The Energy Mergers & Acquisitions Review: Argentina

Overview

Since the early 1990s, when the energy industry was deregulated and key assets owned by the national state were privatised, there has been M&A activity in all areas of the energy industry.

As regards oil and gas, M&A activity has included transactions in the upstream, midstream and downstream sectors, with the largest number of transactions seen in the upstream sector and a considerable number of deals in gas transportation and distribution, as well as in the oil downstream sectors, and fewer transactions in the oil transportation sector.

The peak of M&A activity took place in the 1990s, the most deregulated and market-oriented period in Argentina's energy history, and decreased in the following decades, as the government's involvement in the industry increased (in 2012, YPF, the state-owned oil and gas company that had been privatised in the 1990s, was renationalised through the expropriation of 51 per cent of its shares). However, although far from the number of deals seen in the 1990s, several important transactions have taken place in the last decade, among which it is worth mentioning that the three largest oil downstream businesses (excluding YPF) were sold during that period (Exxon's business was sold to Pan American Energy, Shell's operation was transferred to Raizen and Petrobras' business was transferred to Trafigura).

M&A activity has been scarce during the past two years due to several reasons, namely:

  1. the new administration that took office in late 2019 (a centre-left/populist coalition) took over the government without a clear plan for the economy in general or for the energy sector in particular;
  2. the stringent foreign exchange restrictions the previous administration had been forced to take in September 2019 were expanded and strengthened by the new administration;
  3. the crash of oil prices in the first quarter of 2020;
  4. the covid-19 pandemic; and
  5. the worsening of the country's macroeconomic problems as a result of erratic policies and notorious disagreements within the governing coalition.

Within a legal framework that, as a general principle, allows for ample participation of the private sector in the energy industry, the country has experienced cycles of increasing and decreasing government involvement, usually coinciding, respectively, with centre-left or centre-right administrations. The current cycle is one of increasing government involvement in the sector and in the economy in general.

On the one hand, the energy sector is subject to foreign exchange restrictions applicable generally to all sectors of the economy, including, among others, the mandatory repatriation of export proceeds (with very limited exceptions applicable to certain hydrocarbons exports), and the prohibition on freely accessing the foreign exchange market to pay dividends, remit funds abroad for the formation of external assets and pay inter-company debt, as well as certain restrictions on accessing the foreign exchange market to pay imports.

On the other hand, as regards the oil and gas sector specifically, the government has been inclined to regulate prices through several mechanisms. A clear example of this is Decree No. 488/20, which, in a scenario of extremely low market prices, set forth that crude oil domestic sales should be made considering a fixed reference price of US$45 per barrel and royalties should be paid based on such an unrealistic value, against basic principles established in the Hydrocarbons Law 17,319.

The government also affects domestic prices through the state-controlled YPF, which holds a majority market share in the downstream sector, and through export duties.

As regards gas transportation and distribution, the government has repeatedly frozen tariffs, in a fragrant breach of the basic terms contained in the applicable natural gas legal framework and of the terms and conditions provided for in the relevant licences. As an example of this, in December 2019 the government froze gas transportation and distribution tariffs and forced a renegotiation of the tariffs scheme that should have applied until December 2022. This renegotiation process is far from being completed and, in the meantime, modest provisional adjustments (several percentage points below inflation) have been allowed.

The above-mentioned creates significant uncertainty for potential investors, deeply affecting M&A activity in the oil and gas sector.

In this scenario, the trend consists mainly of international companies selling their assets in Argentina to local (or regional) companies, or to international funds focused on business opportunities.

As regards power and utilities, the Argentine sector is characterised by a very complex set of bodies working at various segments and jurisdictional levels.

The power market in Argentina has been characterised by increasing demand for electric power, coupled with ageing, inefficient assets and high operating costs, which has created a very narrow supply and demand gap at peak times and energy shortages.

