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WEBCASTKPMG LATAM Energy Institute&Energy Forum of KPMG Argentina

October 29th - 2014

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Agenda

• Introduction and Speakers

• Opportunities in unconventional hydrocarbons: Vaca Muerta

• Risk management in the negotiation of drilling and other Oil & Gas

service contracts

• Negotiation of payment terms in a regulated exchange control

environment

• Customs benefits, regulations & restrictions for the import of equipment

in the current environment

• Setting up a regime for the promotion of investments in the exploitation

of hydrocarbons

• Foreigners working in Argentina

• Questions & Answers

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Néstor García

Moderator Lead Partner, Energy

and Natural Resources KPMG Argentina

Speaking with you today…

Juan Martín Jovanovich

Partner, Trade & Custom KPMG Argentina

Adriana Laurino

Partner, International Executive Services KPMG Argentina

Mario Pallaoro

Partner, Legal Services KPMG Argentina

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Agenda




service contracts


environment




of hydrocarbons



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Introduction

Vaca Muerta-Molles

Austral-Magalla

nes

Chaco-Paraná

Golfo San

Jorge

Chart 1: Shale Oil & Gas main formations

Source: Energy Information Administration (EIA)

Chart 2

Chart 3

TOP 10 COUNTRIES WITH TECHNICALLYRECOVERABLE SHALE GAS RESOURCES

Rank Country Shale gas (trillion cubic meters)

1 China 31.62 Argentina 22.73 Algeria 204 US 18.85 Canada 16.26 Mexico 15.47 Australia 12.48 South Africa 119 Russia 8.1

10 Brazil 6.9

TOP 10 COUNTRIES WITH TECHNICALLYRECOVERABLE SHALE OIL RESOURCES

Rank Country Shale oil (billion barrels)

1 Russia 752 US 533 China 324 Argentina 275 Libya 256 Australia 187 Venezuela 138 Mexico 139 Pakistan 9

10 Canada 9

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Source: Instituto Argentino del Petróleo y del Gas (IAPG)

Source: Banco Central República Argentina (BCRA) Source: Instituto Argentino del Petróleo y del Gas (IAPG)

year

year

I. Current situation in the energy sector

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Source: Economic study on conventional resources, shale oil and shale gas in Argentina: Current situation and prospects. KPMG Argentina.

II. Opportunities

Chart 4Type Basin Formation

Billions of

barrelsBillions of

cubic meters TCF Factor

Billions of

barrels

Billions of cubic meters TCF Factor

Billions of

barrels

Billions of cubic meters TCF

Neuquén Vaca Muerta 30.770 1.140 27.0% 8.308 308 6.5% 2.000 74

Neuquén Molles 28.198 1.044 27.0% 7.433 275 6.5% 1.833 68

Chubut San Jorge 11.826 438 20.0% 2.365 88 6.5% 769 28

Tierra del Fuego Austral – Magallanes

16.362 606 21.0% 3.436 127 6.5% 1.064 39

Chaco Paraná - Chaco 432 16 20.0% 86 3 6.5% 28 1 Total 87.588 3.244 21.628 801 5.694 210

Neuquén Vaca Muerta 265.00 42.00 1.60 6.0% 16.00 2.50 0.09 6.0% 16.00 2.50 0.09

Neuquén Molles 66.00 11.00 0.40 6.0% 4.00 0.60 0.02 6.0% 4.00 0.60 0.02

Chubut San Jorge 17.00 3.00 0.10 3.0% 0.50 0.10 0 3.0% 0.50 0.10 0.00

Tierra del Fuego Austral – Magallanes

131.00 21.00 0.80 5.0% 6.60 1.00 0.04 5.0% 7.00 1.00 0.04

Chaco Paraná - Chaco 0.30 0.05 0.00 3.0% 0.01 0.00 0 3.0% 0.01 0.00 0.00Total 479.30 77.05 2.90 27.11 4.20 0.15 27.51 4.20 0.15

Shale Oil

Shale estimate Standard Recovery Conservative Recovery

Shale Gas

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Foreign companies investing in shale

Source: Market information

III. Announced investment plans

Chart 5

E: Expected

YPF – Chevron agreement

Stage Period Drilled wells Investment (USD)

Exploration 2013 - 2014 161 1.26 billionProduction 2014 170 E 1.60 billion EProduction total 2014 - 1,500 E 15 billion E

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Energy demand (Argentina)

86% of the energy matrix of the country corresponds to hydrocarbons

Renewable9%

Oil35.03%

Natural gas51.62%

Coal1.5%

Nuclear 3%

Graph 5

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Agenda




service contracts


environment




of hydrocarbons



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Keys on contractual matters

Keys on contractual mattersfrom a legal perspective

Willful conduct and gross negligence

Applicable rules related to the payment in foreign currency

Restrictions on payments abroad. Payment in sovereign bonds as a

contractual alternative

Applicable Law. Jurisdiction

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Willful misconduct and gross negligence

• Concept.

• Specific contractual provisions concerningrelease of liability in case of(according to the Argentine National

Civil Code, scholars and case law)

• New Argentine Civil and Commercial Code (which will be in force and effect as fromJanuary, 2016).

