Short Circuits in Argentina’s Energy Crisis
While Argentina’s government and private sector continue to blame each other for the country’s energy crisis, thousands of Argentine companies are suffering from shortages of gas. The crisis could mean losses of up to $3.3 billion for Argentina, just when that country was starting to emerge from the economic crisis triggered by the devaluation of 2001. Moreover, the crisis is no longer limited to Argentina; the country has significantly reduced its gas exports to both Chile and Uruguay.
One Argentine company suffering from the crisis is Valot S.A. The tissue manufacturer invested more than $900,000 in R&D for a new line of paper towels for public toilets, but Valot wound up without any supply of gas. The fuel is essential for keeping factories working, despite machinery failures, in sectors such as paper manufacturing. Valot’s problem was not an isolated distribution problem, but merely the tip of the iceberg. At least two years ago, reductions in energy supply throughout Argentina were the straw that broke the camel’s back during a severe energy crisis that erupted when demand for home-heating gas increased dramatically during the fall.
The main victims of the current crisis are industrial users and consumers. Moreover, Chile and Uruguay have also suffered. Argentina has reduced its gas exports to both neighboring countries. According to a report by the industrial union of Buenos Aires province, 65% of the factories [in that province] have recently suffered a shortage or disruption of gas supply. If that continues, 96% of all companies will have to institute temporary layoffs of personnel. According to current estimates, Argentina could lose about $3.3 billion because of declining production. Moreover, according to Freyre and Associates, a consulting firm, the country could suffer $2 million in lost export revenues.
Two months have passed since this problem came to light, yet analysts are still trying to explain its origins. Meanwhile, the government of President Néstor Kirchner and the country’s energy companies blame each other for the crisis. The companies argue that the government failed to take responsibility for making the investments that the country needed to take advantage of its gas resources. They also say the government failed to allow the companies that supply public services [such as gas] to raise their rates after the devaluation of 2001. In the absence of such rate hikes, service providers lost money and were unable to make the necessary investments.
Valot S.A. has supplied services for public toilets for thirty years. Eduardo Valot, who heads the firm, says, “The first thing that the government should have done was revise the contracts when privatization took place. The contracts are not legitimate, and they do not benefit both parties. They have hidden agendas. They give [previously state-owned] companies many benefits and few responsibilities. Plus, the government failed to monitor things, to see that [the companies] complied with the few responsibilities imposed on them.”
Valot is referring to the deregulation of the energy sector that took place during the era of [dollar-peso] convertibility, when Carlos Menem was president of Argentina. At the time, the government privatized state-owned companies supplying services for telephones, electricity, gas and water.
By 2001, when Argentina suffered its worst economic crisis in history, rates set by privatized companies were already well behind the times. After devaluation of the peso, the U.S. dollar was worth three Argentine pesos [compared with one peso for each dollar before devaluation.] Despite that change, no policy changes were enacted from that point on. When Kirchner became Argentina’s president, he promised to prohibit any [upward] “adjustment” of prices. “The energy crisis combines all of those factors: devaluation and a failure to raise rates after the new government took over. Moreover, the constant change in Argentina’s political and economic situation made things riskier for companies, and they stopped investing,” says Gerald McDermott, a management professor at Wharton.
According to Alberto Müller, an economist at the Phoenix Plan of the UniversityofBuenos Aires, a secret deal to raise prices is a possibility, even if there are clear shortages of gas. “We could attribute the government’s excuse to pressure to raise [gas] prices. The government could simply publish a decree that authorizes the secretary of energy to grant an adjustment of prices to gas producers. Producers could be holding onto their gas [now], so they can improve prices. [If this is true,] the government act must quickly; it must take vigorous action to reveal this sort of maneuvering. The government must apply its regulations and controls. If the government fails to do that, there’s no way it can avoid getting involved in such maneuvering.”
Beyond questions of who is at fault – or whether there will be shortages of gas and electricity this winter – nature is another key factor. Drought last summer significantly undermined electricity generation capacity at such power stations as Yaciretá and El Chocón.
Moreover, there is a shortage of concrete solutions for the short, medium and long term. The Kirchner government was slow to present its package of measures, and they wound up generating equally intense reaction from supporters and detractors. “The government seems to be running behind events. For example, it waited too long to readjust rates. In managing this crisis, its vision is mainly short-term,” suggests Muller.