The former administration began implementing certain measures to improve the long-term sustainability of the energy sector, including, among others:

  1. the review of the tariff policy, implementing, for the first time in several years, tariff adjustments in line with the applicable licence rules, with the subsequent reduction of subsidies;
  2. the call for private investors to enter into international public tenders, which led to a significant increase in installed power generation capacity; and
  3. the implementation of the RenovAr programme for the installation of renewable energy plants

However, these measures were affected by the financial crisis. Similar to what happened in the natural gas sector, the government froze tariffs and called for a renegotiation process (thus depriving the then current tariff integral agreements of their enforcement).

Regarding renewable energy, Law 27,191 set out ambitious goals for the gradual inclusion of renewables in the country's energy matrix, pursuant to which 20 per cent of total domestic energy demand must be satisfied from renewable energy sources by 31 December 2025. The law also includes tax and other benefits for new renewable energy projects. However, nearly half of the renewable energy projects awarded by tenders within the RenovAr programme from 2016 to 2019 did not complete (or even start) their construction.

The situation described above has impacted investment levels and made large transactions in the electricity and power sector scarce too. In 2021, the volume of transactions remained relatively stable compared to 2020, but the amounts traded have been falling and are at one of the lowest levels of the past 10 years.

Year in review

In a context of scarce M&A activity, the following deals are worth mentioning:

  1. the acquisition by Empresa de Energía del Cono Sur (a group formed by three local investors) of Edenor (the largest electricity distribution company) from Pampa Energía (a local energy group);
  2. the acquisition by Compañía General de Combustibles (owned by the local Eurnekian group) of Sinopec's subsidiary, which holds several hydrocarbons upstream assets;
  3. the acquisition by Vista Oil & Gas (a company based in Mexico) of Conoco Phillips' vehicles holding upstream assets;
  4. as informed in an article published on a specialised energy news web page, the sale of French company Engie's interest in Litoral Gas (holder of a gas distribution licence) to a fund controlled by Oaktree and to Tecpetrol (Techint's oil and gas company, which already held a minority participation);2 and
  5. the transfer of Aleph Midstream (an oil midstream company) from Riverstone Holdings to Vista Oil & Gas.

As of the date on which this chapter was written, 2021 was not a relevant year in terms of legislative and regulatory developments, probably because of covid-19 related restrictions during the first two quarters and the mid-term elections that took place during the second half of the year.

In this context, the issuance of Decree No. 234/2021 was the only government initiative to incentivise investment, with a focus on exports, in several sectors, including energy. The only benefit contemplated in this regime consists of the free availability of 20 per cent of the proceeds of exports generated by the investment project, the free available proceeds to be used to pay dividends, repay debt or repatriate investment by non-residents. Our first impression is that this benefit will not be sufficient to trigger significant investment or M&A activity in the energy sector, although it could work for smaller projects.

On 15 September 2021, a hydrocarbons investments promotional regime bill was submitted to the Congress by the national executive. The regime contemplates several sub-regimes and is aimed at promoting investment in the upstream, midstream and downstream sectors. The benefits contemplated in the bill include:

  1. guaranteed exports permits for a percentage (between 20 and 50 per cent, depending on several factors) of the beneficiaries' incremental production and the ability to freely dispose of 50 per cent of such proceeds;
  2. tax benefits (accelerated depreciation of investments, fast track VAT refund, fiscal stability);
  3. import and export duties benefits; and
  4. guaranteed dedicated productions and transportation capacity in relation to vertically integrated projects.

On the judicial side, in August 2021, the Federal Supreme Court ratified, once again, its competence to hear cases in which the validity of the Hydrocarbons Law is at stake (Capex SA v. Province of Neuquén and other similar cases, related to the enforcement by the province of the provisions of Decree No. 488/20 that established a fixed reference crude oil price as the basis for the calculation of royalties). The fact that this decision maintains an impartial forum for discussion and ruling on material issues for the oil and gas industry is good news for the sector and for investors that might be interested in acquiring companies or participating interests in assets.

