Two-and-a-half years have passed since a non-Peronist government was elected following more than a decade of populist administrations led by the Kirchners. Since then, there has been a significant change in the government’s attitude towards foreign investment.
The past decade (in which Argentina was helped by an international commodity prices boost) saw Argentina experiment with a closed, regulated economy based on an ever-growing fiscal deficit fuelled by one of the highest inflation rates in the world, with capped or frozen prices for energy and utilities, over which subsidies were spent to make energy consumption prices very low. Price and foreign trade controls (on exports and imports alike) or discriminatory taxation were imposed during this period, with foreign exchange ring-fenced by restricting access to the official foreign exchange market (therefore leaving an increasing gap with real foreign exchange rates). This eventually led to the electoral defeat of the Kirchner government.
The 2016 inflation rate of 41 per cent was stabilised, and strict monetary policies have been applied following an IMF stand-by loan of US$57 billion.
The former government’s corruption has now given way to an avalanche of prosecutions in search of transparency with the widest reach seen to date.
Energy policies will be available for developing sound projects in non-conventional oil and gas projects, offshore exploration, energy-market opportunities, lithium mining, and other mining sectors.
Investors are still waiting to see if foreign exchange losses will not be incurred by their investments owing to high inflation, and the stabilisation of a re-balancing of energy prices emerging out of the suppressed or capped prior tariffs of the past, which are now gradually subject to open market policies such as the opening up of energy to foreign trade.
The government has launched programmes in several rounds offering public bidding for foreign investment in renewable energy and thermal energy.
As for the making of a new open market of energy prices, there is still much to do, especially owing to the difficulties brought by the decline in international energy prices while reserves-rich Argentina is struggling to become cost-competitive. The government’s support of crude oil, incremental gas and non-traditional hydrocarbon exploitation has ceased for new projects.
Given the drop in shale hydrocarbon extraction costs, which are aligning with those of the United States, the opening-up of the natural gas market both locally and for export is being put in place through numerous, still-to-be-coordinated measures, involving public bids for the state’s purchasing of short-term gas to be used for power through the electronic gas market board (in Resolution ME 46/18 a price cap was set forth between US$3.5 and US$4.4 per million British thermal units (MMbtu) depending on the relevant basin.
During the 1990s, significant foreign direct investment was made in the Argentine energy and infrastructure sectors (more than US$55 billion). The following decade witnessed significant investment in the mining sector under a special legal regime.
The areas where there will be a recovery, because of the realignment of prices and markets as per the policies put in place, are those related to:
- agriculture and farming, although having suffered flooding and drought recovering;
- infrastructure, with its new open bidding process for public works, through public-private participation projects will receive stimulus guaranteed by a sovereign debt fund;
- energy, owing to the strong commitment by the government to correct the relative prices, regulatory-induced imbalance of the sector thus gradually eliminate government subsidies to consumers. At the end of 2016, the government received six times as many offers, both for thermal and renewable energy, as submitted in the tenders, and the limited size of the experiment will need to adjust to a general framework for a deregulated market, is still lacking; and
- offshore oil and gas, where the bidding process for exploiting concessions for numerous fields has begun, in addition to current concessions.
A regulatory induced gradual increase of renewables’ share of the power generation matrix is anticipated to reach 8 per cent of the aggregate power supply by the end of 2018, but has once more been postponed (it is less than 2 per cent at present, excluding hydro). This has been attended by successive rounds (round 1, later on extended by round 1.5, and round 2, by Resolution MEM 275/17, for which 223 offers were received) of public bids for 20-year supply agreements, at a price subject to escalation, to attempt to reach such targets in the supply side. Large-scale consumers (industry, etc) with a capacity demand above 300Kw will be forced to comply with the 8 per cent quota of renewables with respect to their own overall power demand.
The power purchases by the government would compete with the remaining renewables offers that may be installed for industrial consumers, subject, however, to an iron-fisted choice, once every five years, to decide if its 8 per cent renewables consumption quota will be filled either through purchases from Compañía Administradora del Mercado Mayorista Eléctrico (CAMMESA) or through the combination of both of the above consuming renewables’ sourced energy from the CAMMESA’s Joint Sales pool and from other renewables’ sourced energy, but facing in such case incremental costs for power reserve and other charges. Thus a quota system segregating the captive renewables demand from the rest of the energy aggregate supply, and a forced choice between (i) government-backed supply (at median price of all the bids referred above) and (ii) the supply in (a) a supposedly free market, or (b) auto generation by large consumers themselves, seems to be a confusing method to assure the government, by making the large consumer’s bet of opting out quite risky, that the already acquired future production by the government from the winning bidders will effectively face its captive demand.
In effect, the individual default of the yearly quota of renewables consumption by each large industrial consumer, and ensuing power consumption to match such deficit, from other sources than the renewables contracted out of the governmental offer mentioned in (i) above will be heavily penalised.
The intermittency of renewables, which were allowed to bid with no capacity commitment pretends to be solved by the government through offering capacity back-ups for the pass-through of such contracts to large consumers, at a price that will be the subject of separate bids, with unpredictable results.
The complexity of the system is compounded by the grid shortcomings, with a priority of dispatch adding to the uncertainty of making such choices on a mid- to long-term basis.
To attempt to boost investments while waiting for the yet-to-be implemented power open market, new bid rounds are called (Resolution SE 287/17) for power supplies from newly converted to combined natural gas-fired cycle turbines, or from co-generators, to be dispatched through CAMMESA, the dispatch organ and exchange broker, transformed into being now the state’s mega trader in the regulated power market.
