Argentina mulls oil price controls

Argentina’s government is looking to establish long-term price controls for the domestic oil market, according to Production Minister Matias Kulfas.

The administration of President Alberto Fernandez has included provisions for setting a floor and ceiling for domestic oil prices in a new piece of draft legislation, Kulfas told Bloomberg in an interview last week. These provisions will be part of a bill designed to attract more investment into the hydrocarbon sector, he explained.

According to the minister, the Fernandez administration sees price controls as a means of protecting Argentina from fluctuations on global crude oil markets. With a price ceiling in place, rising oil prices will not cause domestic petroleum product prices to surge, thereby imposing burdens on consumers, he explained. By the same token, establishing a price floor should make investors less inclined to leave the country if world crude prices fall, he said.

“What we want structurally is a solution that foresees the problems of volatility,” he told Bloomberg.

He did not reveal any details of the government’s crude pricing plan.

In theory, the bill should help ensure that international oil companies (IOCs) and other investors do not pull out of projects in Vaca Muerta, a vast shale formation within the Neuquen basin, when global oil prices sink. These projects tend to have relatively high break-even costs, especially when developers are using hydraulic fracturing (fracking) and other techniques to access unconventional oil and gas reserves.

As such, price controls have the potential to keep domestic prices high enough to justify continued investment in Vaca Muerta shale oil, even at times when global markets are taking a bearish turn. But they could also undermine efforts to make Argentina into an oil exporter, since they do nothing to guard producers from the gaps that will arise between domestic and world crude prices.

As of press time, the presidential administration was still working on the bill. Fernandez’s team aims to submit the draft legislation to the National Congress later this year.