On the power and utilities side, no relevant regulations were issued either. Following the mandatory freezing and renegotiation of tariffs implemented in late 2019 and ratified in late 2020, a provisional increase in the generation remuneration of around 29 per cent (well below the inflation rate) was established by Resolution No. 440/2021 while the renegotiation proceedings continue. Decree 389/21, which re-empowered the state-owned company Integración Energética Argentina SA to carry out power infrastructure projects, was a continuation of the government's increasing cycle of involvement.

Legal and regulatory framework

Article 72 of the Hydrocarbons Law provides that the assignment of participating interests in petroleum licences requires the government's prior authorisation, which is granted unless the assignee lacks sufficient financial or technical capacity. This requirement applies to the transfer of participating interests in exploration permits and exploitation concessions and not to the change of control of the company holding such participating interests.

The transfer of natural gas transportation concessions or distribution licences, as well as any direct or indirect change of control of the companies holding such concessions or licences, requires the approval of the national gas regulator (ENARGAS).

Law 24,076, which governs natural gas transportation, distribution and marketing, bans vertical integration in the natural gas industry. Pursuant to this law, natural gas producers, storage companies and distributors cannot have a controlling interest in a transport company; no producer, storage company or transport company can hold a controlling participating interest in a distributor; and no commercialisation company can have a controlling interest in a transport company or in a distributor.

Laws 15,336 and 24,065 (as amended), alongside implementing Decree No. 1398/92 and Decree No. 186/95, set forth the National Electricity Legal Framework.

Pursuant to Section 31 of Law 24,065, no generator, distributor, large user or company controlled by some of them or controlling them may be the owner or majority shareholder of a transmission company or its controlling company. Notwithstanding the foregoing, the National Executive may authorise a generator, distributor or large user to build, at its exclusive cost and for its own needs, a transmission network, for which purpose it shall establish the modalities and form of operation.

Under Section 32 of Law 24,065, only with the express authorisation of the National Electricity Regulator (ENRE) may two or more carriers or two or more distributors consolidate into the same business group or merge. Said authorisation shall also be necessary for a carrier or distributor to acquire the ownership of shares of another carrier or distributor, respectively. The agency shall arrange for hearings to be held to hear the opinion of all interested parties and can conduct other investigations as it deems necessary, following which it shall grant the authorisation provided that the provisions of this law are not violated and that neither the service nor the public interest is harmed.

As per ENRE Resolution No. 548/99 and ENRE Resolution No. 499/2005, generators, transporters and distributors of electric power must report, within 10 calendar days after the occurrence of the event, any act that implies a modification in the shareholdings or control affecting any economic group or corporation that has indirect or direct control over the regulated companies, including any transaction carried out abroad.

As regards mergers and acquisitions control, antitrust Law 27,442 provides that in transactions being reviewed by the Antitrust Commission relating to companies or businesses in regulated sectors, the opinion of the relevant regulator (i.e., the electricity regulator, ENRE, or the gas regulator, ENARGAS) shall be requested before issuing a decision. Although technically the regulator's opinion is not binding for the Antitrust Commission, in practice the Commission never decides against the regulator's opinion.

Cross-border transactions and foreign investment

Cross-border investment has been modest in the past year. As already mentioned, recent M&A activity consisted mainly of transactions between local players, the sale of assets by international companies to local groups, or international companies selling assets or shares to international funds focused on business opportunities.

The last outbound cross-border transaction that is worth mentioning is the sale by Naturgy Inversiones Internacionales SA of its 96.04 per cent stake in Compañía General de Electricidad SA, the company that carries out the electricity network business in Chile, to State Grid International Development Limited on 13 November 2020, which involved the Argentine companies CGE Argentina SA, Agua Negra SA and Gascart SA.

There are no specific rules or restrictions on foreign investment in Argentina's energy markets. The only requirement for foreign companies wishing to do business in Argentina directly or through a local subsidiary is to register with the Public Registry of Commerce as a branch or as a foreign company for the purpose of holding shares in a local company.

