Argentine reform moves slowly
For an economy that has recently been growing at 9% a year, it is remarkable how little energy investment has been made in the country, writes Robert Cauclanis
SINCE the economic crisis five years ago, the Argentine government has made life difficult for energy companies. It has kept natural gas and power prices on hold, maintained a 45% tax on crude exports and encouraged consumer boycotts of fuel retailers when they have tried to lift pump prices for gasoline and diesel. Refined products have been selling at a 40-50% discount to international prices. This has discouraged new investment upstream and downstream.
There is little talk of deregulating energy prices – such a move would be politically unpopular ahead of this year's presidential election. Similarly, the government has no plan to repeal energy export taxes. And the $35-40 producers fetch for a barrel of oil in the local market is far below international prices.
Argentina remains Latin America's fourth-largest oil producer, after Mexico, Venezuela and Brazil. But a continuing lack of exploration spending means the country could use up its modest oil reserves – around 2.3bn barrels according to BP's Statistical Review of World Energy – in a matter of years.
From surplus to deficit
Argentina's crude output fell by 3.1% in the first half of 2006, to 0.657m barrels a day (b/d), compared with 0.678m b/d in the same period of 2005, according to government data. Output has been on a downward trend since it peaked in 1998 (see Figure 1). Argentina still had net oil and liquids exports of 323,000 b/d in 2005, mostly to Brazil and Chile. Yet with output down by over 14% since 1998 and demand for liquid fuels growing at around 8% a year – and gas demand at a higher rate still – Argentina's energy-trade surplus could quickly become a deficit.
While it is reluctant to change energy laws in a way that could alienate consumers or cause inflation, the government has become acutely aware of the country's exposure to supply crises. Amid diesel shortages in the country in recent months, the government threatened to fine downstream players that were unable to meet demand for fuels and even to prosecute company executives.
Diesel is in especially high demand during the country's grain-planting season, which is coming into full swing, and provides the country's top source of export earnings. Gas demand may also soar in coming months as the heat of the southern-hemisphere summer drives up air-conditioning usage. Since 2004, intermittent spikes in Argentine energy demand have prompted the country to cut gas deliveries to neighbouring Chile.
However, the government is aware of the risks of a prolonged shortage of investment and is attempting to attract capital to the energy sector. In October, it pushed a new hydrocarbons bill through Congress that offers several tax breaks for companies making new investments. The fiscal incentives, however, are not free of strings: they require companies to team up with the national oil company, Enarsa, in exploration ventures.
Enarsa holds rights to 1m square km of offshore exploration acreage, but the poorly funded company has only a few dozen employees and no exploration experience of its own. While oil firms in Argentina are able to turn a modest profit selling oil at $35-40 a barrel, that price level may not entice investors to expensive offshore exploration.
Luckily for Argentina, rapid economic growth and a general confidence in the corporate sector that private investors will not face the sort of nationalisation movements seen in Bolivia and Venezuela are finally leading oil firms to consider new investments.
The potential big spenders in the country are the companies that have recently suffered some of the biggest setbacks elsewhere on the continent: Repsol YPF, Petrobras and Occidental. Repsol YPF and Petrobras were the companies most heavily affected by Bolivia's May energy nationalisation (PE 9/06 p34). Occidental's concession to operate the 100,000 b/d Block 15 in Ecuador was expropriated in May after the government claimed the US company had broken its concession rules (PE 6/06 p40).
Ready to spend
Repsol YPF has budgeted to spend $6bn in Argentina over the 2007-2009 period, with $4.6bn of that going towards exploration and production (E&P). Petrobras says it will invest at least $2bn in the country by 2011, including $1.4bn in E&P efforts by 2010. Petrobras, Repsol YPF, Enarsa and PetroUruguay plan to begin offshore exploration south of Buenos Aires in the next few months.
Petrobras is also among several companies looking at fresh investments in energy-rich Neuquén province, which pumps more than half the country's 144m cubic metres a day (cm/d) of gas and nearly half of its oil. While Occidental said in October that it plans to invest $1bn in Argentina over the next four years with the aim of doubling its oil output in Santa Cruz province. Occidental has reserves of around 217m barrels of oil equivalent (boe) and production of around 37,000 boe/d in the south of the country.
Most of Argentina's 10 oil-producing provinces are holding their own concession rounds to offer oil and gas blocks, and some have already attracted significant investment pledges. BP-backed Pan American is ramping up gas output in the northern Salta province with a field investment worth $110m, according to local press reports. Canada's Petrolifera plans to invest around $60m in the country, to drill 50 new wells, increase oil and gas production, and build a gas pipeline and a gas-separation plant.
Meanwhile, Repsol YPF says it is likely to sell 40 marginal fields in the country, with combined reserves of around 50m barrels of oil. The sales are expected to attract investment from small independent oil explorers.
Anxious to diversify its energy sources, Argentina also plans to build a 1,200 km, 20m cm/d gas-import pipeline to the northeast of the country from southern Bolivia, at an estimated cost of $1.2bn. Argentina has signed a 20-year supply deal with Bolivia for up to 27.7m cm/d – relying also on an existing pipeline with 7.7m cm/d capacity. What is unclear is whether new investments in Bolivia will be able to boost the country's capacity to meet contracted demand. Bolivian officials say that will require dedicated gas exploration investments worth another $1bn-2bn.
The Argentine government is also examining alternatives, including long-term imports of electricity from Paraguayan hydro-electric plants and renewable energy sources such as solar, biofuels and wind-power.
While Argentina's energy sector is showing stronger vital signs than in recent years, Repsol YPF, the Spanish oil firm that bought Argentina's state-run YPF in 1999 for $15bn, is still holding out for more rapid reform. The company had hoped to sell 20% of its shares in YPF in an initial public offering by the end of 2006, but chairman Antonio Brufau said in mid-November that this would be delayed indefinitely. In a conference call with investors, Brufau said he is not yet "optimistic" about profit margins in Argentina.