Argentina Faces an Unknown: How to Regain Its Energy Independence
Soon, winter will begin in Argentina. The average temperature usually drops to five degrees Centigrade (41 degrees Fahrenheit), and as low as below zero Centigrade in some of the southernmost locations in the country. Individuals and companies are preparing to increase their energy consumption, but at prices that are getting higher and higher, especially for the poorest segments of the population who consume large quantities of imported gas.
“Twenty years of energy that is abundant, discovered and cheap are over,” notes Alieto Guadagni, a professor of economics at the Torcuato Di Tella University, who served as Argentina's energy secretary in 2002. “We are at a historic moment when energy is scarce, imported and expensive because of the decline in production and exploration.” The big question now, he adds, is “what is the best policy to bring back the [country's] lost self-sufficiency.”
“Argentina possessed 401 million cubic meters of proven petroleum reserves in 2010, which was then the equivalent of 13 years of consumption. When it comes to gas, proven reserves were 359 billion cubic meters, which was then the equivalent of nine years of consumption,” notes Camilo E. Tiscornia, professor of economics at UCA, the Catholic University of Argentina, and director of C&T Economic Advisors. This means that the country's crude reserves dropped by at least 0.4% and its gas reserves dropped 5.3%, compared with the previous year.
According to Guadagni, “Nowadays, we produce barely two-thirds of the petroleum that we produced at the end of the [20th] century, and 15% less gas than we produced in 2004. We’ll need annual investments equivalent to 3% of our GDP for several years -- that is to say, some $400 million. Who is going to invest that much money?”
Argentinaimports about 20% of the natural gas that it needs in the form of liquid natural gas (LNG) via gas pipelines from Bolivia. On the other hand, it imports almost 50% of the fuel oil that it uses for its electricity generation and transportation from Venezuela. That country also supplies Argentina with fuel oil, an inefficient and dirty source of energy, for its electricity generation.
This difficult situation was put on the back burner by the administration of President Cristina Fernandez de Kirchner and previous governments when the economy was growing by an average rate of 8%, and energy consumption was increasing. The government did not resolve the problem of subsidies that had been established during the crisis of 2001, when the country declared a default on its sovereign debt and suspended its debt payments. In the budget approved for 2012, energy subsidies exceed US$16.6 billion.
In an unforeseen move, President Kirchner announced on April 16 that the government was expropriating 51% of the shares of oil producer YPF, which specifically affected Spanish oil firm Repsol’s ownership in YPF. The government accused the Spanish company of withdrawing its dividends rather than reinvesting them in Argentina. The administration's intention has been to return to self-sufficiency and reverse the downward slide of energy production and investment.
A New Chapter
Argentinahas to work on both the supply and demand of hydrocarbons, “maximizing supply and minimizing consumption,” argues Guadagni.
When it comes to supply, Guadagni notes that there are three things to think about. “First of all, the program enacted by ENARSA (a state-owned corporation) to explore the continental sea has achieved nothing, unlike the efforts of BHP Billiton, the Anglo-Australian firm. Second, on-land exploration for conventional resources of oil and gas, as well as for unconventional sources such as shale gas, is costly and complicated both from a technical and environmental point of view.” He estimates that if Argentina were to increase its supply of energy through greater exploration, it would take the country three years and cost it some US$3 billion. Third, adds Guadagni, it would need to spend at least US$4 billion on manufacturing new gas-oil refineries, and about US$1 billion on upgrading its port infrastructure.
While Argentina faces challenges improving its balance of payments, and it spends increasing amounts on imported fuels, experts believe that it will also be difficult for the newly nationalized YPF (which had been privatized in 1999) to achieve similar levels of investment in its effort to restore Argentina’s energy independence.
“There are rumors that American and Chinese companies could be interested in investing in Argentina,” notes Tiscornia. “But the big problem is how to convince a new private investor [to invest in YPF] when Repsol was stripped from that company in such a messy way. Beyond that, there is growing uncertainty with regard to the country’s macroeconomic situation, which works against any sort of investment.” Among other things, inflation is about 30%, according to private-sector economists. In addition, through what is known locally as the “corralito verde” -- literally, "the little green corral" -- the Argentine government has intervened in foreign exchange markets, imposing stringent controls on the purchase of U.S. dollars.
