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    Argentina awaits critical energy reforms [Gas in Transition]


Milei has vowed to deregulate the economy, cut public spending and scale back the state through privatisation, with reforms to the energy sector set to take centre stage.

by: NGW

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NGW News Alert, Natural Gas & LNG News, Americas, Top Stories, Premium, Gas In Transition Articles, March 2024

Argentina awaits critical energy reforms [Gas in Transition]

Argentina’s energy sector is set to see critical changes in policy and regulation in the next few months, as new President Javier Milei, who took office in December, embarks on radical reforms aimed at lifting the country out of economic recession.

A libertarian economist who surprised many pollsters with a landslide election win, Milei has vowed to deregulate the economy, cut public spending and scale back the state through privatisation, with reforms to the energy sector set to take centre stage. But his agenda faces tough opposition in parliament.


Slashing subsidies

Argentina is the largest gas market in South America, with the fuel typically accounting for over half of its power generation and around half of its overall energy supply. But the market’s proper functioning has been undermined by a longstanding system of subsidies, which has led to payment deferrals and defaults in the gas and power supply chains and disincentivised investment in production, Tomas Lanardonne, energy lawyer and partner in Buenos Aires-based law firm MHR explains to NGW. These subsidy payments have also contributed to Argentina’s widening fiscal deficit.

Natural gas producers sell their supply to the state power administrator CAMMESA and gas distributors, with part of the price they pay covered by the state, and the rest with payments from end users. But payments from the state are delayed, and those from end users, frequently delayed or defaulted on. State payments can take as long as three-to-four months. 

Exacerbating the situation, demand is weak, as the recession has triggered a fall in industrial activity.

“This is an explosive cocktail for the gas industry,” Lanardonne says. 

The problems with cash flow are passed on to producers, which have responded by focusing more on oil development, where they can secure high international prices on the export market.

“So the new wells they are drilling are targeting petroleum rather than natural gas reserves.”

Milei’s government is doing away with gas price subsidies, save for those provided for the lowest-income households. It issued a decree in December declaring a state of emergency in the energy sector, mandating a review of tariffs to align them with market prices.

The new tariffs are due to be announced this month. Energy Secretary Eduardo Rodriguez said in January that only 17.5% of consumers were paying the $4/mn Btu cost of gas production, while the remaining 82.5% were only paying $0.70. 

Low prices have left the energy sector “highly disinvested, under-financed, inefficient, at risk of shortages and with a trade balance deficit of $30bn in the last 10 years,” he said, adding that the situation had held back major projects to expand takeaway capacity from Vaca Muerta.


Takeaway capacity

Takeaway capacity improved with the launch of the first 11mn m3/day of capacity at the President Nestor Kirchner Pipeline in July 2023. This has allowed Argentina to supply more gas to its north, cut down on LNG imports and increase exports to Chile, improving the country’s trade balance. The government estimated in December 2023 that the pipeline’s launch would result in $4.2bn in savings on gas procurement in 2024.

But future stages, to expand capacity eventually to 40mn m3/d, have stalled. There have also been delays to a pipeline project to transport more gas within the north and then onwards to Bolivia and Brazil.

“Nestor Kirchner remains in the nascent stages of harnessing its transformative potential,” Mariano Machado, principal Americas analyst at global risk intelligence firm Verisk Maplecroft, tells NGW.

The pipeline is yet to meet its technical assumptions, and the lack of necessary compressors casts doubt on whether it will reach its planned capability on time, meaning LNG imports could still be needed next winter, according to the expert.

“External factors will be crucial in accelerating expansion and adjusting existing pipelines,” Machado says. “For example, the plan to reverse the Northern Gas Pipeline's flow to boost gas sales to Brazil depends on Argentina’s ability to replace the declining Bolivian supply.”

Beyond its substantial reserves, Vaca Muerta also boasts strong productivity and low costs, Lanardonne says. But what has really held development back over the years has been regulatory uncertainty.

Argentina’s ultimate ambition is to export Vaca Muerta’s gas internationally. Malaysia’s Petronas has begun building a floating LNG unit to be placed off the shore of Argentina, which is targeting LNG exports by 2027. The unit would have a capacity of 2mn tonnes/year. But Petronas is working on a much larger project with Argentina’s state-owned YPF to build an onshore plant which could eventually export as much as 25mn t/yr.


Investment support

For development to go ahead, though, Petronas and YPF are waiting on a proposed new promotional regime being discussed in Congress for major infrastructure projects. 

Projects benefiting from the regime will enjoy a reduced income tax rate of 25% versus the standard 35%, among other tax breaks, as well as eased export, capital and other restrictions.

“We need this law for investors such as Petronas to reach a final investment decision,” Lanardonne says. “We expect that the bill is going to be passed. We will know in the next two months whether that is going to happen or not.”

Congress is also debating the establishment of a new hydrocarbon law, which would prevent the government from inteferring with domestic prices for gas and petroleum, cut red tape for the development of midstream facilities and open up the possibility of creating underground gas storage (UGS).

Lastly there are planned reforms at YPF. The plan is for the company to divest smaller and more mature conventional fields to cut costs and raise funds for developing Vaca Muerta.

Machado notes that YPF is following the strategy of Brazil’s Petrobras, which divested its smaller, less valuable assets to priortise offshore development. The mature fields, meanwhile, are expected to be passed to smaller, independent oil companies, which can focus on improving operational efficiency and profitability at reservoirs past their peak.

“Moreover, the decision to trigger a write-off in the valuation of most of these fields (alleging previous estimates were politically motivated, and overvalued) is a bold move that paves the way for effective divestment negotiations and boosting investor confidence,” Machado explains. “Yet, challenges loom in workforce adjustments and labour negotiations with sector unions. Resolving these issues is pivotal for maximising asset potential and attracting investors.

As for Vaca Muerta, 2024 could be a record-breaking year for investment, with data released by operating companies projecting $9bn in capital spending, or around 12.5% more than in 2023, according to Verisk Maplecroft.

“Despite a severe economic crisis and serious political challenges ahead, Vaca Muerta continues to offer opportunities to enhance business profitability, buoyed by signals of market liberalisation from the Milei administration,” Machado says. “However, the government will have to demonstrate it can muster reforms. Now, all eyes are turned to the new political landscape prompted by the national government's proposal to governors to relaunch the "Pact of May” – a broad forward-looking shopping list to boost economic liberalisation.”