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Macri's reforms burned in gas-tariff fight

A retreat on subsidy cuts casts doubts on the Argentine president’s broader energy agenda

Among the most vexing problems on president Mauricio Macri's desk when he took office was Argentina's energy crisis. Subsidies were unsustainably costly, eating up more than 10% of federal spending-a bigger outlay than education and healthcare combined-and growing imports were sucking much-needed dollars out of the country's coffers. The answer was clear enough: raise prices for consumers and provide incentives for domestic producers. But the politics have proven far more difficult.

Macri and his energy minister Juan José Aranguren's first attempt to deal with the subsidy question was disastrous. They tried to put in place a 400% increase in gas prices for most consumers and a sixfold increase for electricity earlier this year. The leaping prices fed a surging inflation rate and triggered a wave of protests, made worse by a bitterly cold autumn in Argentina.

Macri and his government's clumsy sales job didn't help. One minister dismissed the price rise as merely "the cost of two pizzas". Macri drew scorn for asking folk to put on sweaters and showing off a solar-powered water heater at his official residences-echoing US President Jimmy Carter's widely derided response to his country's energy crisis in the 1970s.

Then, in August, the Supreme Court struck down the price increases, saying the government hadn't consulted the public sufficiently.

That sent the government back to the drawing board. In early September, energy minister Aranguren said the government would propose a more modest 203% average increase in gas tariffs-the colder south will get more subsidies compared to the warmer north-followed by smaller twice-yearly increases. The new increase will mean households pay around $3.42 per million British thermal units, up from $1.29/m Btu now, but less than the $4.72/m Btu they would have paid under the previous proposal. Eventually, the idea is to bring the cost to consumers up to around $6.75/m Btu by the end of 2019.

Private investors have closely watched all of this. Macri has won a deep well of support from some of them for pledging to make the sort of deep economic reforms-including in energy-to turn around Argentina's economy. But doubts have lingered about Macri's ability to deliver. A rebuke from the Supreme Court on a central energy reform-and the fact that increasing natural gas prices has become a rallying point for the opposition-don't inspire confidence.

Progress required

Drillers are counting on higher natural gas prices to justify investment in new production, which the government is counting on to cut imports. Prices have been set for new natural gas developments at $7.50/m Btu, and evidence suggests this is working to coax more production, especially from the Vaca Muerta shale play. Tight natural gas output from Neuquen province, home to the shale work, has tripled since early 2014, according to provincial data. Argentina's total gas output was up around 6% in the first seven months of the year compared with 2015, to 124.4m cubic metres a day, according to the energy ministry.

Macri said in July that he hopes to replace liquefied natural gas imports with domestic output in five or six years. Argentina plans to import the equivalent of around 14m cm/d through October this year-around 11% of domestic output-so the timeline looks doable, especially given the country's bounty of shale. But Macri will need help from private drillers, who want to see sustained progress on the reform front.

In the meantime, the steep fall in international LNG prices since 2014, when Argentina and other importers were paying close to $20/m Btu for the super-cooled gas shipments, has taken some of the sting out of the country's import dependence. Argentina will pay around $5.50/m Btu for LNG this year, though prices will be higher in September and October-around $6.55/m Btu-reflecting higher oil prices, according to Enarsa, the state-run company in charge of LNG imports.

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