Fernandez takes centre stage in Argentina
Vaca Muerta shale risks getting stuck in the middle of the new Argentinian president’s political balancing act
Alberto Fernandez plans to rely on development of the Vaca Muerta shale deposits as an engine to boost Argentinian economic growth and prosperity after a decisive victory in the country’s late October presidential election.
However, the Vaca Muerta's development will not occur in a vacuum, but within a country immersed in a deep economic crisis. Argentina will end 2019 with an annual GDP decline of 3pc, an annual inflation rate of 55pc, and with 35pc of Argentines living in poverty. The country also has an unsustainable debt burden with more than $50bn due in 2020 alone.
And Fernandez will have to balance policies that promote Vaca Muerta development—no price or currency controls, market or close-to-market prices for oil and gas, labour reforms, infrastructure improvements—with policies designed to maintain popular support for Fernandez which can concomitantly retard investment and activity in the Vaca Muerta—price and currency controls, empowered unions, extensive government social welfare programs.
Fernandez was elected president of Argentina for a four-year term on 27 October, defeating incumbent president Mauricio Macri 48pc to 40pc. Prior to Macri’s election, shale production in Argentina was constrained by a lack of investment due primarily to a combination of the aforementioned price and currency controls, weak rule of law, excessive government intervention in the economy and widespread corruption under former president Cristina Fernandez de Kirchner (2007-15). Kirchner will now serve as Fernandez’s vice-president.
Fernandez’s first order of business will be to renegotiate Argentina’s debt burden
Upon assuming office in December 2015, Macri signalled a new era in Argentina, with greater respect for the rule of law, market forces allowed to function relatively unfettered and corruption significantly reduced. Macri’s policies helped spur investment in, and the development of, the Vaca Muerta. During Macri's four-year tenure, Argentinian unconventional oil and gas production increased by fivefold and tenfold respectively.
The stronger the economy and the higher Fernandez’s approval rating, the more likely he is to retain Macri’s pro-development energy policies—those in place prior to August, when the threat of a social meltdown led to temporary controls. Conversely, if both measures flag, the more likely he is to engage in practices that discourage investment in the energy sector.
Fernandez’s first order of business will be to renegotiate Argentina’s debt burden, restructuring payments to provide breathing room over the next few years and obtaining a write-down of a portion of the debt. If Fernandez is unable to obtain the concessions, he believes necessary to avoid an economic and social implosion, he may pursue the default option, just as fellow Peronist Adolfo Rodriguez Saa did in 2001.
>$50bn – debt due in 2020
Backsliding by Fernandez on pro-market policies or a default would have negative ramifications for investment in the road, rail and pipeline infrastructure needed to take Vaca Muerta production to the next level. The same would be true for investment in the LNG facilities and petrochemical plants required to take full advantage of the Vaca Muerta’s gas reserves by facilitating increased exports of LNG and chemicals.
Fernandez is well aware that, without pro-development policies, the Vaca Muerta will not be able to provide the Argentine economy with life support. But he will also recognise that—should his approval rating crater—he will at best become an ineffectual lame-duck president, and at worst will be forced to resign.
And, like many Peronists, he has a relatively myopic time horizon, with short-term being this week, medium-term this quarter, and long-term the 2021 midterm. In sum, expect President-elect Fernandez to retain Macri’s pro-market energy policies, only so long as doing so does not significantly weaken his hold on power in the short-to-medium term.