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Juan José Aranguren, the former Shell Argentina CEO, is Argentina's new energy minister. (Photo: Argentine President's Office)
Thursday, February 18, 2016
Legal Briefs

Argentina: Energy Renaissance?

Strong optimism over Argentina’s energy sector under new President Macri.

Inter-American Dialogue

Soon after winning election, Argentine President Mauricio Macri said his country and Chile may resume trading natural gas in the coming years, something that would be made possible by anticipated gains in hydrocarbon production. Meanwhile, national oil company YPF also announced in December that it will join with Dow Argentina to invest $500 million into shale gas exploration, one of the biggest investments in Argentina to be announced in years. Will Argentina’s energy sector under Macri’s administration see the big advances that optimists are hoping for? What other major changes will Macri make to the energy sector early in his presidency? Will business-friendly Macri be able to attract more FDI in the current climate of low global oil prices?

Isabella Alcañiz, assistant professor of government and politics at the University of Maryland: The market signals are there: a new ministry of energy led by a former Shell executive; significant cuts in the 2016 budget of government subsidies for natural gas and electricity consumers; the lifting of capital controls; and the devaluation of the peso (this measure mainly geared toward the agricultural sector). As a business magnate himself, President Mauricio Macri no doubt has the bona fides to persuade international investors that the country, under his leadership, is open for business. Many celebrate, or fear, Macri as a 21st century version of Carlos Menem, the 1990s market-liberalizing Peronist president. But Mauricio Macri is no Carlos Menem. The difference is in the party. Macri’s Cambiemos political party holds only 5 percent of the Senate and 20 percent of the lower chamber. Cambiemos does not do much better at the federal level, given that the party has only two—three counting a coalition government—provinces. In a country with such a risky reputation, many of the key macro changes that are needed to attract more foreign investors to the energy sector will require cooperation with the opposition. To address the fiscal deficit, tame rising inflation and negotiate with the vulture funds holding out for debt repayment, Macri will need to go through Congress. In his first weeks in office, Macri has been willing to alienate opponents by issuing a series of executive decrees, but to ensure deep reform, as Menem would tell him, you need laws.

Jeremy M. Martin, director of the Energy Program at the Institute of the Americas: Macri’s election has unleashed huge interest and optimism about the country. There is a new outlook for foreign policy and Argentina’s international posture. Macri has made clear his intentions to boost the nation’s flagging economy and give the energy sector a much-needed shot in the arm. To wit, only a week into his term he declared an energy emergency through 2017 and with it powers to stave off outages. Moreover, he moved quickly to establish an economic cabinet, including a new ministry of energy and mines with former head of Shell Argentina, Juan José Aranguren taking over as minister. Energy contributes around 5 percent of Argentina’s GDP and 6 percent of its export revenue. But this figure must rise if the country is to revitalize the energy sector as a motor for economic growth and a significant driver of reform. Once a major energy exporter and pioneer in the development of natural gas and regional integration, energy imports are now costing Argentina more than $6 billion per year. The development of Vaca Muerta’s shale resources will require an estimated $200 billion. But the good news is that investment is arriving. Chevron, ExxonMobil, Petronas, Wintershall and Shell continue with important projects, with Dow joining the fray. A critical task for the new president will be to generate legal, regulatory and judicial certainty. A central element of revitalizing the energy sector requires restoring confidence in the nation’s institutions and regulators. These mundane but fundamental pieces must be confronted with alacrity by the new administration and its economic cabinet and will go a long way to reassuring investors that Argentina is once again ready to play by the rules of the game. The Macri administration has a long road ahead, and expectations are increasingly outsized. But, if the rhetoric of the last few weeks can match reality, the nation’s energy sector is set for a renaissance.

Juan Cruz Díaz, managing director of Cefeidas Group: Since taking office, President Mauricio Macri has demonstrated his determination to make changes to attract foreign investment and boost Argentina’s energy sector. In addition to introducing a raft of fiscal and economic policy changes to spur investor interest—such as lifting currency controls, managing a sharp devaluation and removing the majority of export duties—he has made a number of moves targeted at transforming the energy sector. Through an executive decree, Macri empowered Energy Minister Juan José Aranguren to declare a two-year state of emergency for the national electricity system. This grants Aranguren, a former CEO of Shell Argentina, the authority to ration energy, push through contracts with providers and increase electricity prices. Any changes to subsidies are likely to be gradual, to lessen the impact on the general public, but will eventually help reduce dependency on imports. Moreover, the administration has suggested that the domestic oil price will remain fixed at an elevated level for the foreseeable future, which will continue to attract oil majors looking for profitable investments. Aranguren has also noted the government will seek to increase gas prices to incentivize production. The regulatory environment is poised for imminent improvement, and the energy sector has the potential to become a future driver of economic growth. The sheer scale of the fiscal challenges Macri faces mean the road to economic normalization will be a long one. Getting the politics right will help the government to make all these changes sustainable. Also, in addition to environmental and social risks, the principal long-term threats to the industry’s successful development are geological and technical, but I believe these are surmountable and ultimately, unlikely to prevent the industry’s growth in Argentina. The key challenge for Macri will be to ensure that Argentina’s business climate is capable of attracting the level of investment needed to make the energy sector profitable and Argentina energy independent once more.

Jose L. Valera, partner at Mayer Brown LLP: Judging by all the policy changes so far, there is every indication that the energy sector in Argentina will experience a number of positive changes under the Macri administration. There is indeed reason to be optimistic. Argentina has always had the resources. It was due to the policies of the Kirchner administrations that Argentina’s reserves and production went down, the country turned itself into an importer and import price subsidies ballooned. The problems were all ‘above ground.’ Fortunately for Argentina, that is easier to fix. With the currency exchange controls already lifted and foreign trade and financial markets quickly being normalized, what remains now is to restore independence to utility regulators and remove all wholesale price controls in order to see the free market invest capital to fully and efficiently develop Argentina’s vast resources. Under the last Kirchner administration, Argentina’s gas supply was a function of how much gas the government could afford to import, and that stunted the country’s industrialization and distorted consumption. During the late 1990s, the private sector built five pipelines across the Andes for the export of Argentina’s natural gas to Chile. Those pipelines are unused now, but it is reasonable to assume that Argentina could be exporting gas to Chile again in a few years’ time. Chile’s gas consumption continues to grow, as witnessed by the announced expansion of the Quintero LNG terminal, the ongoing development in the Concepcion area of what would be Chile’s third LNG import terminal, and the announced development of additional gas-fired power generation throughout the country.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

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