ENERGY NEWSLETTER N 48

SPECIAL REPORT ON THE ENHANCEMENT OF THE GOVERNMENT'S REGULATION ON THE

HYDROCARBONS INDUSTRY

AUGUST 2012

NEW DECREE 1277/12 END OF PROVISIONS THAT DEREGULATED THE OIL & GAS INDUSTRY DURING THE NINETIES
On July 27, 2012, Decree N 1277/12 (the Decree) was published in the Official Gazette. Under the title of Hydrocarbons Sovereignty, the Decree implements the rules set forth by Law N 26,741 ( the YPF Expropriation Law) and formally abrogates what was left of the regulatory framework of the industry that had been established starting in 1989. This new development conveys a disturbing signal to investors and to the energy business in particular. Rather than showing that the YPF expropriation was a one time event and that the Government would set out to develop Argentina's abundant unconventional hydrocarbons resources through the establishment of a set of clear and attractive rules, it has abrogated what was left of the former regulatory framework that was based on the pillars of deregulation and free marketing. With the Decree and the foreseeable subsequent implementing regulations, the Government has not only eliminated short term hopes for the reinstatement of free market principles, but has established the basis for enhancing it's interference in all aspects of the business by requiring sensitive information on costs and setting forth the grounds for regulating the margins of every segment of the up-stream, mid-stream and down-stream businesses. The general parameters mentioned by the Decree suggest the maintenance of the gap between domestic and international energy prices, as well as a direct regulation of the margins of each segment of the hydrocarbons business. Thus, the Decree impacts adversely on the expectations for the establishment of adequate prices and regulatory conditions as well as certainty and predictability, creating additional uncertainties in relation to the prospects of developing joint ventures among international oil companies and YPF, to invest in and develop Argentina's shale oil and gas resources.

1. Abrogation of Deregulation Decrees The decree repeals the sections contained in Decrees 1055/89, 1212/89 and 1589/89 (Deregulation Decrees) that had established the free marketing of hydrocarbons production in the domestic and external markets, and exemptions from export withholdings.1

2. Creation of Commission of Planning and Strategic Coordination of the National Hydrocarbon Investments Plan The Decree creates a Commission of Planning and Strategic Coordination of the National Hydrocarbon Investments Plan (the Commission), headed by the Secretary of Economic Policy and Development Planning2.

The abrogated sections are: sections 13, 14, 15 and 5, subsection d) of Decree 1055/89, Section 1, 6, and 9 of Decree 1212/89, Sections 3 and 5 of Decree 1589/89.

The Commission will be in charge of executing annually a National Hydrocarbons Investment Plan which will be designed on the basis of a full assessment of the hydrocarbons industry, setting forth criteria and goals in terms of investment in exploration, exploitation, refining, transportation and marketing of hydrocarbons.

3. Creation of the National Registry of Hydrocarbon Investments The Decree creates the National Registry of Hydrocarbon Investments (the Registry) and provides that all hydrocarbon companies engaged in exploration, exploitation, refining, transportation and marketing of hydrocarbons and fuels must register with the Registry, which will be created under the Commission. Registration is a condition for carrying out activities in Argentina. To register, hydrocarbon companies engaged in exploration and exploitation will be required to provide technical, quantitative and/or economic information, according to the guidelines to be set-forth by the Commission which will be used to design of the National Investment Plan. The Commission will issue supplementary regulations within the next 90 days regarding formal additional requirements to be fulfilled in order to be granted registration.

