third-largest reserves in South America behind Venezuela's 
166.3 Tcf and Bolivia's 26.5. (Local analysts note that Bolivian 
reserve figures are disputed and could be as low as half of this 
amount).  While Argentine natural gas production has steadily 
increased over the last decade (Argentina produced 1.80 Tcf of 
natural gas in 2007, according to the Argentine Petroleum and Gas 
Institute, nearly double 1996 levels), local analysts note that new 
gas discoveries have not kept pace with consumption that has risen 
significantly in the past decade: Natural gas is currently the 
country's dominant fuel source, accounting for over 50% of primary 
energy consumption.  The provinces of Neuquen, Salta, Tierra del 
Fuego, and Santa Cruz contain most of Argentina's natural gas 
production, with the Neuquen basin alone accounting for over half of 
Argentina's total natural gas production. 
 
¶9. (SBU) In 2007, according to Argentine Petroleum and Gas Institute 
statistics, Spanish-owned Repsol-YPF (in which Argentina's Santa 
Cruz province e entrepreneur and Kirchner family confidant Enrique 
Eskenazi recently purchased a 15% share) is Argentina's top natural 
gas producer, with about 28% of all production, followed by France's 
Total with about 25%, UK/Argentine Pan American Energy with about 
12%, Brazil's Petrobras with 10%, Argentina's Pluspetrol with 9%, 
and U.S. Apache Energy with 6%. 
 
¶10. (SBU) Argentina is a net exporter of natural gas, principally to 
 
Chile.  However, this relationship has been strained since 2004, 
with Argentina repeatedly reducing natural gas exports to Chile to 
compensate for domestic shortages.  Argentina is Chile's sole source 
of natural gas imports, and the continuing supply disruptions have 
caused Chile to pursue alternative energy sources, including the 
in-progress construction of an LNG receiving terminal.  Despite 
being a net exporter of natural gas, Argentina also imports natural 
gas from Bolivia through the 270-mile, 230- million cubic ft/day 
(Mcfd) Yacimientos-Bolivian Gulf (Yabog) pipeline.  Argentina began 
importing natural gas again from Bolivia in 2004 to cover a domestic 
shortfall, which it had not done since 1999. 
 
¶11. (SBU) In October 2006, Argentina and Bolivia signed an agreement 
for Argentina to import natural gas for an additional 20 years. 
Under the terms of the deal, Argentine imports from Bolivia are to 
eventually reach one billion cubic feet per day (Bcfd), a fourfold 
increase from current levels.  The price that Argentina pays for the 
natural gas will also increase and eventually become linked to 
market rates.  To facilitate this increase in volume, Argentina and 
Bolivia have agreed to build a new US $1.5 billion, 710 Mcfd 
capacity pipeline system connecting the two countries, the Gasoducto 
del Noreste Argentino (GNEA).  However pipeline construction has 
been delayed, as have expanded Bolivian deliveries.  To cover 
anticipated winter shortfalls, at a Buenos Aires energy summit last 
month between the Argentine, Brazilian and Bolivian presidents (Ref 
B), Argentina asked Brazil to cede a small share of its gas 
deliveries from Bolivia in order to increase Argentina's Bolivian 
gas imports by a third to roughly 140 million cubic feet a day.  But 
Brazil, which buys 1.1 billion cubic feet a day from Bolivia - 
roughly half the natural gas consumed by Brazil's 190 million 
consumers - declined and instead offered to sell Argentina. 
 
------- 
Comment 
------- 
 
¶12. (SBU) While officials of U.S. companies involved in the 
exploration and development of Argentina's natural gas resources and 
local hydrocarbon sector analysts tend to see the GoA's heavily 
conditioned "Gas Plus" announcement as economically insignificant, 
they agree that it is an overall positive sign that the GoA is 
finally beginning to understand that multinational energy firms 
respond more readily to the carrot of market incentives than to the 
sticks of public harangues on their "social obligation" to invest. 
However, these initial Gas Plus measures are not viewed as tackling 
the root of Argentina's energy crisis - the fact that low, regulated 
prices of natural gas and electricity charged to residential and 
industrial consumers have boosted consumption and discouraged 
private investment in the energy sector.  Residential Argentine gas 
tariffs remain among the lowest in the world and have cost the GoA 
hundreds of millions of dollars.  On the one hand, inexpensive 
energy has helped fuel economic expansion and consumer spending.  On 
the other, Argentina has faced seasonal natural gas shortages since 
early 2004 and opinion polls show the Argentine public doesn't get 
the connection between low energy bills and energy shortages.  While 
the GoA continues to publicly state that new domestic oil and gas 
discoveries and new domestic generating capacity coming on line will 
see Argentina comfortably through the coming austral winter's 
heating season, the potential recurrence of domestic energy 
shortages of the same magnitude as Argentina experienced last 
austral winter raises a question mark on the performance of 
Argentina's industrial sector, at least during the peak energy use 
months in 2008. 
 
WAYNE