Argentina: Disputing the Power of Provinces

Argentina's former secretary of domestic trade wears a lapel badge of national energy firm YPF.(YASUYOSHI CHIBA/AFP/GettyImages)

Summary

A burgeoning fight over hydrocarbons between Argentina's national and provincial governments is beginning to take center stage in Buenos Aires. Governors from 10 oil-producing provinces will meet with Argentine Planning Minister Julio de Vido on June 3 and President Cristina Fernandez de Kirchner on June 9. The ostensible reason for the meetings is to discuss the standardization of provincial taxes on state-owned energy company YPF. The national government is pushing for provincial taxes of no more than a 3 percent on the company's gross income. The real question is whether the firm can force provincial governments to offer better, more consistent terms. The implications of this political struggle go far beyond YPF and will help set the stage for a more favorable investment climate for foreign companies.

Analysis

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The meeting with de Vido was announced just a week after YPF President Miguel Galuccio stated publicly that control over the terms of Argentina's energy deposit leases should be taken away from the provincial governments. According to Galuccio, strong provincial control over the energy industry has deterred investment. Though Galuccio did not specifically single out an ongoing dispute between YPF and Neuquen province, the negotiations over whether provincial oil company Gas y Petroleo de Neuquen holds a stake in local YPF ventures provide a clear incentive for Galuccio to push back against the power of the provinces.

Argentina's provincial governments are guaranteed ownership of resources found in their territory by Article 124 of the Argentine Constitution. In addition, a 2006 legal reform called the "short law" gave the provinces the power to issue concessions, set taxes and impose other requirements, such as the inclusion of provincial companies into operating consortiums. The law incentivized a patchwork energy regime across Argentina in which provincial governments have different regulatory frameworks. This adds uncertainty and costs for any company investing in Argentina, even YPF, and has forced Galuccio into tense negotiations with provincial governors over YPF access to Argentina's promising oil and natural gas deposits.

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Nevertheless, the development of these energy deposits is of the utmost importance to Argentina. Though the country was once a net exporter of oil and natural gas, it is now a net importer of both. This has reduced Argentina's trade surplus significantly and, combined with sustained capital flight, has created a balance of payments crisis that is causing Central Bank reserves to fall precipitously. The need to arrest and reverse this decline led the Argentine government to nationalize Spanish energy firm Repsol's majority stake in YPF in 2012. It also has Argentina working relentlessly to attract investment from international energy companies.

The fight between YPF and the provincial governments will play an important role in the evolution of the regulatory environment in Argentina. The country has settled its outstanding dispute with Repsol and secured investment from Chevron, and it hopes to increase crude oil output by 5 percent in 2014. But several questions remain that will continue to hinder foreign investment. These include a recent court ruling challenging incentives offered to Chevron to convince the supermajor to partner with YPF, as well as the discrepancies associated with provincial rule-making.

The ongoing conversation in Buenos Aires is unlikely to strip provinces of their authority over oil and natural gas deposits entirely, at least not immediately. The provincial governments are in delicate financial positions. They need oil revenues and would likely rather compromise than lose the ability to sell off local resources. On the part of the national government, ongoing economic uncertainty means that its resources are also scarce, limiting its ability to financially compensate the provinces. The only question going forward is to what degree the compromise will benefit foreign companies as well as YPF. The details of specific investments will likely be worked out on an ad hoc basis with foreign companies, but YPF and central government efforts to ensure regularity and predictability among provinces will create a beneficial precedent going forward.

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