Argentina and Brazil take different approaches to energy policy

Argentina took a big step forward in attracting foreign and domestic investment in the country’s energy sector with the adoption of the Basic Law, which included the Large Investment Incentive Regime (known as RIGI by its Spanish acronym). This is a significant move to attract considerable investment in Argentina’s energy sector, especially for large-scale projects such as pipelines and export terminals linked to the Vaca Muerta shale area. Projects exceeding USD 200 million are guaranteed 30 years of legal and regulatory stability, assuming 40% of the investment is realized in the first two years. For projects above USD 1 billion, there are significant tax exemptions and an export tax exemption after 2-3 years depending on the project size, as well as import tax exemption related to the project size and progressive access to foreign currencies— 20% after two years, 40% after three years and full access (100%) after four years.

This initiative aims to create a favorable environment for foreign and domestic investors by providing financial incentives and ensuring long-term project security. This could significantly boost investment in Argentina’s energy infrastructure, encouraging oil and gas production and increasing export capacity. The RIGI framework outlines specific eligibility criteria and benefits for large-scale investment projects in Argentina, focusing on attracting substantial investment and promoting strategic industries. RIGI is available to single-project entities, joint ventures and other forms of partnerships involved in large investment projects, typically structured as special purpose vehicles (SPVs). To qualify, investments must be at least $200 million in countable assets. The executive branch has the authority to set higher thresholds for certain sectors, up to a maximum of $900 million. Projects with investments of US$1 billion or more that could establish Argentina as a long-term global supplier can be classified as strategic exports. These projects can access additional benefits and incentives beyond the standard RIGI terms. Due to their export orientation, oil and gas, mining and hydrogen projects are likely candidates for these additional benefits. Applications for RIGI membership must be submitted within the next two years. The executive branch has the power to grant a one-year extension for filing.

On the other side of the coin, President Luiz Inácio Lula da Silva’s recent policy shift regarding natural gas has excited supporters of natural gas sovereignty in Brazil. However, it also raised concerns about the potential impact on investment in Brazil’s oil and gas sector. A new decree gives Brazil’s oil regulator, ANP (Agência Nacional do Petróleo, Gás Natural e Biocombustíveis), the authority to set limits on the amount of natural gas that oil producers can re-inject into reservoirs. Today, in Brazil’s offshore fields, most natural gas produced in association with oil is usually reinjected to maintain reservoir pressure and improve oil recovery. This practice also helps manage the high cost of transporting gas to shore. With this decree, the administration aims to boost the domestic supply of natural gas and lower prices to boost industrial activity in Brazil. By potentially reducing the volume of reinjected gas, the policy aims to redirect more gas to the domestic fuel market.

However, there are potential investment concerns here, particularly in terms of cost implications. For companies such as Equinor, Shell and Petroleo Brasileiro SA (Petrobras), the new rules could impact the economics of their offshore projects. If the policy leads to higher gas transportation costs or requires more gas to be diverted from reinjection, this could affect the project’s feasibility and profitability. The uncertainty surrounding the new regulations could make these companies more cautious. Equinor and Shell are assessing how the decree could affect their multibillion-dollar offshore investments in Brazil. It is worth noting that the rule will only apply to new wells and will not affect existing contracts. For Lula’s administration, the decree prioritizes increasing the supply of natural gas and reducing prices, which it considers crucial for industrial growth. However, the introduction of this new regulatory framework could create significant challenges for offshore oil companies, affecting their investment decisions and project economics.

How these government mandates will shape the future of the energy sector in both countries remains to be seen, and indeed the implications here are long-term in nature. Argentina and Brazil have seen quite a pronounced oscillation in their political leadership over the past decade, swinging from left to right and right to left. In this regard, it remains unclear how future changes in the Casa Rosada and Palacio do Planalto could affect these policies in the future. For now, the positions of both leaders seemed well marked. President Lula will continue to emphasize increased state control and regulation to manage domestic energy supplies and prices, which may lead to more cautious investment by international companies. At the same time, President Mila will focus on liberalizing the energy market to attract investment and expand Argentina’s energy infrastructure and export capacity, aiming to create a more favorable environment for large-scale projects.

Of Rystad Energy

More top reads from Oilprice.com