Argentina Govt, Provinces Negotiate Higher Crude Oil Prices

BUENOS AIRES --The Argentine government is negotiating with oil-producing provinces to lift a two-year-old cap on crude-oil prices, people familiar with the negotiations say.

Since 2007, export taxes on oil have capped prices well below international prices, at $42 a barrel for the lighter "Escalante" crude and $47 for the somewhat heavier "Medanito." Comparable international oil prices are now trading at almost $70 per barrel.

The caps have crimped profits at oil companies, deterred investments plans and in some cases led to layoffs and shutdowns. As production has fallen, provinces have seen revenue fall from a 12% royalty tax on output.

Governors from oil-producing provinces such as Neuquen are pushing to lift prices by around $5 a barrel to $47 and $52, respectively.

"I know that governor [Jorge Sapag] is talking with the government about this, but there's still no definition as to when this is going to happen," said Neuquen Province spokesman Gerardo Burton.

Sources familiar with the talks say a deal could come within the next few weeks, though officials in the Planning Ministry, which oversees energy policy, have declined to provide details on the talks.

"Provinces are pushing for price hikes for their own fiscal reasons," said an oil-industry official who asked for anonymity. "Producers are pushing to make their businesses sustainable. Unions are pushing to defend their jobs."

Argentina's oil and gas prices have been out of sync with world prices since the country's 2002 economic meltdown, when the government devalued its currency and froze utility prices in devalued pesos.

But the most important impact came two years ago with the export taxes, which aimed to ensure domestic supplies amid a red-hot economy and soaring demand. That capped prices even as global prices soared beyond $140 a barrel.

Even though local prices stayed still, the cost of services such as drilling soared in line with rising global prices, sharply reducing margins for local producers. Investment in exploration and production has slumped in recent years.

"The government is finally recognizing for the first time that the price of oil has to rise or it will no longer make any sense for companies to remain in this business," said an industry official familiar with the situation.

"I know the governors are talking about this with [Argentine President Cristina Fernandez] and I know we're probably going to have to focus on this," Energy Secretary Daniel Cameron told reporters in Neuquen Thursday.

Cameron said there would be an impact on prices at the pump if the crude caps are lifted. However, it's unclear exactly what that impact would be.

Hardest hit might be the local units of Royal Dutch Shell PLC (RDSA) and Exxon Mobil Corp. (XOM), which don't have local production, and would have to pay more for crude. Yet, despite vehement government opposition, and sometimes open threats, pump prices have risen by around 35% or 40% in recent years.

"They built up a profit cushion," said an industry official. "Their margins here are much higher than in Europe, where crude prices have been much higher. Refiners like Esso and Shell are against raising prices because they'll have to pay more for raw material."

Spokesmen for Shell and Esso couldn't reached immediately for comment.

The local unit of Repsol YPF SA (REP) and Brazil's Petroleo Brasileiro SA (PBR), or Petrobras, might be under less pressure because they both produce crude in Argentina.