New Regime for the Promotion of Investment on Hydrocarbons Production and Regulation of Unconventional Hydrocarbons Production

Decree No. 929, published in the Official Gazette on July 15, 2013 (“Decree 929”), created the “Regime for the Promotion of Investment on Hydrocarbons Production” (the “Regime”) and regulated the “Concessions for Unconventional Production of Hydrocarbons”.

The legal framework provided by the Hydrocarbons Law No. 17,319, the Hydrocarbons Provincialization Law No. 26,197 and the Hydrocarbons Sovereignty Law No. 26,741, among other provisions, was invoked to enact the Regime.

The enforcement authority of the Regime is the Commission of Strategic Planning of the Federal Hydrocarbons Investments Plan of created by Decree No. 1277/2012 (the "Commission").

1. Regime for the Promotion of Investment on Hydrocarbons Production

Pursuant to Decree 929, the benefits of the Regime will be granted to those companies which:

i. Hold an exploration permit, a production concession or are third parties associated with those holders;
ii. Are registered with the Federal Hydrocarbons Investments Registry created by Decree No. 1277/2012; and
iii. Submit an investment plan encompassing a minimum of US$ 1,000,000 within the first 5 years of the project (the “Project”).

The Regime shall be applicable to any Project approved by the Commission.

The benefits provided by the Regime will be effective from the fifth year of performance of each Project. Benefits include:

a. The right to export up to 20% of the hydrocarbons produced by the Project;
b. The right to export such hydrocarbons free of export duties (zero rate);
c. Free disposition of such hydrocarbons exports' proceeds (up to 20% of the production of each Project); and
d. In the case that, due to hydrocarbons shortfall, exports were restricted to supply local demand, the right to collect for the hydrocarbons that could have been exported (20% of the production of each Project) and were not actually exported, would be their international reference price without any deduction of export duties. To this end, a compensation mechanism payable in local currency shall be established. In that hypothesis, producers have priority right to acquire foreign currency in the Official Exchange Market up to the total amount of the local currency obtained in exchange of the hydrocarbons that were prevented from being exported, including the amounts collected for their sale in the domestic market plus any compensations received under the above mechanism.

Companies included in the Regime will also have the right to apply for production concessions of unconventional hydrocarbons under the terms provided by Decree 929, as described below.

Similar and even greater benefits to those included in the Regime (free marketing and export of hydrocarbons, no foreign exchange restrictions up to 70% of the export proceeds and no export duties), were the pillars of the policies of privatization and deregulation of the hydrocarbons’ industry adopted in Argentina since 1989. Those benefits were established by Decrees Nos. 1055/1989, 1212/1989 and 1589/1989 and allowed Argentina to gain self-sufficiency in oil and gas.

The Regime was partially implemented by the Commission as regards the requirements to apply for the approval of the Projects by means of Resolution No. 9, published in the Official Gazette on July 16, 2013.

Resolution No. 9/2013 provides as an additional requirement for the approval of the Projects that companies applying to be included in the Regime have filed the Annual Investment Plan required by Decree No. 1277/2012.

Apart from specifying certain technical requirements that must be met, as regards economic and financial aspects, Resolution No. 9/2013 provides that, in addition to the investment commitment, the application for approval must identify the financial sources, the investment plan for the first five years and the estimated date for the beginning of the Project.

2. Production Concessions for Unconventional Hydrocarbons

Decree 929 creates the concession for the production of unconventional hydrocarbons. For this purpose, ‘unconventional hydrocarbons’ production’ is defined as the extraction of liquid and/or gaseous hydrocarbons through unconventional stimulation techniques applied to reservoirs located in geological formations of schists and slates (shale gas or shale oil), tight sands (tight oil and tight gas), coal layers (coal bed methane) and, in general, from any reservoirs distinguished by the existence of low-permeability rocks.

Specific regulation of this matter is highly relevant considering that Argentina has, according to the US Energy Information Administration, the third largest unconventional hydrocarbons’ reserve in the word. The Governor of the province of Neuquén, where the largest portion of these resources are located, has recently enacted a decree to adhere to the Regime.

Decree 929 provides that holders of hydrocarbons’ production concessions have the exclusive right to produce hydrocarbons from all reservoirs located within the boundaries of their concessions, regardless of their conventional or unconventional condition.

Holders of exploration permits and production concessions included in the Regime may apply for concessions for the production of unconventional hydrocarbons. These concessions shall be governed by the Hydrocarbons Law (No. 17,319, Chapter 3, Tittle II).

For that purpose, Decree 929 provides that the Federal or provincial governments (depending on the geographical location of each concession) may divide the area currently under concessions into new areas of unconventional production and grant new concessions over the latter.

The main purpose of unconventional concessions must be the production of unconventional hydrocarbons. However, production of conventional hydrocarbons is also allowed as a secondary purpose. Unlike conventional concessions, which are granted for a 25-year term and may be extended for an additional 10-year period, the new concessions for unconventional production may be initially granted for a 35-year term.

Decree 929 constitutes an important change in the Argentine Government's energy policy. However, additional measures will be required in order to create a more favorable investment environment in the sector.