Modes of Investment

The oil industry accounts for 13% of all foreign investments in Argentina, and the recent
increase in these investments is largely due to the discovery of the Vaca Muerta oil field. FDI
inflows in Argentina have been unstable for several years, and the overall openness to foreign
investment is below average. The Argentine government actively seeks foreign direct
investment, but economic insecurity and recurring crises hamper the task. Argentina has
definite assets in the form of its considerable natural resources, including oil and gas, and
highly skilled and competitive workforce. The regulatory framework for Argentina's energy
sector aims to increase market certainty and draw more international investment to increase
export oil and gas production. Below are presented the various alternatives and the risks
associated with each of these.

100% owned subsidiary

In an effort to encourage investment and increase output, Argentina proposes to loosen the
restrictions on foreign exchange for the shale oil and gas sector. The nation is still working
on legislation that would let oil companies operating within its boundaries access foreign
cash if production rose. The benefit of such an expansion is the complete control over all
operational & sales decisions which becomes important if a foreign player wants to establish
its brand in a different country. It also insulates the investor from IP thefts and profit-
sharing negotiations.
Major Risks:
Instability: The Argentine government confiscated the assets of the Spanish oil
corporation Repsol in 2012, causing it to cease operations within two years of the
expropriation. This is only one of the recent instances of official confiscation of foreign-
owned property on domestic soil. There is strong evidence of unpredictable behaviour by the
Argentine government and remains a major concern for the business environment in the
country.
Societal conflict: The economy of the country is crucial for maintaining social stability
and peace keeping. There have been protests against the restrictions and isolation measures
set to contain the pandemic. The economic conditions though much improved remain far
from perfect and the current global pandemic has put significant strain on the prosperity of
Argentina making the risk of societal conflict imminent.
Expropriation risk: The government has often expropriated oil and gas corporations
using nationalism. Huge expropriation risk exists for foreign firms due to the considerable
fiscal deficit that the Government maintains. Expropriation can also be in terms of added
taxes for foreign firms operating in Argentina.
Negative influences of regional political forces: Fernandez's 2019 election increased
regional tensions. In January 2020, he opposed the acceptance of Juan Guaido as
Venezuela's temporary president; Brazil and Colombia back Guaido's claim against
Maduro's. Fernandez orchestrated Argentina's resignation from the U.S.-backed Lima Group
the following March. Disputes about China's expanding position in Latin America,
Mercosur's future, and maritime boundaries have strained relations with Brazil, Chile, and
Uruguay. In this parameter, the investment seems to be moderately risky.
Exchange rate risk: The current exchange rate (US $) of Argentine Peso is 130.62. It has
depreciated by 35.25% in the past 12 months where it stood at 96.57. The currency has been
steadily depreciation in the last decade, relevant for analysis it has done so steadily since
2019.
Risk- High

Majority owned joint venture with government/PSU partner

Proximity to the Government through the Joint Venture gives the company an opportunity
to influence policy making and technical regulations development in Argentina which can be
of long-term benefit to the company.
Major Risks:
Instability: Given the long and tumultuous history of military dictatorship in the country it
could be falsely assumed to be the cause behind future upheavals but the democratically
elected governments in Argentina have also behaves unpredictably when it comes to dealing
with foreign business interests. There is strong evidence of unpredictable behaviour by the
Argentine government and remains a major concern for the business environment in the
country.
Corruption: There is a tumultuous history of some significant corruption even at the
highest echelons of power that threatens natural resource companies. Argentina is ranked
96th least corrupt out of 180 countries in the Corruption Perception Index by
Transparency.org and the dynastic nature of national politics shares a lot of blame for that.
Royalty to parent company: The fraction of royalty payment can become an issue with
various governments. Since the central leadership can potentially change every 4 years, a
nationalistic government may force the JV to reduce its royalty payments to USA.
Fiscal deficit: Earlier, Argentina’s oil industry growth was restricted by a fiscal policy that
included a 35% tax on profits and a 12% royalty on production value. Given the current
slowdown in economy and depleting national reserves Argentina has pledged to reduce its
fiscal deficit to 2.5% of GDP this year and 0.9% by 2024 under the terms of a $45 billion deal
with the International Monetary Fund.

Risk- Moderate

Minority owned joint venture with government/PSU partner

Petroleum has played a vital role in the establishment and evolution of economic nationalism
in Argentina. The government has often expropriated oil and gas corporations using
nationalism. Thus this venture could entice the public with nationalism and have positive
impact on the brand of the Joint Venture. A local player as the face of the Joint Venture will
also promote sales. However, the current state of Argentine economy means there aren’t
many local players who could raise such amount of capital to own a majority stake in the
venture. Also, the projections of the economy are modest, at best, meaning the venture
would have solvency problems making the venture more prone to failure. Owning a minority
stake can lead to issues as the firm may not be able to control the decisions made by the
board and higher management. It is certain that the company will lose out its technical and
managerial advantage to YPF who may benefit privately from the knowledge.
Major Risks:
Corruption: Corruption threatens natural resource companies. Foreign agricultural
enterprises should be wary of Argentine rivals' favouritism. An Argentinian company was
recently awarded an exclusive export licence for rice and grain to Venezuela at inflated
prices, profiting middlemen. In 2014, an Argentinian prosecutor began investigating PAN
American Energy (PAE) for bribery of local government officials in exchange for oil
exploration licences. PAE's self-reported leaks spurred the investigation, which is ongoing.
Fractionalization of the political spectrum: Argentina has a multi-party system with
two strong political parties or alliances: Radical Civic Union and Peronist Party. The next
presidential and legislative elections are scheduled for October 2023 and Argentina's
economic situation is likely to remain difficult for some time, this will open the door for
Juntos para el Cambio (JC backed by Peronist Party) to return to power. Ambiguity
regarding energy policy in this uncertain time will pose significant risks to investment in the
long run.
Nationalism: Petroleum has played a vital role in the establishment and evolution of
economic nationalism in Argentina. The government has often expropriated oil and gas
corporations using nationalism. It has also been observed that the government is receptive to
international investment, although investors must adhere to the government's demands.

