Energy Newsletter - February

On February 8, 2019, the Secretary of Energy issued Resolution 32/2019 to regulate the auction of natural gas at the electronic market.

The main terms and conditions for the first bidding round, which took place on Feb. 14 and Feb. 15, are as follows:

• Term: 1 year (seasonal)
• Supply: Firm (i.e. non-interruptible). Suppliers must bid price and volume.
• Take or Pay / Deliver or Pay: 70% of Maximum Daily Quantities
• Make Up Period: summer period subsequent to shortfall period.
• Make Up Gas: Gas made available by Seller in excess of the TOP quantities during the summer period subsequent to the shortfall period.
• Price: USD per Million BTU
• Invoices: AR Pesos (see exchange rate for conversion below)
• Payment term: 65 days counted from the end of the month of delivery.
• Exit clause: Exit allowed if pass-through to distribution rate is not allowed by the natural gas watchdog, ENARGAS.
• Bids ranked from the lowest to highest bid; equal bids ranked from earliest to latest (price- time priority).
• Jurisdiction: General Arbitration Tribunal of the Buenos Aires Stock Exchange.
• Antitrust: Sellers and buyers must sign a commitment not to enter into concerted practices.

The Resolution includes also a “Model Offer” with more details, e.g. the price in USD shall be converted into AR$ at the exchange rate established by ENARGAS for the relevant season. By subsequent regulation (Resolution 72/2019) ENARGAS determined that the exchange rate to be utilized for pass-through to tariffs is the average Sellers’ exchange rate quoted by Banco de la Nación Argentina for the first 15 days of the month immediately preceding each seasonal period, i.e. exchange rate for April- September 2019 will be the Banco Nación average for March 1st to March 15th, 2019, while the average exchange rate for September 1st to September 15th, 2019 will be used for sales between October 2019 and March 2020.

The first auction for natural gas acquired by distributors for distribution between April 1, 2019 and March 31, 2020, resulted in a weighted average Price of US$4,62 per MM BTU i.e. an overall increase in the final rate of approximately 35%. Natural gas imports from Bolivia are at $6,50/MMBTU and LNG imported shipments are at $9+/MMBTU, while natural gas exports to Chile are at less than $4/MMBTU (net of export tax).

Winter volume assigned is 36,087,000 cubic meters. But demand is 75 to 83 million, so distribution companies will need to enter into contracts with producers for the balance. Distributors must submit figures to ENARGAS for the public hearing to occur on February 26th.

By means of Resolution 65/2018 (“Resolution 65”) on November 4, 2018, the Energy Secretariat (the “ES”) called for an International Public Bid for the awarding of off-shore exploration permits over blocks listed on National Decree No. 872/2018. Due to the many requests for term extensions, and in order to increase the number of bidders, the SE issued Resolution No. 28/2019 (“Resolution 28”) – published in the Official Gazette on February 8, 2019 - replacing the schedule to Resolution No. 65 for the following:

By means of Resolutions No. 1/2019 and 2/2019 (the “Resolutions”), the natural gas transportation and distribution watchdog, ENARGAS, called for two public hearings (the “Hearings”) to discuss: (i) Tariffs Biannual Adjustment mechanism for the licensees mentioned in the Resolutions; (ii) the implementation of the natural gas price pass-through according to the Basic Rules of the Distribution Licenses; (iii) the creation of an Entry Point to the Transportation System in Escobar and; (iv) the applicable tariffs of the networks fed with liquefied petroleum gas.
The Hearings will be held on February 26, 2019 and February 28, 2019, in four different locations across the country.

The Argentine Government amended and supplemented the existing midstream regulation provided by Decree 44/91. By means of Decree No. 115/2019 (the “Decree”) published on the Official Gazette on February 8, 2019, the definition of “Polyduct” is extended to encompass not only the crude oil and crude oil products pipelines, but also the transportation facilities and equipment for the transportation of natural gas liquids, starting from the loading point up to an industrial plant or terminal or any other polyduct. The term “liquid hydrocarbons” is expanded to include natural gas liquids too.
The rates applied to the shippers will be adjusted every 5 years or earlier in case of significant variations in the base indicators for rate calculation.
Transportation concessionaries must file an annual declaration of available capacity, and follow the procedure to be issued by the Enforcement Authority.
Transportation concessions awarded by public bid shall be effective for 35 years, renewable for additional ten-year periods. Extensions shall be granted if the applicant has met all obligations and proposed a work and investment program. Hydrocarbons should be transported at the time of the extension request is filed.
Concessions granted before effectiveness of the Decree shall continue to be governed by their original terms.
“New” transportation concession-holders and “old” holders to the extent of new capacity expansions may provide firm capacity to third-party shippers through firm capacity contracts. Capacity allocation, price and volume may be freely negotiated.
The Enforcement Authority will establish the procedure for the expansion of existing pipelines and the terms and conditions for the bidding of transportation concessions within 90 days.

On February 11, 2019, the Natural Gas Regulator (“ENARGAS”) issued Resolution No. 72/19 (the “Resolution”), by means of which it approved the “Pass-Through Methodology” (the “Methodology”) and the “General Proceedings for the Calculation of Accumulated Daily Differences” (the “Proceedings”).
Following the over 50% devaluation of the Argentine peso during 2018, the Federal Government issued Decree 1053/18 (the “Decree”) on November 16, 2018[1], whereby in no case will the higher cost of natural gas due to exchange rate variations be passed through to end customers (please see PAGBAM’s Energy Newsletter No. 109).
The Decree aimed at protecting end consumers from the gas tariff hikes likely to follow after devaluation[2], albeit at odds with the very basic principle established in Section 38 of Law No. 24,076 (the “Gas Law”) i.e. “the price of natural gas from the distributors to consumers will include acquisition costs.”
In this context, the ENARGAS issued the Resolution in order balance the interests of natural gas producers and consumers.
To that effect, the Methodology establishes that, in order to implement the pass-through, the lower of (i) the Banco de la Nación Argentina selling exchange rate observed between days 1 and 15 of the month immediately preceding each seasonal period; or (ii) the exchange rates contained in the relevant contracts shall be passed through.
Furthermore, the Proceedings establish the steps to take in order to calculate the Accumulated Daily Differences (the “DDA’s[3]”). For this purpose, Daily Purchase Gas Volumes (“DPGV”) and Daily Sales Gas Volumes (“DSGV”) must be determined. DPGV and DSGV shall be accumulated monthly in order to obtain the Monthly Difference Amount which shall be updated at the effective rate of the Banco de la Nación Argentina for 30-days deposits in Argentine currency from the time of payment, until the last business day of the month prior to the starting day of the following seasonal period.

[1] Effective as from April 1st, 2019.
[2] In Argentina the natural gas price at the wellhead is denominated in US dollars.
[3] The DDA is a concept that is added to or subtracted from the price of gas to the transportation system entry point, for the pass-through to be complete. For this purpose, the distributor keeps a separate accounting between (i) the actual average price of gas purchased from each producer and basin; and (ii) the value of the natural gas at the point of entry to the transportation system that is passed through to the final rate. Monthly DDAs accruals are adjusted by an interest rate and then factored into the adjustment of rates for the following seasonal period.