Tariff fight roils Argentina’s shale patch

Luc Cohen –

Argentina needs oil rigs to develop its vast shale oil and gas resources. The United States has plenty of idle equipment laying around after its own unconventional drilling boom cooled. But moving that machinery from the plains of Texas to the windswept Patagonian desert is proving complex and costly for global oil majors who say Argentina’s protectionist past is slowing efforts to spark its own shale revolution.
A move by Argentina’s government to cut import taxes on used oil-field equipment has sparked fierce opposition from local manufacturers, who are lobbying the government to include protections for them in a measure they fear will destroy their livelihoods.
Among them is Adrian Ramos, President of QM Equipment, a manufacturer of drilling and fracking equipment located in the Argentine coastal city of Mar del Plata.
“We got in touch with [the Production Ministry] and let them know it was totally impossible for us to survive this,” Ramos said. Negotiations with Ramos and others have slowed the rollout of tariff reductions.
President Mauricio Macri in April had promised oil executives the changes would be coming within “weeks.”
The previously unreported talks with local manufacturers underscore the challenges faced by Macri, who came to power in 2015 on a wave of popular discontent that ended 12 years of leftist rule.
The market-friendly former businessman has pledged to revive Argentina’s moribund, inflation-racked economy by reducing trade barriers and wooing foreign investment.
But he has gotten blowback from industries and unions that have benefited from protectionist policies.
With mid-term elections approaching in October, popular opposition to rising imports and factory layoffs has become a vulnerability for Macri’s “Let’s Change” coalition.
Big oil firms, meanwhile, are fuming too. Vaca Muerta, a Belgium-sized shale formation located in the western Patagonian province of Neuquen, is seen as the most promising unconventional oil and gas field outside of North America, the birthplace of the shale revolution.
Already burdened with pricey labour and transport costs in Argentina, companies have grown frustrated with delays in the equipment import reform.
Speaking at an industry event in Buenos Aires in late June, Richard Spies, Chief Executive of Pan America Energy, an Argentine subsidiary of BP PLC, called on government officials to hit the accelerator.
“Get these things done,” Spies said. “We need that equipment that’s idle in the United States moved down here to facilitate the developments that are coming in Vaca Muerta.”
A Production Ministry spokesman said the import proposal was advancing and a decree would be passed by the executive branch in the coming weeks.
It would not need congressional approval, the spokesman said.
Argentina is one of many resource-rich Latin American countries that have struggled to develop abundant oil and mineral reserves. Rules aimed at protecting domestic players and guaranteeing large revenues for government have chased away some foreign investors.
New right-leaning governments in the region have introduced business-friendly policies to lure them back.
Brazil’s Congress in 2016 opened the nation’s deepwater pre-salt fields to foreign operators.
This year Peru lowered air-quality standards to attract mining investment.
Spurring development of Vaca Muerta — Spanish for ‘Dead Cow’ — is one of Macri’s major priorities as he tries to unwind regulations put in place by his predecessor Cristina Fernandez.
Argentina holds the world’s second-largest shale gas reserves, but it imports a quarter of its energy needs, one reason for the country’s $7 billion current account deficit. Macri has promised rail and pipeline projects to connect remote Vaca Muerta to markets and ports.
Most crucially, he struck a deal with unions in January to reduce notoriously high labour costs.
Still, production costs remain well above those of global competitors.
Prices at the Loma Campana field, jointly operated by state-run oil company YPF SA and Chevron Corp exceed $43 per barrel, compared with $32 in the Niobrara in Colorado and Wyoming.
Used oil equipment can currently be imported at tariffs ranging from 7 per cent to 28 per cent, with imports of some types of machinery banned, the Energy Ministry said.
The proposed change would eliminate the bans, lower tariffs to between 0 per cent and 7 per cent and provide a form of compensation for companies that buy locally produced equipment, the ministry said. — Reuters