Argentina Changes the Rules Again for Energy Companies, a Credit Negative

Argentina Changes the Rules Again for Energy Companies, a Credit Negative

The Argentine government on 3 February suspended two tax breaks for the largest of the foreign and domestic energy companies operating in Argentina, a credit negative. The suspension of these tax breaks is particularly credit negative for Pan American Energy (Ba2 review for downgrade), YPF Sociedad Anónima (Ba2 review for downgrade) and Petrobras Argentina (Ba2 review for downgrade), since these companies benefited from the cash refunds that the programs offered. The tax change demonstrates the unpredictability of Argentina’s government, as well as regulatory risk for energy companies that operate there.

President Cristina Fernández’s additional demand that producers in Argentina now operate at full capacity indicates increased government interference and pressure on these companies, which were also negatively affected by the president’s 26 October 2011 surprise decree requiring that oil, natural gas and mining companies repatriate 100% of their foreign-currency proceeds, instead of allowing the oil and gas companies to keep 70% of export proceeds offshore.1

The tax breaks under the Petróleo Plus and Refinación Plus programs had handed out roughly $404 million in annual tax savings to oil and natural gas producers in Argentina. The tax breaks, initiated in 2008 to help increase the country’s energy security, would prove administratively cumbersome. Still, energy companies benefited from the programs, which rewarded investment in growth projects, and led to higher profits and cash flows with credits to offset taxes on exports of crude and certain refined petroleum products.
Argentina levies high export duties on hydrocarbons, particularly oil, and in recent years the government has taken essentially all export revenues above $42 per barrel. The export-duty credits through Petróleo Plus and Refinación Plus allowed producers to keep more of their export revenues, even if well below international levels.

Argentina’s government has a history of intervention in the energy sector. As a result, the country’s oil and gas production has declined over the past several years, and hydrocarbon exports have fallen. Energy companies have added little refining capacity in Argentina during the past two decades, leading to a rise in costly imports of refined products and natural gas.

The government announcement noted that domestic oil and refined product prices have risen during the three years since the two tax programs took effect, when crude sold for $35 per barrel. Today, oil sells for about $70 per barrel in Argentina, giving companies far more incentive to sell crude and refined products domestically. Still, domestic energy prices remain below international prices, with West Texas Intermediate priced at about $99 per barrel today. An unofficial inflation rate of about 25% has only added to the pressure on energy companies, even as they see higher prices for the oil they sell.