As an exception to this general rule, companies performing activities in the Malvinas (Falklands) area without the Argentine government's authorisation are not allowed to register with the oil and gas companies' registrar or to perform any activity in the country.

Gas exports require government authorisation, while oil exports have to be offered to the domestic market first.

The parties to M&A transactions are free to choose the governing law and jurisdiction, provided there is an international component in the transaction. Then, in a transaction between two companies registered in Argentina, the purpose of which is to be carried out entirely in Argentina, the choice of foreign law and jurisdiction could be challenged before an Argentinian court.

In any event, regardless of the choice of law under a share purchase agreement, certain mandatory legal provisions apply given their status as public policy, including tax-related matters, labour matters and rights that cannot be waived as a matter of public policy.

Financing

Transactions in the energy sector are usually financed from traditional sources, such as bank financing, including both domestic and international loans, inter-company loans and capital contributions, or with the purchaser's available cash.

Recently the acquisition of Sinopec's subsidiary by Compañía General de Combustibles was financed with a bridge loan from an international bank, which was repaid with the funds disbursed under longer-term loans from local banks.

Companies such as Compañía General de Combustibles, Pan American Energy, Petroquímica Comodoro Rivadavia, Vista Oil & Gas and YPF have obtained financing in recent years by issuing bonds in the domestic capital market (typically, senior unsecured notes denominated in US dollars or in Argentine pesos but linked to the evolution of the peso–dollar exchange rate, with interest rates ranging between 3 per cent and 4.75 per cent) to finance specific projects or their operations in general. In the electricity sector, senior secured floating rate notes have been issued by Río Energy SA, UGEN SA and UENSA SA as co-issuers. Power generator Genneia has also obtained financing through the issuance of notes. The issuance of these kinds of notes would be available to finance mergers and acquisitions, together with other less usual sources, either in the domestic or in the international market, like equity (the only relatively recent example being Vista Oil & Gas Mexican holding's IPO of 2019, in which US$185 million was obtained to finance projects in Vaca Muerta).

As per Article 73 of the Hydrocarbons Law, participating interests in hydrocarbon exploration and production licences can be assigned as collateral, with the previous authorisation by the relevant province or by the national state, which is generally granted. This security interest can be used as collateral to guarantee the repayment of financing or the obligations of farmees in farm-in agreements in which a participating interest is transferred before the completion of the work or funding obligations by the farmee.

The foreign exchange regulations currently in force prevent free access to the foreign exchange market to repay financial debt to related parties.

Collateral trusts, to which hard assets or accounts receivable can be assigned, can also be used as part of the security package.

Due diligence

In transactions involving oil and gas companies or assets, special attention should be paid to the following matters:

  1. title ownership and ownership background on exploration and production licences;
  2. review of pending work commitments under exploration permits and farm-in agreements;
  3. review of compliance with royalty, surface fee and other government take payment obligations;
  4. review whether the company's registration with the relevant upstream companies registrars is in good standing;
  5. review of the company's compliance with its obligations under the plan Gas.Ar scheme, if the company was awarded contracts thereunder;
  6. review of substantial compliance with applicable environmental laws and regulations and assessment of liabilities in connection with environmental incidents, and review of compliance with abandonment requirements in relation to decommissioned wells and facilities;
  7. review of joint operating agreements applicable to the relevant assets, with a focus on provisions regulating the transfer of participating interests, change of control, decision-making, operatorship and sole-risk operations;
  8. material services agreements; and
  9. agreements with and claims from landowners.

In transactions involving natural gas transportation, distribution or commercialisation concessions or licences, special attention should be paid to any potential non-compliance with the vertical integration limitations set forth in the natural gas legal framework, as well as to gas-balancing agreements and lifting agreements.

In transactions involving the acquisition of downstream businesses, special attention should be paid to environmental issues affecting refineries and services stations, many of which have been operating for years, including periods in which environmental regulations or enforcement thereof were lax. Contracts with service stations operators, as well as actual or potential disputes in relation thereto, should also be reviewed carefully.