• Appropriate insurance coverage.

willful misconduct

gross negligence

forbidden

could be challenged

in court

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Applicable rules related to the payment in foreign currency

• Argentine National Civil Code parties are allowed to agree the payment of theirobligations in foreign currency and the debtor discharges the obligation by delivering thetype of currency specified the day on which the obligation matures.

• New Argentine Civil and Commercial Code (which will be in force and effect as fromJanuary, 2016) parties are allowed to agree the payment of their obligations in foreigncurrency. Such obligation shall be considered as an obligation to give certain amount ofthings. The debtor may be released by giving the equivalent amount in legal tender.

• Current uncertain situation due to the restrictions for the purchase of foreigncurrency, the companies are adopting alternative payment methods (for example, stock-exchange transactions).

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Restrictions on payments abroad. Payment in sovereign bonds as a contractualalternative

• Argentine Republic has been imposing tight controls on its foreign exchange marketsince 2009. Such controls are still in full force and effect.

• Companies are not being allowed to make payments abroad to related parties andpayments to non-related parties are very limited.

• The big challenge among the parties to an agreement consists in the negotiation on thepayment conditions.

• Alternative payment methods stock-exchange transactions (for example, payment inArgentine sovereign bonds). Certain BCRA requirements must be taken into account inorder to avoid any violation with the foreign exchange control regime.

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Applicable Law. Jurisdiction

• Argentine National Civil Codeaccepts

• A link between the applicable foreign law and the purpose of the relevant contracts, itsparties, etc. must exist. Otherwise, it could be challenged in court.

• New Argentine Civil and Commercial Code seems to be more open to this kind ofprovisions for comercial agreements.

• Arbitration provisions (to be incorporated in the relevant agreements) arerecommended.

the subsmission of contracts to the laws of a foreign jurisdiction.

the extension of the jurisdiction in favor ofa foreign venue or arbitrators (providedthat no public order rule is affected).

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Agenda




service contracts


environment




of hydrocarbons



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Restrictions on imports

Anticipated Import Sworn Statement (DJAI)• Non-automatic import licensing procedure• Authorization of the Secretary of Commerce• WTO Panel against Argentina

De facto restrictions• Severe limitations to the access to foreign currency to pay imports• Sale of USD 150k per day to pay imports• No written regulation. Pressure of the Central Bank on Commercial Banks

Restrictions to the importation of used capital assets• Refurbishment by the original OEM• Certificate of Refurbishment• Certificate of importation of used goods must be issued by Ministry of Industry and Secretary of

Foreign Trade.

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Other Restrictions: Dividends, Royalties and Service Fees

Dividends• De facto limitations to purchase foreign currency• Pressure of the Central Bank on Commercial Banks

Royalties and service fees• Regulatory restriction to sell foreign currency to pay intercompany royalties and service fee for more

tan USD 100k.• Prior approval of the Central Bank

Virtually double exchange rate system• Official exchange rate: 8.40 pesos per dollar• Implicit exchange rate in transactions with sovereign bonds: 14 pesos per dollar.• Bonds and securities quoted both in pesos and dollars in Argentina and in foreign stock markets• Certain regulatory conditions must be met

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Exports of Oil and Gas

Distortions in the currency exchange market• Obligation to bring foreign currency collected from exports into Argentina• Obligation to sell such currency at the oficial exchange rate (8.40 pesos)• Limitations to purchase foreign currency to pay dividends• Access to foreign currency at the implicit exchange rate (14 pesos)

High export duty rates on the export of oil and gas

Regulatory incentives to the production and export of oil and gas

Requirements• Registration in the National Registry of Hydrocarbon Activities• Submission of Investment Project

– Requires disbursement of not less than 1 billion dollars (draft legislation more flexible)– Disbursement must be made during first five years

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Regulatory incentives to the production and exportation of oil and gas

Benefits are two-fold• As of fifth year, right to export 20% of production with 0% export duty rate and without obligation

to repatriate foreign currency.• If national production is not enough to cover domestic needs, right to sell 20% of the production

at reference export price and priority right to have access to foreign currency.

Draft legislation will modify the current hydrocarbons regime

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Agenda




service contracts


environment




of hydrocarbons



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Migration aspects

• Identifying the proper type of residence.• The development of any activity other than tourism requires authorization from

migration authorities (Dirección Nacional de Migraciones).• Each type of residence addresses different needs and personal situations;

therefore a case by case analysis is required. • Knowing exactly what to do in each situation will save time, efforts and money.

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Social security exemptions

• Social security costs in Argentina are among the highest in the Latam region.• Identifying exemptions will entail relevant savings in the costs of the project.• Evaluation of totalization agreements.• Evaluation of exemptions under domestic legislation.

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Payment of compensation

• Need for a mechanism to make payments outside Argentina. • Argentine bank account with unrestricted funds held abroad. The costs are borne by

Argentina. • The home country pays the compensation and bears the costs (no chargeback).

Such costs may be regarded as a non deductible expense in the home location.

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Agenda




service contracts


environment




of hydrocarbons



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www.kpmg.com/energylatam [email protected]

Nestor GarciaENR Leader for [email protected]

Daniel TrigoInstitute Manager+55 (21) [email protected]

Martiniano LopesENR Leader for Latin America+55 (11) [email protected]

webcast kpmg latam energy institute energy forum of kpmg ...€¦ · kpmg latam energy institute...

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