4. Mandatory Submission of an Annual Investment Plan The Decree establishes the obligation to file an Annual Plan by September 30 of each year, pursuant to the following guidelines: Companies engaged in exploration and exploitation of hydrocarbons shall provide information regarding their quantitative goals in exploration and exploitation of hydrocarbons and inform their plans for the maintenance and increase of reserves, including: (a) their investment plan in exploration; (b) their investments plan for primary recovery of reserves and (c) their investment plan for secondary recovery of reserves. Companies engaged in the refining of hydrocarbons shall provide technical, quantitative and/or economic information which is considered relevant by the Commission to assess the refining sectors performance including their quantitative goals in terms of hydrocarbons refining. Companies engaged in marketing and transportation of hydrocarbons and fuels are required to provide the technical, quantitative and/or economic information which may be considered necessary to assess the sectors performance, including their quantitative goals in terms of marketing and transportation of hydrocarbons and fuels. Moreover, the Commission will evaluate all Annual Plans submitted by the companies and their consistency with the National Investment Plan, within 60 days after their submission. It may also request the submission of a new Annual Plan to meet the Commissions criteria. According to the information provided by the companies, the Commission will design the National Investment Plan. The Commission will also conduct quarterly audits to ensure compliance with the Annual Plan and may apply penalties if it determines deviations from the National Investment Plan.
This Commission will also be formed by a representative of the Secretariat of Energy and of the Secretariat of Domestic Trade.
2

5. Mandatory supply obligations for refineries The Decree establishes that primary and secondary refineries shall ensure the regular supply to their commercial chain even in cases of programmed or unprogrammed shutdowns, scheduled maintenance programs or changes or improvements in their refining processes. In case of failure to do so, the Commission is empowered to apply the sanctions set forth in Law No 20,680 (the Supply Law) and in the Decree.

6. Reference prices for cost and prices The Commission will additionally establish reference prices for each item of costs and prices of reference for the sale of hydrocarbons and fuels to ensure reasonable commercial prices in the domestic market. According to the wording of the Decree, those reference prices will cover the production costs and allow for a reasonable profit. The Commission will periodically monitor the reasonableness of the costs reported by producers and the respective prices. The Commission is empowered to adopt any measures necessary to avoid or correct distortive conducts affecting consumers interests in relation to price, quality and availability of hydrocarbons by-products.

7. Sanctions The breach of the obligations set forth in the Decree is subject to the sanctions established under the Hydrocarbons Law such as fines, admonishment, revocation of permits or concessions, etc. as well as the suspension or termination of the registration in the Registry. These sanctions are to be applied by the Commission which also has full competence to apply all sanctions established in Law No. 20.680.

8. Grounds to challenge the Decree The main grounds on which the Decree may be challenged are: Unconstitutionality, because it abrogates key sections of the Deregulation Decrees which, as recognized by Supreme Court precedents, enjoy legal status and higher legal hierarchy than regulatory presidential decrees such as the Decree; Unconstitutionality, because it creates administrative sanctions contrary to the principle of separation of powers. Violation of the rights arising under exploration and exploitation titles, since the Deregulation Decrees were generally incorporated into the terms of the exploration permits and exploitation concessions and contracts; and Unconstitutional interference with Provincial regulatory jurisdiction, as provided by the Law N 26.197. There are several courses of actions which may be pursued in order to challenge the Decree. These include administrative remedies before the Executive (particularly, the Reclamo Impropio remedy) and/or judicial actions, such as the declaration of unconstitutionality action or the amparo action. In any case, to stay the application of the Decree, the administrative or judicial action may be accompanied with an injunction.

Apart from local remedies, foreign investors may purse international investment arbitration before the International Centre for the Settlement of Investment Disputes (ICSID) or before an ad hoc tribunal under the rules of the United Nations Commission on International Trade Law (UNCITRAL), on grounds that the Decree and subsequent implementing regulations violate the standards of protections established in the relevant bilateral investment treaties. In the following issues of our Newsletter we shall continue reporting on any implementing regulations and further news related to the Decree.

Pablo Rueda pr@pagbam.com.ar

Jos Martnez de Hoz (h) jmh@pagbam.com.ar

You are welcome to request additional information on any of these topics contacting any of us at:
PEREZ ALATI, GRONDONA, BENITES, ARNTSEN & MARTINEZ DE HOZ (h)
ABOGADOS

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Note: This newsletter is not intended to serve as substitute for consultation with an attorney but to provide information of general interest.

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