Monday, October 19, 2020
Perfil

ECONOMY | 23-05-2020 09:31

What is Argentina's US$45 'barril criollo' and how will affect local producers?

Artificially fixed reference price for barril criollo imposed in move to defend jobs and output levels, with an eye keenly trained on Vaca Muerta shale.

The government has imposed an artificially fixed reference point for domestic crude, in an effort to protect local producers and its flagship Vaca Muerta formation amid a drop in oil prices and the pandemic-led plunge in demand.

Decree 488/2020, pricing the so-called “barril criollo” at US$45 for the rest of the year, irrespective of world oil prices, was finally issued on Tuesday, more than a week after its appearance had been widely trailed. As the decree was published, world oil prices stood below US$35.

The artificially fixed reference price – which must be paid by all refineries when buying oil from producers – is designed to defend jobs and levels of output in the sector, with preserving the vast potential of Vaca Muerta shale especially in mind.

President Alberto Fernández’s government said in the decree that the move was a response to “the drastic fall in the international price of a barrel of oil that is seriously damaging the activity of the national hydrocarbon sector.”

“We want to guarantee productive activity and sustain direct jobs in the sector,” said Productive Development Minister Matías Kulfas.

YPF and Shell are the only companies working both upstream (production) and downstream (service stations) while producers benefitting from this support price also include Pan American Energy (PAE), Vista Oil, Pluspetrol, Tecpetrol and Exxon, among others.

On Wednesday, Fitch Rating agency reported that the measures would protect YPF, despite the challenges facing the state giant. 

Later that day, an unnamed spokesperson for the country told Reuters that the move would “help guarantee a competitive local energy price, head off the need for imports, and protect the country’s precious reserves of foreign currency.”

“The criollo barrel would also have a positive impact on small and medium producers," said BNAmericas in a report, while Moody's highlighted the positive impact for oil-producing provinces, such as Santa Cruz, Neuquén and Chubut.

The government’s decree also slashes export taxes for crude to zero, down from eight percent, as long as international crude remains at or below US$45 a barrel.

Impact

The measures will impact the prices of petrol and diesel at service stations because, while refinery costs, logistics, investment, marketing, profits margins and taxation are all components, the barrel of oil itself represents the biggest cost – especially when fixed in dollars.

But for now the retail prices of petrol and diesel will remain the same, despite warnings from refineries that they will lose money since service station prices reflect a barrel cost of US$35, which could be US$40, eliminating all profit margins. 

The government has pledged not to increase the ICL liquid fuel tax (updated to inflation every quarter) until October after upping it by almost 30 percent last month, although the decree did not explicitly stipulate a freeze on the petrol prices at the pump.

However, the president of the Confederation of Organisations of Trade of Hydrocarbons (CECHA, representing service stations owners), Gabriel Bornoroni, predicted that petrol prices would remain frozen until at least October 1.

The pace of devaluation, even in the official exchange rate in recent weeks, and rising inflation will continue to pressure petrol and diesel prices (or refinery losses if they stay the same).

Consumers will thus be paying above international prices while industry will be less competitive since its energy costs will be higher than for its overseas competitors (this also applies to farm exports). Nevertheless, it is necessary to detail that from 2002 to 2014, and in 2017, it was the producers who subsidised consumers since they were paid oil prices below international market levels.

Sales at the pump dropped by around 75 to 85 percent in April from the previous year as demand plummeted amid the nationwide lockdown, Bornoroni told Perfil.

Provincial pressure

The government’s decree responds to pressure from the oil-producing provinces, who have been affected by the fall in royalties and believe that they can thus maintain production. Their argument (which was supported by the government) was that if activity is further halted, it will be subsequently very difficult for the industry to regain momentum and the country would have to revert to importing oil to meet local demand.

Ahead of the “barril criollo” being decreed, the governors were complaining that last month royalties were being paid on the basis of an average barrel price of US$21 when that price was US$42 in March and US$51 in February. Furthermore, sales fell off 25 percent last month from March with a fatal impact on provincial coffers.

Some local producers, including Vista Oil (the oil company founded by ex-YPF president Miguel Galuccio), also campaigned for the imposition of a “barril criollo” in order to be able to maintain investments, arguing a value of US$35 would not cover costs and complicate new drilling operations. Both provinces and producers have said this will sustain activity and hence jobs.

Reacting to the news from Neuquén, union leader and former senator Guillermo Pereyra told the Diario de Río Negro newspaper, that the move would “satisfy the needs of all sectors partially and logically, because you can’t have everything.”

Criticism

Refineries and sector analysts, however, reacted more critically. Some observed that if consumption does not recover, no support price will be able to maintain production since there will be nobody to buy the petrol. For example, refineries say that storage tanks are so full that they could supply service stations without needing to buy oil for three months.

In comments quoted by both local and international outlets, ex-hydrocarbons secretary José Luis Sureda said the move would not "incentivise investments," warning that the "barril criollo will have practically no effect until demand recovers and we don't know when that will be."

“There is lots of bark but little bite,” he said in comments reported by Reuters. “It is going to have a time lag effect for companies because obviously there is a lot of crude stock and demand has not yet recovered.”

Sureda told Diario de Río Negro that "a refinery today cannot buy crude at US$45 and sell fuel at current prices without incurring a loss." 

“I wish I didn’t think this way, but I am convinced the barril criollo will not end and the market will not return,” he added.

Details

The decree stipulates that the reference price will remain in place for the rest of the year from the date of its publication in the Official Gazette unless the Brent international oil price tops US$45 for 10 days running, in which case international values would again become the reference price. In that period the Energy Department will also be able to make quarterly price reviews. The measure is not retroactive.

Faced with high oil prices (and barred from imports), refineries might opt not to buy crude. 

In that case integrated companies like YPF and PAE (owning Axion service stations) which are both upstream and downstream should be differentiated from the independent refineries as less affected by the decree, although they still have the impact of having to pay royalties on a higher price while their main revenues – petrol and diesel sales – suffer losses. These two oil companies account for 70 percent of both the downstream and upstream markets so if they lose money, their investments will be lower and there will be less activity.

Nevertheless, the decree still obliges companies to "maintain their staffing levels as at December 31, 2019. " This norm will be difficult to heed, all companies warn, since demand is much lower than last year. According to the latest market estimates, petrol and diesel consumption is respectively 55 and 30 percent below the demand in the first three weeks of March prior to quarantine. This still signifies recovery levels of 80 and 50 percent respectively from the consumption at the start of lockdown.

 In March (with only 11 days of quarantine) oil, diesel and aviation fuel sales fell 32, 14 and 42 percent respectively in comparison to February, according to official data.

The Productive Development Ministry had tried for two months to reach agreement across the industry but could not place producers and refineries on the same page. Finally, in the face of the pressure of the governors, who saw their royalties collapsing, it was decided to go ahead and decree the “barril criollo.”

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