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 Tuesday, more than a week after its appearance had been widely trailed.
On the day the decree was published, world oil prices were generally 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.
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.
This move will have its impact on 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.
For now, the retail prices of petrol and diesel will remain the same although the refineries warn that they will thus 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. Export duties run up to eight percent.
Yet 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, from 2002 to 2014, and in 2017, it was the producers who subsidised consumers since they were paid oil prices below international market levels.
This support price mainly 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 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 like Vista Oil (the oil company founded by YPF ex-president Miguel Galuccio) also campaigned for the need for “barril criollo” in order to be able to maintain investments since a value of US$35 does not cover costs and it becomes more complicated to invest in new drilling. The provinces and some producers thus argue that the “barril criollo” permits them to sustain activity and hence jobs.
Refineries and sector analysts have been more critical, pointing out 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, the refineries say that their storage tanks are so full that they could supply service stations without needing to buy oil for three months.
The decree stipulates that the “barril criollo” will hold good for the rest of the year from that date of its publication in the Official Gazette (it is not retroactive) 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.
Faced with high oil prices (and barred from imports), the refineries might opt not to buy crude. In that case the 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.
The decree also obliges companies to "maintain their staffing levels as of December 31, 2019." This will be difficult to heed, companies have warned, 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.”