The administration’s first move was to import one million tons of fuel oil from Pdvsa, the Venezuelan oil company. Although that fuel can replace industrial gas, it is much more expensive and it generates higher levels of pollution. Next, the Argentine government signed an agreement to import gas from Bolivia at a higher price than it pays for domestic Argentine gas. The deal prohibits Argentina from later exporting that gas to Chile. That is because Bolivia still maintains its long-standing territorial dispute with Chile concerning [land-locked Bolivia’s] “outlet to the Pacific.” [A portion of the Pacific coast in northern Chile has long been claimed by Bolivia.]
Argentina’s relations with Chile have been faltering ever since Kirchner decided to reduce gas exports to Chile by 4.8 million cubic meters in order to focus on Argentina’s domestic needs. Ninety percent of Chile’s gas consumption comes from Argentina, and Chilean president Ricardo Lago has threatened to bring the case to international arbitration. “Perhaps the diplomatic problem could have been managed more skillfully,” explains Müller. “Bilateral relationships are important, and they should have managed things with greater care. Chile doesn’t want to depend on another type of fuel, such as fuel oil, which is more expensive.”
According to critics, if the Argentine government had planned for the crisis, companies could have prepared for adapting their machinery to another source of energy. Valot says, “From the outset, I suggested to the government that they do what Brazil did during its crisis. Everyone should set a limit on energy consumption [in advance], not just cut down on consumption later, when the idea occurs to them. We had to make a lot of phone calls and complaints to the government before we got them to understand what we needed: Stop operations for several days at a time instead of [briefly] every day; when machines manufacture paper, they have to work continuously.”
Argentina’s domestic consumers have yet to suffer any supply cuts (the thermal plants work with gas to produce electricity.) However, the government has asked all Argentines to work together on a plan that saves energy and helps industry [by freeing up supply to keep machinery working]. The government has launched a program that involves both rewards and penalties. It provides incentives for residential users to lower their electricity consumption by 5%, setting maximum consumption at 600 kilowatts per hour bimonthly. In return, consumers are rewarded with lower rates. On the other hand, consumers pay a 50% higher rate when their consumption exceeds the acceptable limit. When it comes to gas for cooking or heating, the consumption limit is set at 1,000 cubic meters per year, and the penalty for excessive use is a rate that is 40% higher.
In another key decision, Kirchner opted to create a state-owned enterprise called Argentine Energy S.A., which will focus on offshore exploration for hydrocarbons. Both the private sector and political analysts rejected the proposal. They see it as a return to the past. According to McDermott, “The idea of setting up a state-owned company is typical of Néstor Kirchner. History shows that when Kirchner was governor of Santa Cruz, an oil-rich province, he had no policy for development. The fear is, development does not matter to him … Kirchner’s minister of infrastructure, Julio de Vido, has the same approach. Both have a problem drawing up a coherent policy for public services.”
In any case, McDermott says, “We should not react negatively to the idea that the state intervenes in this market. There are some things that the state must do – for example, getting the state gets involved in the development of institutions for the gas industry.”
Business leaders also felt under attack by changes in taxes imposed on exports of gas and petroleum products. Export taxes will rise to 25% for crude oil; to 10% for diesel oil; and to 15% for LPG in cylinders. This will allow the government to collect an additional $240 million [in taxes] this year. These funds have been earmarked for construction projects outlined in the government’s package of measures for dealing with the energy crisis.
Total investments will rise to $11.149 billion. Plans also call for the extension of the San Martín gas pipeline by TGS, an Argentina company, and the completion of both the Yacyretá dam and the Atucha II nuclear power plant.
An Uncertain Viewpoint
The energy problem is only one of the key challenges facing the Kirchner administration. Others include insecurity, poverty, street crime, and debt. In such a climate, the government’s image – along with public confidence – has suffered damage. According to the Di Tella Foundation’s school of government, confidence in the government fell by 15% in April, compared with the previous month.
“We must understand that the gas sector is operating within a context of overall uncertainty,” says McDermott. “The truly troubling thing is how the crisis will unfold over the next twelve months. This period will provide a fundamental test for the government when it comes to energy because the problem is both short-term and long-term.”
According to Müller, the government should not take lightly something as sensitive as energy. “It is hard to substitute [energy sources]. Above all, there is a close linkage between gas and electricity, and there is no substitute for electricity. Moreover, you have to worry about the loss in management capability. If there are energy problems, we have to plan for them. We must address not only what is urgent, but also the medium and long-term.”
Business leaders are also worried about the political, social and economic environment in which they are working. “The energy crisis is creating distress because, once again, we don’t know which direction the country is moving in,” says Valot. “With this government, you don’t know what is going to happen. We are still waiting. I still don’t believe that they have spelled out where they are going.”