{"id":34489,"date":"2016-12-16T10:24:00","date_gmt":"2016-12-16T10:24:00","guid":{"rendered":""},"modified":"2020-09-25T10:05:21","modified_gmt":"2020-09-25T10:05:21","slug":"9489-argentina-s-power-struggle","status":"publish","type":"post","link":"https:\/\/dialogue.earth\/en\/business\/9489-argentina-s-power-struggle\/","title":{"rendered":"Argentina\u2019s power struggle"},"content":{"rendered":"

For over a decade Argentina\u2019s oil sector has profited from the government\u2019s policy to keep domestic oil prices low. But when new President Mauricio Macri took office last year he vowed to reduce energy subsidies in an effort to tackle the country\u2019s multi-billion dollar deficit.<\/span><\/p>\n

In November, a year after Macri\u2019s election victory, his centre-right administration announced that subsidies for oil producers would be stopped and prices aligned with international markets. The result was a rapid 25-30% fall in the local value of crude. However, no timeline has been set for changes.<\/span><\/p>\n

The implications of this decision for Argentina\u2019s efforts to resolve its stubborn economic problems, reform its creaking energy sector and address the blackouts that plague its capital will be keenly watched, and not just by the Argentinian people at the sharp end of fluctuating fuel prices.<\/p>\n

In a world of falling oil prices, foreign governments are facing a similar challenge to reduce or remove subsidies for high carbon energy and reorient investment into low carbon alternatives. Argentina is a notable laggard<\/a> when it comes to exploiting renewable energy resources but as it gets on board, the opportunity for China<\/a>, which is one of its biggest financiers, to build new partnerships is set to grow.<\/p>\n

Protecting oil industry profits<\/strong><\/span><\/p>\n

In 2016, Argentinians paid more than double the international market price for oil. At their peak, prices reached US$67.50 per barrel, compared to the WTI international crude price of US$33.26.<\/p>\n

The decision of former President Cristina Fern\u00e1ndez de Kirchner\u2019s administration to maintain an artificially high oil price was supposedly to protect jobs in the Argentinian oil and gas sector as the price of oil tumbled on global markets.<\/p>\n

Argentina is Latin America\u2019s third biggest economy after Brazil and Mexico. It is also home to the second-largest shale gas reserves and fourth largest shale oil reserve globally. Faced with a US$6 billion energy trade deficit in 2014, Kirchner\u2019s government also sought to bolster what it considered to be a stable industry facing a period of uncertainty.<\/p>\n

This policy meant that energy companies in Argentina made an additional US$5 billion from consumers in 2015, and a further US$3.5 billion this year, according to data from FIEL.<\/span><\/p>\n

The main beneficiaries have been state-controlled YPF and Pan American Energy. More than 40% sits in the pockets of oil companies, 12% has gone to oil provinces as royalties; and the remainder into raising salaries and paying higher prices for suppliers.<\/p>\n

Mart\u00edn Prieto, director of Greenpeace Argentina, said that the government should be focusing on renewables and not oil.<\/p>\n

\u201cArgentina is assuring domestic companies that the wellhead price they receive is higher than in the rest of the world. It is neither economically nor environmentally justified. It is an incentive to continue investing in oil extraction. Renewable energy development is the only way to go,\u201d he told chinadialogue<\/em>.<\/p>\n

Initially, pressure from the municipal governors to maintain oil bonuses led Macri to continue supporting the subsidised price. But the wider economic ramifications, such as the increasing deficit and complaints from other industries about a loss of competitiveness, motivated the government to remove support.<\/span><\/p>\n

Dropping consumer subsidies <\/strong><\/p>\n

Elimination of consumer subsidies, which could commence this month, is now expected by the oil and gas sector. Madalena Energy, a Canadian company operating in Argentina, believes the crude oil price will be reduced by 30%.<\/p>\n

\u201cThe labour unions and provinces are against this taking place but we all know that subsidies will eventually have to end,\u201d said David Tawil, founder of the investment fund Maglan Capital<\/a>, and owner of a stake in Madalena Energy.<\/p>\n

Government sources have also maintained that negotiations are in progress between the labour unions, oil producing companies and oil provinces for the elimination of the subsidy.<\/span><\/p>\n

\u201cThe Energy Minister\u2019s policy is to continue with a gradual elimination of the subsidy scheme. It is a complicated task but the aim is geared towards the international price. Current prices artificially distort the competitiveness of renewable energy. The long-term goal must be to abandon fossil fuels,\u201d stated Gerardo Rabinovich, director of the General Mosconi Energy Institute.<\/p>\n

Argentina has one of the most significant hydrocarbon deposits in the world known as Vaca Muerte (literally \u201cDead Cow\u201d). The decline in international crude prices has slowed down the area\u2019s once thriving activity.<\/p>\n

The reduction in subsidies for crude oil follows similar cuts in support for natural gas and electricity earlier this year.<\/p>\n

This was one of the first measures adopted by the Macri government after more than ten years without a price adjustment for the cost of public services such as natural gas, electricity and water in Buenos Aires.<\/p>\n

\u201cPrice rationalisation in Argentina makes investment in renewable energy attractive and is an invitation to energy saving. In Argentina, energy waste was encouraged in the absence of any incentives for rational energy consumption,\u201d said Prieto.  <\/p>\n

The previous administration\u2019s decision not to increase prices resulted in an extraordinary increase in energy subsidies, which rose from 0.2% of GDP in 2004 to 2.9% in 2014, totalling 342 million pesos (US$21.3 million\/ 147 million yuan) in that period, based on a report from the Argentine Association of Budget and Public Financial Administration (ASAP).<\/p>\n

But that was not the only problem. The tariff freeze discouraged energy distribution companies from making the required investments in technical upgrades due to the lack of liquidity, resulting in frequent power outages during summer and winter. Meanwhile, the subsidies, which were supposed to benefit lower income groups, became skewed towards those with higher incomes.<\/p>\n

\u201cEnergy subsidies were transformed into the second largest state expenditure and this largely explains Argentina\u2019s deficit. More is spent on energy subsidies than on health and education combined.  They are also poorly distributed. The richest 20% receive four times as much in subsidies,\u201d said Rafael Flores, president of ASAP.<\/p>\n

Having only reduced rather than eliminated subsidies, Argentina will finish the year with another increase in its budget deficit. To date, it has increased 10% on last year, amounting to 133 billion pesos (US$8.3 billion\/ 57.3 billion yuan).<\/p>\n

Renewable energy<\/strong><\/p>\n

Oil and natural gas subsidies have also deterred investment in renewable energy, despite the country\u2019s significant potential. Argentina\u2019s energy mix remains dominated by high carbon energy sources with wind and solar energy less than 2% of the energy mix.  <\/p>\n