As regards transactions in the power generation and electricity transportation and distribution sectors, the due diligence should focus on:

  1. the ownership of plants and other facilities;
  2. applicable concessions for transporters, distributors and hydroelectric generators;
  3. registration as an electricity wholesale market agent in the relevant category;
  4. environmental and zoning licences;
  5. commercial licences (for power generators);
  6. ability to connect to and use the transmission grid;
  7. the natural gas supply sources and agreements;
  8. tariffs schemes applicable to the relevant transportation concessions and distribution licences and to the terms and status of tariff renegotiation processes or tariff-related claims;
  9. electricity sale agreements; and
  10. renewable energy contracts awarded under the Renov.Ar programme and status of compliance with commitments and obligations assumed thereunder.

Purchase agreements and documentation

The covid-19 pandemic and the long-term lockdown ordered by the Argentine government resulted in an increase in the use of tools that, although already available before the pandemic, were not widely used. These include electronically signed documents, virtual closing meetings and the uploading of lengthy schedules to the cloud.

Oil and gas M&A contracts include typical representation and warranties and indemnity provisions that can be generally found in stock purchase or asset purchase agreements, as well as other representations and warranties that are more energy industry-related. The latter usually include:

  1. representation and warranties on exploration and production licences, transportation and distribution licences, including title ownership, material compliance with licences terms and conditions;
  2. representations and warranties on environmental and decommissioning obligations;
  3. compliance with royalty and other government take related obligations;
  4. first refusal rights applicable to the assets;
  5. work commitments in relation to the assets, and
  6. oilfield services and other material contracts.

M&A contracts in the power sector contain representations and warranties that are conceptually similar to those mentioned in the paragraph above but refer to the particularities of this industry, such as representations and warranties on:

  1. title or other rights to the site;
  2. registration as an electricity wholesale market agent;
  3. zoning and environmental licences;
  4. rights to connect to and use the transmission and distribution grid;
  5. transmission and distribution concessions;
  6. commercial licence for generators; and
  7. status of renewable energy contracts awarded under the RenovAr programme.

The indemnity provisions typically include indemnities in relation to breaches of representations and warranties, as well as special indemnities relating to identified environmental and government take or tax issues.

Key regulatory issues

i Competition

This issue is governed by Antitrust Law 27,442 (Antitrust Law), enacted on 15 May 2018.

Transactions that cause a change in the control structure of a company or asset shall be filed for authorisation when the combined annual revenue (considering the last fiscal year closed) of the company or asset being acquired and of the acquirer group (the company acquiring control over the asset and its affiliates in the country) exceeds an amount equivalent to 100 million Mobile Units3. Until one year after the date on which the new National Competition Authority created by such law is formed and functioning, transactions meeting such requirements shall be filed not later than seven consecutive days after closing of the transaction occurs. As from the expiry of this one-year term, filings shall be made, and approval will have to be obtained, before closing of the transactions. As of today, the new National Competition Authority is not functioning, so this one-year term is not running yet.

Even when the abovementioned requirement is met, the filing will not be necessary if neither the price being paid, nor the value of the asset being acquired, exceed an amount equivalent to 20 million Mobile Units.

Under the Antitrust Law and the cases ruled by the antitrust authority under the previous law (Law 25,156), an assignment of participating interests in hydrocarbon exploration permits, exploitation concessions or association agreements has to be filed with the competition authority for authorisation, provided the general requirements for pre-economic concentrations approval are met.

As mentioned in Section III above, transactions being reviewed by the Antitrust Commission relating to companies or businesses in regulated sectors require the opinion of the relevant regulator.

ii Environmental protection

Key environmental regulatory issues to be considered when entering into M&A transactions refer, on the one hand, to the compliance with formal requirements in connection with environmental impact assessments and licences for wells, pipelines, generation plants and other oil and gas and power plants and facilities, maintenance of facilities, reporting of incidents, registration with the relevant registrars (i.e., hazardous waste generators registry) and decommissioning.

