CHAPTER 26 GAS BALANCING AGREEMENTS AN ARGENTINE PERSPECTIVE

• Jurisdiction: Derecho Internacional

Mining and Oil and Gas Law, Development, and Investment - Book 2
(Apr 2007)
CHAPTER 26
GAS BALANCING AGREEMENTS AN ARGENTINE PERSPECTIVE
Teodoro Marcó
Legal Manager of Natural Gas and LPG for Argentina, Brazil, and Bolivia
Repsol YPF
Buenos Aires, Argentina

TEODORO MARCÓ

Teodoro Marcó is the Legal Manager of Natural Gas and LPG for Argentina, Brazil, and Bolivia of Repsol YPF. He has been actively involved in regional transactions, including natural gas export and import agreements, and natural gas balancing and transportation agreements.

Mr. Marcó worked as an associate in the Oil & Gas department of Perez Alati, Grondona, Benites, Arntsen & Martínez de Hoz (h), one of the leading law firms in the energy sector, until the year 2002.

He graduated from the University of Buenos Aires in 1994, and obtained a Master of Comparative and International Law at Southern Methodist University, Dallas, Texas, in 1996.

An ounce of prevention is worth a pound of cure.

Henry de Bracton, De Legibus in 1240

I INTRODUCTION

The purpose of this paper is to discuss and analyze certain issues in connection with gas balancing from the perspective of a producer of hydrocarbons in Argentina. It should be noted that the author does not know of any Argentine case law and/or legislation in connection with gas balancing and gas balancing agreements. Certain disputes have arisen with respect to agreements executed to address gas imbalances in Argentine fields, but it is the author's experience that they have been mostly resolved at the level of the operation committees of the UTEs.¹ As several commentators have noted, there are more articles regarding producer imbalances than there are cases.²

This paper does not propose solutions. Its intention is to raise issues, analyze them, and provide a perspective from an Argentine standpoint,

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which may be of interest considering the profound differences existing between the legislation and development of the market in the U.S. (where some of the most commonly used forms of balancing agreement are drafted) and Argentina.

Going to the basic definition, balancing is "the process by which persons having an interest in production from a well, unit or reservoir adjust their take therefrom to insure that each such person receives his proportionate part of production (or the value or proceeds thereof)".³ A gas balancing agreement is an agreement between the parties entitled to share in the gas produced setting forth the steps by which balancing will be accomplished.

Firstly, a balancing agreement usually provides for the overproduced parties to reduce their takes of gas and for the underproduced to increase their takes until balance is regained, and, secondly, if balance is not restored, for the overproduced parties to pay the underproduced parties for the excess gas taken. These agreements are also called storage agreements, banking agreements, underlifting agreements, out of balance production plans, deferred production programs, and probably other names.⁴ In Argentina, the preferred name coined during YPF's privatization, and which has been used ever since, is "Acuerdo de Compensación de Gas".⁵

II THE PRIVATIZATION OF THE OIL AND GAS SECTOR IN ARGENTINA

A. Predominance of the Public Sector.

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From the 1920's to the early 1990's, the Argentine public sector dominated the exploration, production, development, transportation, refining and distribution of hydrocarbons, while the private sector played a secondary role, restricted to activities under contracts with Yacimientos Petrolíferos Fiscales, the former state owned oil company, and Gas del Estado, the state owned company which operated the gas transportation and distribution system.⁶

Being Yacimientos Petrolíferos Fiscales the sole producer of natural gas in Argentina, balancing was certainly not an issue. Yacimientos Petrolíferos Fiscales owned the rights to produce in all of the natural gas fields located in Argentine territory, and of course, was the sole seller in a market which, on the buyer's side, was dominated by Gas del Estado.

B. The Private Sector Enters the Game.

In the early nineties, the Government launched the "Plan Argentina"⁷ for exploration purposes. Investors under this program were not required to offer Yacimientos Petrolíferos Fiscales a participation in the venture. Argentina's vastly unexplored sedimentary basins were offered to national and foreign companies. Successful bidders pledged investment in exploration, and when commercial hydrocarbons were found they received exploitation concessions.

To support the "Plan Argentina" the Government enacted a series of deregulation Decrees which provided for the free disposal of hydrocarbons extracted by concessionaires, the renegotiation of existing service contracts, the full harmonization into the international market, and the free import/export of hydrocarbons.⁸

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In December 1990, Yacimientos Petrolíferos Fiscales was transformed into YPF S.A. (Corporation) in order to allow the company to operate effectively in the private sector environment. On June 29, 1993, YPF went public when the new company symbol (YPF) was listed for the first time on the Big Board at the New York Stock Exchange.

As part of the deregulation process, private companies were offered joint ventures with YPF for the exploration and exploitation of certain major producing fields held by YPF, existing exploration and production service contracts with YPF were transformed into exploration permits and concessions, and production concessions of certain oil & gas fields were put up for international bidding.

In line with the exploration and production market deregulation, the monopolistic buyer, Gas del Estado, was privatized with the creation of several gas distribution private companies.⁹

Apart from distribution companies, large industrial users like power plants and steel mills were allowed to purchase natural gas directly from the producers. In 1999, Repsol (now Repsol-YPF) took control of YPF.

The scenario of the natural gas market was dramatically altered in less than a decade. By the year 2000, YPF was still the major player, but it had to compete with an important number of national and international companies that had the right to freely sell and market the hydrocarbons they produced.

As a result of the privatization/deregulation process, the production of most of the natural gas fields in Argentina passed on to the hands of more than one producer. Such producers' consortia were organized as Unión Transitoria de Empresas (UTE), a legal structure similar to a joint venture. Not all parties to the UTEs were in the same situation vis-à-vis the market. In order to allow for a viable deregulation, YPF had to make room for the newcomers in the natural gas market, either by assigning its marketing rights under certain contracts, or by purchasing the production

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of its new partners which had no prospective buyers. Balancing issues started to erupt due to the new important changes. The market would have to go through major readjustments, and disproportionate production in the UTEs would be inevitable in the light of market and pipeline restraints.

III BALANCING IN TIMES OF PRIVATIZATION

A. The use of model forms without adequate revision.

When opening YPF's natural gas fields for association, the Government noticed the high probabilities of imbalances in the future. For such reason, in most of the cases, the partnership documents (UTE agreements) that the winning bidders had to sign included a model form of balancing agreement.

Agreement on balancing is always difficult, but the task becomes even harder when it has to be...