Guadagni notes that “the coffers are empty. And to impose this cost on consumers is something difficult from a political viewpoint. The big question is what the government will do in order to mobilize private investment.”
From the demand side, Argentina’s consumption would have to decline “while its electricity infrastructure increases, because Argentina is one of those countries that uses more gas when other countries are doing the opposite,” says Guadagni. In fact, the country has the greatest fleet of natural gas-powered vehicles in the world. In addition, many families access gas over public networks; a great portion of electrical generation operates through gas, and the petrochemical industry relies on gas as well.
According to INTI, the National Institute of Industrial Technology, it could be possible to achieve savings of about 20% in the consumption of fuels and electrical energy in almost any installation without making further investments. Energy efficiency, INTI says, can result from changes in human behavior and from using the most efficient technologies, teams and tools. Mario Ogara, who heads INTI’s energy division, notes that numerous countries have put into practice the concept of "demand-side management." “They have learned that it is absolutely necessary to promote the reduction of consumption through various means, such as government programs, regulatory frameworks, promotional rate periods, public campaigns for awareness, human resource training, technical assistance and the development of more efficient teams and equipment.”
Legal and Political Security
In order to get investors to bring in their capital, Argentina needs to establish predictable economic, political and legal horizons, experts note.
“Essentially, a better regulatory framework is one that gives appropriate incentives to producers,” Tiscornia points out. He notes that in the framework of official policy for subsidies for domestic consumption, local Argentine producers of hydrocarbons receive prices for their hydrocarbons that are a lot lower than international prices. On the other hand, the Argentine government upholds international prices for foreign producers when it must pay for imports. In addition to making this readjustment, “which is a situation specific to the energy sector, [the government] would have to improve the general climate for investment since, over the course of recent years, Argentina has become less and less predictable -- especially because of the growing discretional intervention of the government in the economy,” Tiscornia adds. Over the past eight years, Argentina has had a record of inconsistency when it comes to releasing official data; ever since INDEC (The National Institute for Statistics and Census) got involved in the process, the country’s statistical data stopped being realistic, critics contend.
With respect to new legislation, Guadagni notes, “They need to change the libretto because the [script] they are working with dates from 1968, when the de facto president was Juan Carlos Ongania. They have to improve the basic parameters with respect to the technology they are going to use, as well as the economic framework and the legal aspects in order not to succumb to crony capitalism.”
According to Guadagni, “Today, [Argentina] produces barely two-thirds as much petroleum as it was producing at the end of the last century (1999), and about 15% less gas than it produced in 2004. This is something new in the history of the Argentine hydrocarbon sector, which had not recorded a single decade of declining production ever since hydrocarbons were first discovered in 1907.”
On May 3, the Argentine Congress approved the expropriation of the shares of YPF, and Cristina Kirchner appointed Miguel Gallucio to head the oil company. He is an experienced technician, according to people in the sector. Now 51% of its shares belong to the government, and an additional 49% are divided among the provinces (25%), the Argentinean Petersen Group (25.4%) and Repsol (6.4%). Beyond that, 1.7% of its shares are traded in the stock market. Observers are still waiting for the Spanish government to react in international economic and political forums in order to achieve compensation for the harm that has been done to Repsol.
Meanwhile, the country is facing restrictions on its supply of energy, and Tiscornia notes that “each winter is getting more difficult than the previous one. For several years, they have already been implementing numerous supply cuts, especially to industries, in order to deal with the shortages. That will happen again this year. Nevertheless, the intensity of the cuts could moderate this year because local economic activity is currently stagnant [which is moderating demand for energy]. On the other hand, they will once again increase energy imports in order to improve supply, and this will have a fiscal cost.”
Perhaps, adds Guadagni, Argentina needs to take a close look at neighboring Brazil, a country “where the resources belong to the nation -- not to the provinces, as they do here [in Argentina]. [Brazilians] have a national oil agency, where the most important state-owned companies in the world have a presence in order to make investments. Around here, the government has never developed a vision for guiding the future of the country.”