Argentina’s Presidential Election and the Energy Sector

By Luis Ferreira Alvarez

Oil drilling in Argentina. (Photo by Nestor Galina.)

Oil drilling in Argentina. (Photo by Nestor Galina.)

Argentines will go to the polls later this year and elect a new president, ending 12 years of ‘Kirchnerite’ rule. A change in administration could lead to a revolution in Argentina’s energy sector, which has seen drastic changes under the presidencies of Néstor (2003-2007) and Cristina Kirchner (2007-2015). Under President Cristina Kirchner, investor confidence in both energy and the economy deteriorated as the government implemented interventionist policies, including the expropriation of Yacimientos Petrolíferos Fiscales (YPF) in 2012. The government’s justification for the renationalization of YPF was to expand natural gas production in the Vaca Muerta field. However, despite the government’s claim, production of both crude oil and natural gas have declined 10% and 12%, respectively, since 2010 (Figure 1).

Figure 1

The fall in oil and natural gas production, combined with the slowdown of Argentina’s economy, and the promise of substantial oil and natural gas reserves in Vaca Muerta, have pushed the government to make reforms. The reforms (discussed below) are critical for Argentina’s energy sector, which has seen an investment increase of 107% since 2010 in anticipation of production in Vaca Muerta. The primary investor has been YPF, whose investment share rose to 46% from 30% since 2010 (Figure 2). Although YPF’s investment in developing Argentina’s hydrocarbon reserves is a welcome sign, YPF cannot reverse the decline in output alone. Without foreign investors, Argentina’s energy capacity is unlikely to materialize. This makes the upcoming presidential election an important moment for the energy sector.

Figure 2

Recent polls put Daniel Scioli, governor of the Buenos Aires province and member of the governing Justicialista Party, at 45.2%, just above the 45% winning threshold set by Argentine electoral law. The other main candidates, Mauricio Macri and Sergio Massa, polled at 32.4% and 13.8%, respectively. Furthermore, Scioli’s lead has been consistent for the past few months, increasing his chances of being sworn-in as president on December 10, 2015. Finally, the Peronist-Justicialista Party is likely to win a majority of seats in Congress. This would make governing Argentina very difficult for Macri or Massa, whose parties (Commitment to Change and Renewal Front, respectively) do not have substantial national support like the Justicialista Party. Governing Argentina for any non-Justicialista president would be extremely difficult with a Peronist-dominated Congress.

With the Justicialistas set to remain in power for the next four years, Argentina’s energy sector could capitalize on reforms that are aimed at attracting international investors. In October 2014, the government overhauled Argentina’s hydrocarbon law. The law aims at simplifying foreign investment in the country, and provides multiple incentives for foreign companies, such as capping royalties at 12%, increasing the concession time for unconventional (35 years) and offshore (30 years) exploration and development, and allowing firms that invest over US$250 million in Argentina to export 20% of their production, which is exempted from an export tariff. The law also curtails the power of the provinces to tax producing firms and to change their auction rules. Instead, the provinces and the federal government will work together to set new national rules. The government also reduced oil export tariffs to encourage production and export, and to show its commitment to the new hydrocarbon law. The Argentine government has taken other steps to mend its relations with foreign firms, such as the US$5 billion settlement with Spain’s Repsol, from which Argentina nationalized YPF in 2012.

These are steps in the right direction, and the next administration needs to uphold the reforms. Furthermore, the next president’s task will be to work on the details of the recent reforms and attract more investors despite the current low oil and natural gas prices. The commitment by foreign firms such as Chevron, Petronas and DOW Chemicals is a good sign that companies remain interested in Argentina’s energy potential.

Similarly, energy subsidies need to be reformed to ensure that the sector becomes competitive. Currently, Argentina’s domestic market subsidizes producers with oil prices set at US$77.50 per barrel and natural gas at US$7.5 per million British thermal units (BTUs). While the subsidies help producers, it does not help exporters, who find their profits reduced as they are constrained by international prices. These domestic prices remain a challenge for producers in the long run, as oil and natural gas prices are likely to rise above the Argentine price cap, making it uncompetitive to produce and export oil and natural gas. The new government will have to reform the subsidies so that firms are able to adapt their production according to market forces instead of government price mandates.

Finally, the next administration will need to keep the hydrocarbon producing provinces in line. Although the reformed hydrocarbon law limits provincial power over energy concessions, the pushback the provinces (especially hydrocarbon-rich Neuquén, Rio Negro, Mendoza and Chubut) mounted against the federal government in the run up to the overhaul of the law is likely to resurface once production picks up. The new government should not only enforce the new hydrocarbon law, but also ensure that the provinces are treated as equal partners when taxes and concessions are negotiated.

Argentina has the chance to become a regional energy powerhouse, but it will all rest with the decisions of the next government. Although the Kirchner-era saw turmoil in the energy sector, last year brought a fury of reforms and reconciliation with private companies. The next president needs to uphold these steps and move forward with more concrete plans for the energy sector. However, strong state presence related to energy and the overall economy is likely to continue, not only because the Peronist Scioli seems likely to become the next president, but due to the overwhelming support for state intervention that exists within Argentine society (Argentine polls show that 79% of Argentinians prefer the state to control public services). For the Argentine energy sector to capitalize on the fortune it is sitting on, moderation and compromise will need to become the norm between the government and foreign investors.

Luis Ferreira Alvarez is a research analyst for an energy consulting firm and a UC Berkeley alum.

Luis Ferreira

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