How Are Politics Influencing Energy Policy in Argentina? [GGP]
Q&A - How Are Politics Influencing Energy Policy in Argentina?
Q: Argentine Energy Secretary Javier Iguacel resigned last month. Although a government statement did not cite a reason for his departure, the move came within a day of leaked news that the administration of conservative President Mauricio Macri plans to increase electricity prices by an average 35 percent, according to Reuters. The government has named Gustavo Lopetegui, currently a presidential advisor with close ties to Macri’s cabinet chief Marcos Peña, as the new energy secretary. What was behind the change in leadership? How are political considerations, such as the upcoming presidential and legislative elections in October and local elections in the gas-rich Neuquén province in March, shaping the outlook for Argentine oil and gas policies? What are the biggest challenges Argentina’s energy sector faces this year?
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A: Lisa Viscidi, director, and Nate Graham, assistant, of the Energy, Climate Change & Extractive Industries Program at the Inter-American Dialogue: “Though it may not be the only reason for his departure, Iguacel’s resignation comes amid reports that the Treasury Ministry felt he was not sufficiently committed to cutting subsidies for producers in Vaca Muerta as part of Argentina’s austerity efforts in compliance with its IMF loan deal. The government is currently obligated to purchase gas from producers at a price about 75 percent above market value, worsening Argentina’s fiscal burden and stifling competition that could help lower electricity prices. Projects already approved by Neuquén province are awaiting approval from the federal government, which does not have the funds to supply additional subsidies. On Jan. 7, Neuquén Governor Omar Gutiérrez, who discussed the development of Vaca Muerta at a Dialogue event last April, met with Macri to request approval for these stalled projects, which he claims amount to $3 billion of investment. Gutiérrez also opposed changes to the subsidy regime and advocated for the elimination of a 10 percent export tax that is damaging upstream investment (oil producers say refiners are shifting the tax burden to them by asking to purchase crude at a 10 percent discount). Though Macri and Gutiérrez are allies, the president supports the mayor of Neuquén city, Horacio ‘Pechi’ Quiroga, who is a member of his Cambiemos party, in the vote for governor scheduled for March 10. Quiroga, who also supports developing Vaca Muerta but has said little about the producer subsidies and export taxes, is challenging Gutiérrez along with the Peronist candidate, Ramón Rioseco. At the federal level, Macri has gradually raised electricity prices since taking office, anger-ing consumers. Thanks to his government’s plans to further raise prices as part of the IMF deal, as well as general discontent with his failure to produce economic recovery, Macri’s re-election is far from guaranteed. His opponent, which will likely be Cristina Fernández de Kirchner or another Peronist candidate, may seek to renegotiate the IMF deal and return to subsidies.”
A. Víctor Bronstein, director of the Centro de Estudios de Energía, Política y Sociedad (CEEPYS) in Buenos Aires: “We can outline three reasons that motivated the change at the energy secretary. First is the need to comply with IMF and fiscal requirements, since the resigning secretary attempted to maintain subsidies established by Resolution 46, which, due to the plan’s success, paradoxically generated a significant fiscal cost. Second are several of Iguacel’s mistakes: he didn’t resolve the problem of dollarized price rates within the context of a strong dollar surge. Moreover, his term was characterized by highly optimistic goals that would be difficult to achieve. And the third reason is to ensure the subordination of the energy portfolio to the finance secretary, which shows the government’s poor under-standing of energy issues. The priorities for energy policy should be based on the concept of energy security, not fiscal goals. This is the way it is in the United States and OECD countries. Within the upcoming electoral context, the price rate and fiscal issues will be the priorities. This could be influential in Neuquén province, where the removal of subsidies will affect activity. The development of unconventional resources initially requires higher wellhead gas prices. Note that the development of such resources in the United States was possible because the price of one million British thermal units of natural gas was $14 in 2010, instead of the current $3. In general, energy challenges are never annual challenges, but rather exist in the medium and long term. However, there is a big challenge this year: to comply with fiscal commitments, while at the same time implementing subsidy commitments for the development of Vaca Muerte, which will have a strong fiscal impact in the short term but which are necessary for Argentina to become an energy exporter."
A. Jeremy M. Martin, vice president of energy & sustainability at the Institute of the Americas: “The change at the energy secretariat in Argentina is the second in six months. The latest one can be traced back to October. Early that month, a new public policy measure with regard to natural gas rates, Decree 20/2018, created increased tension across the country, the energy sector and within the Macri government’s energy and economic team. The decree stipulated a retroactive gas payment to compensate the rate approved for consumers prior to the crash and continued volatility of the Argentine peso. In addition to flaming public unrest, the measure began the countdown for replacement of Javier Iguacel as energy secretary. Over the course of the episode, Iguacel’s standing in the government was affected particularly after he revealed that he had not consulted with the president before enacting the decree. Those concerns, combined with a rumored clash with Treasury Minister Nicolás Dujovne over reducing the natural gas production subsidies for Vaca Muerta, proved to be too much and forced out Iguacel. Indeed, it is increasingly clear that the requirements of the IMF loan agreement and the corresponding fiscal terms aimed at reducing deficits, largely on the back of adjusting utility rates and reducing subsidies, requires a close ally of the president, who has his complete confi-dence, to handle the energy portfolio. Part of Macri’s original senior cabinet, Lopetegui has a direct line to the president and should bring better alignment to the economic and political objectives of the nation’s energy sector as the election cycle heats up and fiscal issues take center stage. First up will be finishing negotiations with shale producers as to the level of incentives they will receive."
A. Roberto S. Carnicer, director of energy at Universidad Austral in Buenos Aires: “The change at the energy secretariat responds to a need for better alignment with Treasury Minister Dujovne within Argentina’s macroeconomic context. Iguacel showed a more personalistic behavior, and the government opted instead for a single rudder in the energy sector. The elections should not bring major changes. The aim of standardizing the sector and restoring leadership in energy is already in process. It is likely to decelerate promptly but will recover as soon as economic objectives are met. The government’s oil and gas policies have consisted of standardizing a sector that had been completely destroyed. Its macroeconomic errors prompted an economic slump, and the market does not forgive these mistakes. But we shouldn’t forget that 2018, despite the economic crisis, was the year that gas at Vaca Muerta exploded. Today, unconventional gas production represents 38 percent of the country’s total production. It should be noted that the stimulus program for unconventional gas was the driver of this extraordinary production. The incentive did not disappoint. The producers’ excellent performance, with technological and efficiency improvements, allowed for a level of production that was unthinkable a year ago. The results show the market and the government that Vaca Muerta production is not only for self-sufficiency, but also, mainly, for export. Now, the objective is not only standardization, but also intensive development of energy exports so that Argentina becomes a great player in the international arena. I don’t think these goals will disappear in any rational government. The main challenges this year will be achieving the adaptation of economic incentives to produce unconventional gas, as well as the contractual standardization between long-term supply and demand. But the most important thing will be to show the world that efforts are being made to correct previous errors and that Vaca Muerta is a real option for international supply."
Originally published in the January 25, 2019 issue of the Inter-American Dialogue's weekly Energy Advisor.
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