In anticipation of such change scenarios for after the end of these subsidies, the merger of the telescoping companies controlled by Messrs Bulgheroni, and shared with BP and a major Chinese oil company (CNOOC) as partners, Panamerican Energy, Axion Energy (refinery and gasoline stations grid) and a holding company, Bridas, has given life to a mega company with full vertical integration across the whole oil and sub-products sectors, to face increased efficiency with expanded markets, beyond market sales of crude oil, and allowing the development of chemical manufacturing (solvents, fertilisers, plastics out of polypropylene and pesticides) thus going beyond energy fuels.
Dow Chemical has been looking for another integration path by means of adding upstream prospects to assure feedstock for its petrochemical plant in Bahía Blanca, in the province of Buenos Aires. Shell sold its petrol station forecourt network to its Brazilian partner company thereby sharing with its partner the title on this territory too.
FDIs, which were active in the exploration and development of oil and gas fields, through direct contracts with the once again state-controlled Yacimientos Petrolíferos Fiscales (YPF) - the major company acting in such areas, on account of its sizeable areas under concession in the Vaca Muerta and Los Molles shale formations - are now taking a break, due to the still-to-be-defined framework, aside from the now-closed-to-newcomers’ special programmes for price enhancement of incremental and non-traditional natural gas. Argentina has been ranked by the US Energy Information Administration as the third-largest shale oil and gas resources holder in the world (with good prospects on the basis of abundant water resources and pipeline capacity), with companies such as Chevron, Exxon, Total, Shell, Pemex and Petronas attracted to exploring and developing such new formations.
The programme, now over for new entrants, installed by Resolution ME 46/17 and Resolution ME 447/17, extended the US$7.5 per MMbtu government’s price support for non-conventional (tight or shale) gas, and with a declining path (50 cents per year until 2021 at US$6 per MMbtu), guaranteeing such a floor with respect to the median price of the aggregate natural gas (conventional or not) sales of the applicant.
The aim is to support investments by YPF as the dominant shale gas holder of title and, to a lesser extent, Total, Panamerican Energy, Wintershall, Shell, ExxonMobil and the newer project by Tecpetrol, which are nearly all in the Neuquén province basin. Tecpetrol is materialising its bold plans to expand its rig operations (and horizontal wells) to reach substantial investments and ensuring shale natural gas production increases in the years to come, based on the need to reduce the gas import gap, the extended concessions granted, and productivity curves assisted by cost reductions, trade swaps and other factors. Thirty-five-year extension of concessions is the latest trend, by converting concessions to non-conventional, mixed with conventional, ones (eg, CAPEX and others). New infrastructure projects are underway, such as gas processor plants and new pipelines (Tecpetrol) to connect to the main ones.
Paradoxically, if the natural gas (from any source) market were free from any remaining regulatory interference, it would reach an import parity price (hovering around US$7.7 per MMbtu for imported liquefied natural gas (LNG) regasification sources, mid 2018), since Argentina is a net importer of up to 25 per cent of its aggregate gas consumption, thus freeing the government of the heavy burden of sustaining these programmes (as the price differential between the floor price and the domestic market price would be substantially reduced). A soft landing could thus be attempted, while freeing the government from the burden of having to end the subsidies, in essence the other side of controlled prices. The postponed natural gas open market is being cautiously announced for the above-mentioned natural gas seasonal exports, and, further, for establishing a permanent export current of shale gas.
After having imposed a 10-year ban (through a super tax), and after an incursion into gas exports (swaps), through Decision 962/17 (amending article 3.1/5 of annex I of Decision 1738/92), Resolution 104/18 of the Ministry of Energy (ME) authorises gas exports, subject to the local market’s actual and forecasted supply priority assessed by the ME from time to time, for:
- long or short term, less than one year, on firm or interruptible supply basis;
- seasonal (summer) authorisations, less than five years long; and
- authorisations for exchange-swaps of gas imports and exports of the same volumes within 12 months.
Contract terms shall be public and overall supply commitments, production, certified reserves and shipping rights will have to be disclosed by the applicant to show its spare export capacity throughout the contract term. Third party access is granted for any request by local consumers the same terms as publicised, ceteribus paribus, after a still to be streamlined procedure of offers exchange. Volumes exported are excluded from the declining-base guarantee granted under Resolution ME 46/18. Power exports will also be allowed, by computing their implied gas-by-wire indirect exports.
The new regulation for exports is meant to assure new, significant, investments in shale gas may use the existing international gas pipelines, through which exports to Chile were made with conventional gas more than a decade ago, thus resolving bottlenecks to reach local consumption destinations, while opening a new market window for improved conventional gas investment projects.
The disputes in US courts with Argentine sovereign bond holdouts has nearly come to an end. Holdouts had rejected a debt restructuring plan, approved in 2005 (with a substantial haircut) by a large majority, and had obtained since from such courts a string of decisions to enforce the award by means of preventing Argentina (and its financial agents) from paying such bonds (issued in exchange for the restructured ones, subject to New York jurisdiction) if the holdouts were not paid simultaneously.
A settlement was reached with practically all of them as one of the first measures taken by the new government.
Prior settlement (2013) of five different awards from the International Centre for Settlement of Investment Disputes (ICSID) and the restructuring of the Club de Paris debt by Argentina, purportedly enhancing the opportunity to return to international financial creditworthiness, which had been set back by this dispute, were followed by some other settlements with other ICSID claimants (El Paso and BG Group in 2016, and Total in a second wave, Resolution MF 112/17, ending an ICSID arbitration), as referred to below.
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