Government's energy policy comes under scrutiny

Government's energy policy comes under scrutiny

After months of complex negotiations, and with no easy way out of the deadlock, the government announced in January that it would reduce subsidies for gas production in the Vaca Muerta shale deposits in the Neuquén province.

Although the move introduces risks to investment in the energy sector, just as gas supply had begun to recover after years of disinvestment, the government sees the decision as a necessary part of its fiscal consolidation efforts. However, public patience with fiscal consolidation and its knock-on impact on energy prices is wearing thin. Despitesharp tariff hikes, the capital, Buenos Aires, has been plagued by power outages in recent days, prompting fresh complaints about electricity tariffs and the removal of subsidies.

Looking to boost natural gas production, the government implemented a programme back in 2017 that would set above-market prices for unconventional gas between 2018 and 2021. The production subsidy was initially promised based on planned natural gas production by oil companies at that time. However, production of shale gas has since come in significantly above expectations, potentially implying a sharp increase in the government's subsidies bill.

In order to abide by the strict target of primary fiscal balance in 2019, as mandated by the government's IMF deal, the Mauricio Macri administration has been forced to cut subsidies from an estimated US$1.3bn (as per the original arrangement), to US$700m. The energy secretary, Gustavo Lopetegui, announced that the higher prices would only be paid on the initial production estimates, leaving energy companies in the lurch. Tecpetrol, owned by an Italian-Argentinian conglomerate, Techint—the largest investor in the Vaca Muerta shale play—will be hit hardest, as its daily production of 17m cu metres came in significantly above its initially estimated production 8.5m cu metres. OnFebruary7th Tecpetrol filed an administrative appeal of the government's decision with the Comisión Nacional de Valores (the national securities commission). Techint has not ruled out the possibilityof taking the issue to the courts.

At the same time, Tecpetrol is analysing cuts to production and employment to keep costs under control—a move which in itself led to mass protests by oil workers in Neuquén. Other major oil companies such asYPF, the state-owned oil company, andPampa Energía, an Argentinian firm, have also considered production cuts, but not threatened litigation. Thenegative impact on investor sentiment clearly presents some downside risks to our forecasts for energy investment and exports.

 

Political fallout

These recent problems have coincided with a recurrence of power cuts in Buenos Aires that have highlighted the problem of still-unreliable supply amid large price rises (from an extremely low base) for consumers. During the final years of the administration ofCristina Fernández de Kirchner (2007-15), power cuts were frequent (especially in the Buenos Aires Metropolitan Region), when demand peaked in the hottest days of summer. Tariffs had remained more or less frozen since 2002, leading to insufficient investment in electricity production and distribution and crimping household electricity supply. Subsidies retrenchment and tariff hikes under the Macri administration were aimed at once again attracting investment in energy, and tackling these problems. Accordingto the Buenos Aires City consumer price index (IPCBA), electricity prices rose by 1,316% in 2016-18, more than eight times the rise of the general IPCBA. However, despite these tariff increases, production and distribution of electricity has not increased to the desired level, as evidenced by widespread power outages in mid-to late January, which affected more than 300,000households

The political opposition is trying to capitalise on the government's misfortunes. Several mayors of the opposition Peronist party, who govern cities in the Buenos Aires province, have announced that they will go to the courts to seek anamparo colectivo(a legal remedy for the protection of constitutional rights), on the grounds that recent tariff increases did not follow due process. Some Peronist presidential candidates, including SergioMassa, have accused the government of favouring electricity distributors at the expense of common citizens.

For its part, the government is looking to counter this narrative by explaining that the current cuts were the result of abnormally high temperatures that are putting greater stress on the electricity grid, while highlighting once again the role of the Fernández administration in discouraging investment in the electricity sector (a problem that to be remedied requires time and substantial investment). The power cuts have not produced any substantial social unrest and are expected to be temporary. Coming on the heels of the government's troubles with unconventional gas producers, this issue is indicative of broader difficulties that the administration is facing both in implementing policy and in keeping a weary public on side.

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