The Wall Street Journal: Argentina Fuel Price Deal Leaves Refiners In Tight Spot

By LAURENCE NORMAN

May 20, 2004 1:06 p.m.

Of DOW JONES NEWSWIRES

Posted 21 May 04

BUENOS AIRES -- A late night phone call between Argentina's President Nestor Kirchner and Alfonso Cortina, president of oil giant Repsol YPF SA (REP), has transformed the rules of the game in the local oil sector and squeezed refiners into a lose-lose situation.

Late Tuesday, while producers and refiners were still working on a new version of a fuel price accord that would have seen fuel prices raised for the first time in 16 months, Kirchner asked Cortina to block the hikes, according to an industry official.

Cortina agreed and, within minutes, Cabinet Chief Alberto Fernandez and Repsol Vice President Miguel Remon announced in a news conference that fuel prices would not rise for the foreseeable future. Petrobras Energia Participaciones (PZE) soon gave its OK to the deal, meaning the two companies representing over 55% of Argentina's oil output and two-thirds of fuel production had foresworn increases. By Wednesday afternoon, companies representing some 90% of total oil production had signed on, industry officials said. These would include BP PLC unit (BP) Pan American Energy SA, the local ChevronTexaco unit and Total SA (TOT). There was no comment from these companies.

Notably absent from the deal, however: companies that have refining but not production operations in Argentina, essentially the local units of Shell (RD) and Exxon Mobil Corp. (XOM). Their absence is surely due to the fact that they are the main losers from the deal, which involves higher crude prices along with the promised fuel price freeze, industry official say. For Repsol and Petrobras, the accord simply means a transfer of profits from the refining operation to the production side. For Shell and Exxon Mobil, it means a net loss.

The refiners, whose operations have already been hurt by a protracted recession and by increased use of compressed natural gas by Argentine car owners, now face a tough choice. They can keep the freeze on gasoline prices, letting the higher crude price eat into margins. Or they can lift them and risk not only losing clients, but also appearing as the villain - the "greedy" companies, as Fernandez, the cabinet chief, said over the weekend.

The Repsol-led deal, a verbal accord whose details are still being finalized, marks an abrupt change in the pricing structure of the domestic oil industry. According to officials, producers will now sell crude to refiners at a reference price of $30 per barrel, which is roughly equal to the current international crude price minus the recently hiked 25% export duty.

Previously, under periodic accords that were repeatedly rolled over after their inception in January 2003, the price was fixed at $28.50 a barrel and gasoline prices frozen. The proviso was that when the international price dropped below $28.50, producers could continue charging the same price until they had recouped the foregone earnings.

The prior accord meant the nonintegrated refiners were accumulating large debts to the producers, payments on which would kick in when world prices fell below $28.50 per barrel. As of last month, the debt owed by Shell and Exxon Mobil's refiners stood at $160 million.

The collapse of the accord doesn't appear to mean the end of that debt. One official spoke of a committee being set up to negotiate it, while another said it would be left to bilateral negotiations between the refiners and the producers. Officials said it was also possible that the new $30 price would act as the $28.50 price worked previously - any move below that level in the export tax-adjusted international price would be the new trigger for the producers to recoup lost earnings.

None of this is what Shell and Exxon Mobil had in mind when the last accord expired at the end of April. With international prices soaring to record levels above $41.50 a barrel on Monday, both refiners and producers were pushing hard for a solution that would put the domestic crude price at $32.50 a barrel - thereby slowing the accumulation of their debt - and at the same time permitting an increase in gasoline prices. Until Tuesday's press conference, it was widely expected that this would result in a 5% hike in the pump price of gasoline. Last week, Shell and Exxon Mobil hiked their diesel prices by 4.3%. The same day, the government increased the export duty by five percentage points.

One industry official said the refiners were taken aback by the government-Repsol announcement late Tuesday. One moment the negotiations were going full steam ahead. The next moment, they were off.

"Last night was a surprise for us. Since this morning the companies have been meeting to sort the situation out," the same refinery official said on Wednesday.

Yet with the heavy hand of the government now involved in the process, it's not clear what the refiners can do. Amid a looming energy crisis that is threatening higher costs for middle class gas and power users, the government doesn't want to see another sensitive energy product hit with price hikes.

In a news conference Wednesday, President Kirchner described the outcome as another victory over a sector he has previously accused of seeking to "blackmail" the government.

"They were tough, difficult negotiations, but we met our goal, which was that without any time limit ... fuel and diesel prices will not rise," the president said Wednesday.

Indeed, Remon, the Repsol vice president, said it was hard to imagine any scenario where domestic crude prices will have to rise, though it was quite possible they could fall if the international prices falls back from 14-year highs.

And while Shell and Exxon Mobil might not be happy with that, there didn't seem to be much sympathy for them among their producer counterparts.

"You know how the industry is, there are lots of contrasting interests in play," said one official at a top producer. While he said "there is no doubt that they have been most harmed," the official also noted that it was Shell and Exxon Mobil that decided to lift diesel prices originally.

-By Laurence Norman, Dow Jones Newswires; 5411-4311-3127; laurence.norman@dowjones.com

(Michael Casey contributed to this article)