The last significant development regarding environmental protection in the energy sector was the issuance in 2019 of the rules for the obtainment of environmental licences for oil and gas offshore exploration activities (Secretariat of Energy and Secretariat of the Environment Joint Resolution No. 3/19). Pursuant to these rules, a public hearing was called in September 2021 as part of the proceedings for the issuance of the environmental licence for the first deep water oil and gas exploration campaign to be carried out in one of the blocks awarded in the offshore bidding conducted between late 2018 and early 2019. Following the hearing, in which the fishing industry and environmental NPOs expressed their complaints, the environmental authority decided to put the issuance of the licence on hold. As of the date on which this chapter was written, the Energy Secretariat was still trying to overcome this decision.

There were no other regulatory developments in this department during 2021 that are worth mentioning.

iii Employment

When acquiring an establishment or ongoing concern, the employment contracts are transferred to the purchaser, who thereafter shall be liable for any labour liabilities in connection to the transferred employees, regardless of whether such liabilities relate or correspond to periods before or after the transfer (pre-existent seniority shall be recognised by the purchaser). The seller shall also remain liable – jointly and severally with the purchaser – for liabilities corresponding to periods prior to the transfer. Employees cannot consider themselves dismissed (indirect or constructive dismissal) except when the transfer implies a change in their salaries or other material benefits or working conditions (location, working hours, etc.).

The transfer of employees under any other circumstances requires the employees' written consent.

The change of control of a company does not entail a change of employer and, therefore, does not allow the employees to consider themselves dismissed and claim the payment of severance.

As regards health and safety, employers must contract mandatory labour risk insurance with a licensed labour risk insurance company. Although the labour risk insurance system was designed to eliminate the risk, on the employers' side, of having to pay labour illness or accidents compensation, which can be very onerous (especially for smaller companies), the fact is that the labour courts have upheld, based on constitutional principles, the employees' right to receive full compensation for the damages suffered as a result of illness or accidents, even if the amount of the damages awarded exceeds the compensation cap contemplated in the mandatory insurance system.

Owing to Argentine labour law and judicial precedents, labour claims are usually won by the claimants, which has led purchasers to include in the stock or assets purchase agreements robust labour representations and warranties and even special indemnities with respect to certain employees. Collective bargaining agreements applicable to energy sector employees (especially oil and gas workers) contemplate several benefits and extra payments, which makes the consequence of dismissals more onerous than in other industries. The statute of limitations applicable to labour claims is two years.

Any termination agreement entered into with an employee as a condition precedent to the closing of a transaction needs to be ratified by the labour authority in order to be enforceable against the employee.

iv Tax

Tax applies on the capital gain resulting from direct and indirect transfers of stock of an Argentine company. If the seller is a local company the gain is taxed at the corporate income tax rate of 35 per cent. If the seller is a resident individual, a special capital gain tax applies, at a 15 per cent rate. If the seller is a non-resident, the seller shall opt between paying a capital gains tax of 15 per cent, or a 13.5 per cent tax on the sale price. The cost base for capital gains purposes should be determined in Argentine pesos adjusted for inflation.

The gains resulting from the sale of assets are subject to income tax at the applicable corporate rate of 35 per cent. Also, depending on the assets included in a bulk transfer, different taxes shall apply. Value added tax shall apply on the sale of fixed movable property and on inventory (the general rate is 21 per cent and 10.5 per cent for certain assets such as machinery). In addition to the above-mentioned national taxes, the following provincial taxes shall also apply:

  1. turnover tax shall apply on the transfer of movable property and inventories, at the rate applied by the relevant jurisdiction (usually around 3 per cent); and
  2. stamp tax shall apply on the transfer of real estate, at a rate of 4 per cent.

The transfer of a participating interest in an exploration, production, transportation or distribution licence is not subject to VAT, although the fixed assets and inventory that are transferred along with it are subject to such tax, as described above.

