Like most things in deeply troubled Argentina, the fate of a controversial new revenue-raising 20% tax on oil exports is in question. Argentine Cabinet chief Jorge Capitanich says the tax may be revoked in favor of a royalty-payment measure, according to a news report. The policy backtracking occurred while oil workers began an open-ended strike, fearing the export tax will result in widespread layoffs. George Gaspar, an analyst with Robert W. Baird & Co., Milwaukee, says, "[The tax] seems to be the way a lot of countries go. They implement things like this, then they find out that it really hurts exploration and development activity, and reverse course along the way. But I guess Argentina's going to have to experience it for itself." In recession-racked Argentina, the government defaulted on its $141-billion of debt and untied its peso from the U.S. dollar. In one two-week period, the country went through five presidents. Though the export tax was intended to boost revenue, Gaspar says there isn't any question it will hurt near- and intermediate-term drilling, especially for exploration. "It's a tremendous disincentive to have that kind of a tax. The government has made a major, major error in implementing it. In generating that revenue stream, they're putting at risk a sizeable amount of exploration activity that's going to be deferred. The bottom line is this is not good for American oil companies, and it's not good for oil-service operators dealing there." Pioneer Natural Resources Co., Irving, Texas, had to take a 2001 fourth-quarter charge of $7.7 million because of Argentina's economic instability and devaluation of the peso. Pioneer has postponed all drilling in Argentina; 17% of the company's reserves are in the country and 15% of its fourth-quarter operating cash flow was as well. At UBS Warburg LLC's recent energy conference in New York, executives were vague as they assessed the situation. The conference was held shortly before the 20% export tax was announced. Devon Energy Corp. chairman Larry Nichols says the company's Argentine properties, which had a $100-million PV-10 value at the end of 2001, are "the only fly in our divestiture ointment." Devon has a divestment program under way since its acquisition of Mitchell Energy & Development Co. and Anderson Exploration Ltd. "Interestingly, the [currency] devaluation that took place there helped. We do business in pesos that have a much lower value now and sell production into world markets in dollars. That may be offset by possible added expenses, such as export taxes," Nichols says. Vintage Petroleum Inc. executives are keeping a close eye on the situation. "All the oil we sell is under three-month contracts," says Robert Phaneuf, vice president of corporate development. "We haven't had much experience being paid in pesos. But we tend to benefit on the cost side because our contract specifies we pay for local services in pesos. Accordingly, we'll be paying less under a floating rate. Longer-term, the road probably is smoother than it might appear the next couple of months as everyone negotiates the differences." For now, Vintage still plans to spend money in Argentina. Nearly 32%, or $55 million, of its 2002 nonacquisition capital budget is targeted for South America, with $36 million of the total allocated for exploitation projects in Argentina. Approximately 37% of Vintage's proved reserves at year-end 2001 and targeted production for 2002 are in Argentina. Brad Beago, who covers Vintage for Credit Lyonnais Securities (USA), is expecting Vintage's revenues to drop approximately $20 million in 2002 due to the export tax. -Jodi Wetuski and Nick Snow
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