Risk- High

Choice of Products
Argentina's federal and provincial governments are taking on a bigger role in crucial
economic sectors, including energy, mining, and transportation due to the country's wider
economic difficulties. The Argentine government wants to see the energy industry take the
lead in driving exports, increasing foreign exchange liquidity, and luring foreign direct
investment to spur economic expansion. The path to reviving Argentina's natural gas-based
economy is clear: attract skilled workers, upgrade its infrastructure, and adopt new
technologies to spark the first shale revolution outside North America. Under exploration
and production companies can invest in shale oil and gas development wells and explore
opportunities to participate in offshore exploration. They can also invest to build LNG
liquefaction and export facilities. These investment opportunities can be broken down as
follows:

Upstream Opportunities
Partner with acreage holder companies in Vaca Muerta
Vaca Muerta is one of the largest onshore shale fields in the world. The production of natural
gas from Vaca Muerta exceeded 1.0 Bcfd in December 2018, despite the fact that less than
10% of the land is in production in 2019. To encourage investments government also
declared that companies who explore Vaca Muerta and export from the field will be given the
opportunity to keep their profits in foreign currency outside of the South American nation.
There’s USD 120 billion investment opportunity to join vaca muerta’s development. In an
effort to boost domestic supply and exports at a time when energy prices have skyrocketed
owing to the conflict in Ukraine, the government began the construction tender phase of a
gas pipeline from Vaca Muerta to the country's north.
Licensing rounds lead by the Province of Neuquén (GyP)
Implementing the Technical Evaluation Agreement on free areas with the
Province of Mendoza
Argentina ranks 37th globally with 11 trillion cubic feet (Tcf) in proven gas reserves. More
over half (52%) of the total energy used is produced by thermal power plants that burn
natural gas, which account for the generation of 61 percent of the world's electricity.
Subsidized natural gas prices and an expanding economy raised demand, which in turn
increased natural gas consumption. Due to the expanding gap between rising demand and
declining supply, natural gas imports were required to maintain supply on the domestic
market. It imports 23% of its natural gas needs while having proven reserves that are 6.5
times its annual usage.

Midstream investment opportunities

Argentina was the 42nd largest Crude Petroleum exporter in the world in 2020 with exports
of $689M. Following this, Argentine President Alberto Fernandez declared that he would
focus on raising energy output in order to meet local demands, replace imports, and provide
greater exportable balances that result in a steadily improving energy trade balance. There
are several investment opportunities to build infrastructure to debottleneck the distribution
of oil and gas production. From short term perspective, gas transportation system should be
expanded or rebuilt (system from Neuquén to Northern Buenos Aires). Companies can
invest to build new gas trunk lines to expand the current gas transport capacity and enable
LNG exports. By monetizing, and maintaining trunk gas pipelines, businesses can strengthen
their position in the natural gas market. They can also encourage the production of
electricity, carry out public projects related to energy, and encourage using renewable
energy. There are several investment opportunities in processing plants and gathering
systems associated with the development of new oil and gas wells.

Long term investment opportunities

Positioning Argentina as one of the world-class energy players to gain access to global LNG
markets. Argentina is in an invaluable position to participate in this market that is open for
business. Key drivers for this investment opportunities are: China and India
decarbonisation, and growth of high gas consumption industries like petrochemical and
Fertilizer. Reports forecasted a demand gap for LNG worldwide of 500 and up to 700 MTPA
from 2025-2040. Investors have the advantage of positive seasonal dynamic with Asia
through Argentina. Vaca Muerta light oil is already on the market with breakeven below 3
USD/MMBTU. Additionally, Plan Gas 4 assures 3-year contracts and guarantee of
competitive price levels for operators. Austral Basin offshore is another profitable
investment opportunity that produces 23 MMm³/d. It represents 20% of total gas
production. There is a large underexplored area of 7 basins with a total of 500 M km² (200
M km² round 1).
Limited exploration activity in the last 20 years (6 M km² of 3D outside concessions and no
well >500 m). • Medium to high risk (size of structures in Malvinas and Austral
Basins/source rock in Argentina Basin). • Limited infrastructure.
 Conclusion
Argentina has the fourth largest shale oil and gas reserves in the world. Thus, with the
appropriate policies in place, the next administration should have no issue luring capital to
replace Argentina's lost energy independence, alleviate current shortages, and, in the long
run, reclaim Argentina's position as a regional energy exporter. Major companies like Pan
American Energy (PAE) invest large portions in oil production followed by gas production.

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