Stock and assets purchase agreements are subject to provincial stamp tax of 1 per cent of the economic value of the agreement (in principle, equal to the sale price of the stock or assets), unless the transaction is formalised through a properly structured 'offer letter' mechanism. This would require that seller and buyer do not sign the same agreement but rather that one party issue an offer letter and the other party express its acceptance by performing a positive act previously indicated. Although this offer letter mechanism may be used in order to avoid paying stamp tax on agreements whereby participating interests in exploration, production and transport licences are transferred, the assignment will eventually have to be formalised in a public deed (following governmental approval of the assignment) and stamp tax will have to be paid on the deed. If the assignment or farm-in agreement has been entered into as a traditional contract (signed by both parties) and is thereafter formalised in a public deed, stamp tax shall be paid only once.

v Real estate

The transfer of rural lands or land adjacent to country borders may in certain cases require regulatory approval, and restrictions in respect thereto may apply for foreign entities or individuals.

The Rural Lands Law 26,737 contemplates certain limitations (caps on the acreage than can be owned by the same person within a certain area, aggregate acreage that can be owned by persons of the same nationality, acreage a foreign person can own within a certain core area) that would not usually apply to energy companies or businesses, even if they owned property that might be catalogued as 'rural' due its location, considering the use they may give to such lands and the rather small acreage that such companies would own. However, this is an aspect that should be checked in the due diligence and eventually addressed in the assets or stock sale and purchase agreements.

Under Argentine law, the holders of exploration, production or transportation licences do not own the land subject to the licence. Instead, the licence holder is granted access to the land and pays compensation to the landowners, based on the acreage and the wells or facilities to be drilled or built thereon. A similar right is held by the holders of electricity transportation or distribution licences. Therefore, M&A agreements relating to such licences, or to companies holding such assets, should include representations and warranties in relation to easements and other agreements entered into with landowners.

vi Anti-money laundering and anti-corruption

Money laundering is a criminal offence described in the Argentine Criminal Code (Section 303.1) as converting, transferring, managing, selling, charging, disguising or in any other way putting in the market, goods amounting to more than 300,000 pesos, originated in a previous illicit act, with the possible consequence that those goods will acquire a licit appearance. In order to prove the money laundering, the existence of a previous illicit act (a previous illicit fact that has resulted in the acquisition of assets or money including, among others, tax evasion) must be proved.

There are 23 categories of 'obliged subjects' obliged to report suspicious transactions, including, among others, banks, foreign exchange houses, notary publics, customs agents and public registries.

The Argentine Criminal Code punishes bribery involving a national or foreign public officer. Bribery between private parties is not contemplated. Law No. 27,401 provides for the criminal liability of private legal entities, either with Argentine or foreign shareholders or partners, and regardless of whether the shareholders or partners are private or state entities, engaged in such bribery offences.

The sanctions applicable to legal entities for anti-money laundering and bribery offences provided by the law include:

  1. fines (two to five times the benefit obtained or that could have been obtained);
  2. suspension of all or part of the company's activities for up to 10 years;
  3. dissolution and liquidation, when the legal entity was created with the specific and sole purpose of committing the offence; and
  4. loss or suspension of any benefits the company may be entitled to receive from the state.

vii Energy regulation

See Section III above in relation to governmental authorisation in connection with transfers of assets and to restrictions on vertical integration in the energy industry.

viii Other issues

As mentioned above, stringent foreign exchange restrictions have been reinstated in Argentina since September 2019.

As a result of these restrictions, payment of the purchase price for the acquisition of shares by wire transfer to an account outside Argentina shall be made with freely available foreign currency held by the purchaser outside Argentina.

Pursuant to such restrictions, foreign currency received abroad as payment of the price for the transfer of non-financial non-produced assets (such as exploration and production licences) shall be brought to Argentina and exchanged for Argentine pesos at the foreign exchange market.

Insurance

Although representations and warranties insurance has been used in a few transactions related to Argentine companies (contracted with foreign insurance companies), such policies are not yet common in the Argentine market.

Dispute resolution

The Argentine capital market is still small and has limited liquidity and, generally, only a minority of Argentine public companies' stock is traded in the capital markets. Accordingly, public M&A transactions through public deals in Argentina are not frequent, and disputes relating thereto are not frequent either.

Disputes resulting from M&A transactions in the energy sector usually relate to tax and labour matters, as is the case in transactions in other sectors, and, as regards more industry-specific matters, to environmental, royalty and surface fee issues.

As in M&A transactions relating to other sectors, deal terms that mitigate the risk of disputes include comprehensive and detailed disclosures by the seller made in the schedules or disclosure letter attached to the agreement, clear and detailed indemnity provisions and the withholding of a portion of the price in an escrow account, among others. In deals in which the buyer acknowledges certain environmental conditions affecting the assets and undertakes to carry out remediation activity in relation thereto (usually seen in agreements whereby the seller is a large company seeking a clean exit), standby letters of credit have been requested from the purchaser.

Outlook

As mentioned already, M&A activity in the energy sector has been modest during the past two years, in line with M&A activity in other sectors of Argentina's economy.

Although we do not expect the situation to change in the short term, there are certain aspects that might create potential M&A opportunities in the medium term.

Following a disastrous 2020, oil and gas activity is showing an acceptable recovery, basically driven by the development of unconventional hydrocarbon blocks in the Vaca Muerta formation, the resumption of domestic activity after a long lockdown because of the covid-19 pandemic and the recovery of international demand and prices. As regards natural gas, the implementation of the Plan Gas.Ar in late 2020, which allowed producers to obtain reasonable wellhead prices and enter into firm four-year gas purchase and sale contracts, together with the possibility of exporting excess production during the warm season, triggered investments that had been suspended or slowed down since 2019.

However, the stringent foreign exchange restrictions currently in force constitute a big obstacle for investment to flow. The foreign exchange benefit provided for in Decree No. 234/21 for investment projects approved under such decree, aimed at increasing exports, partially mitigates these restrictions, but does not seem the tool that will trigger massive investment in the energy sector.

The passing into law of the promotional regime for investment in the oil and gas industry that the National Executive has recently submitted to the Congress could encourage investment and, consequently, M&A activity in the sector, although we do not anticipate massive amounts of investment and acquisitions or farm-ins flowing as a result of this regime if the bill is passed into law as it is currently written. Having said this, a promotional regime, even in the terms currently contemplated in the bill, would be better than not having any promotional regime at all and would improve expectations with respect to M&A in the oil and gas exploration and production and hydrocarbons industrialisation sectors.

Other aspects that could be important in improving the investment environment in the natural gas transportation and distribution sector, as well as in the electricity sector, will be making progress and completing the tariff renegotiation that has been forced by this administration (when the last integral tariff reviews were challenged or declared null and void) as soon as possible and, in any case, within the term set forth by the government (December 2022), in such a way that tariffs allow licence holders to pay for their costs, execute their investment plans and obtain reasonable gains, in accordance with the basic principle set out in the applicable regulatory frameworks.

In the medium to long term, investment and M&A activity in the energy sector in Argentina should increase owing to the potential of the country's world-class shale resources, the possibility of producing large volumes of natural gas (the cleanest fossil fuel, which will play an important role in energy transition) and the country's renewable energy potential.

In the meantime, M&A activity in these sectors will consist mainly of transactions involving licence holders deciding to leave, and potential investors (probably local groups or investment funds) searching for opportunities to acquire assets for only a fraction of the value they had a few years ago.

Footnotes

1 Pablo J Alliani, Fernando L Brunelli, María Inés Corrá and Cristian A Galansky are partners at Bomchil.

2 Not closed at the time of writing.

3 Currently 5,529 billion pesos (approximately US$62 million).

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