Argentina’s economy needs a quick return to energy self-sufficiency

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Javier Iguacel, Argentina’s Secretary of Energy and the man tasked with reversing the energy deficit that has distorted Argentina’s economy over the past decade, is recovering, almost choking at the mention of YPF, the main the country’s energy company.

“It’s outrageous,” he said of YPF, a majority state-owned company, to increase production by 5% per year. It could “double its production in five years”, he says, and “has the capacity to go even faster than that”.

The government is keen for Argentina to become self-sufficient in energy soon, not least because it would help reduce the deficits that are at the heart of the country’s $ 50 billion IMF program. But the oil companies on which it depends to achieve this have different imperatives. YPF and others, keeping a close eye on their results, plan to ramp up production more slowly than officials want.

Mr. Iguacel’s impatience shines a light on the drama that underlies Argentinian energy today. Although one of Latin America’s leading energy exporters in the 1990s, a series of populist policies deprived the industry of investment and made Argentina dependent on expensive imports.

Not only did this deplete Argentina’s foreign exchange reserves after a historic default in 2001, the hugely generous consumer energy subsidies were the biggest drain on the budget. This left a budget deficit that the government of President Mauricio Macri is struggling to eliminate by 2019.

The speed at which Argentina can regain its energy autonomy is therefore of paramount importance. Net energy imports now cost Argentina more than $ 3 billion a year, but, as recently as 2005, it earned $ 6 billion from its net energy exports.

Mr. Iguacel remains optimistic. In August, he presented a plan to double energy production by 2023, with natural gas production increasing from 130 million cubic meters per day to 260 million cubic meters per day, of which about 100 million cubic meters per day would be exported. He says oil production will also double, from around 500,000 barrels per day to 1 million barrels per day, with the additional production exported. Together, that would wipe out Argentina’s energy deficit and provide $ 15 billion in net exports over the period, according to official calculations.

The plan depends on the willingness of the oil companies to invest in Argentina, with Mr. Macri’s unfinished desire to liberalize energy prices greatly helping to regain their confidence by allowing them to sell energy at market prices, even though consumers have screamed.

Jorge Lapeña, former energy secretary and now president of Argentina’s General Mosconi energy institute, an independent non-profit think tank, fears Mr Iguacel’s projections are too optimistic – in in particular, the increase in the production of natural gas, given the capacity to export it, is severely limited by the lack of necessary infrastructure.

“If there is a disconnect between what businesses think and what the government is saying, that would be a serious concern,” he warns.

Argentina has the know-how and the resources. It was the realization ten years ago that the Vaca Muerta shale field in Patagonia was economically viable that revolutionized the energy outlook.

Indeed, although the production of Argentina’s more conventional energy resources has declined over the past decade at a rate of more than 10% per year, this decline can easily be offset by Vaca Muerta, which has the second largest reserves. global shale gas after China.

Argentina, meanwhile, is increasing its production of renewable energy, aiming to power 20% of electricity production by 2025, freeing up more oil and gas for export.

The first signs are good. Between July and July, shale oil production increased 39% from the previous year to almost 13% of total oil production. But shale gas production jumped 193% over the same period. Unconventional gas now accounts for over a third of Argentina’s total gas production.

“We already have a problem with excess gas,” says Mr. Iguacel. “We had to shut down wells. There is more production than we have the capacity to extract, which is why we are starting to export to Chile this year for the first time in 11 years. He says the energy deficit will be less than 0.4 percent of gross domestic product next year.

Yet even if Argentina, where domestic consumption relies mainly on natural gas, could afford to cancel the construction of a pipeline from Bolivia agreed by the previous Argentine administration, it could still need the gas from its neighbor, as well as imports of liquefied natural gas, to cover higher demand during its winter months.

Until Argentina builds an LNG plant to allow it to export excess gas during the summer, it will continue to depend on imports. This month, Argentina’s largest natural gas carrier, Transportadora de Gas del Sur, and Texas-based Excelerate Energy signed a memorandum of understanding to assess the construction of the country’s first LNG plant, but the construction of these facilities can take three to five years. And even with the necessary infrastructure, Argentinian producers must be able to compete with their American rivals, whose own shale boom over the past decade has made the United States a major exporter of LNG.

“Can Argentina become a player in the world gas market? asks Daniel Montamat, former president of YPF and consultant. “This is the great challenge to which Argentina must devote all its efforts”, he adds, estimating that by 2030 Argentina could start to be competitive in the world markets.

Given that by 2040 energy markets could be disrupted as renewables become cheaper than fossil fuels, Montamat believes it makes sense for Argentina to develop its natural gas resources before diversify too much towards renewable energies.

Mr. Lapeña said that in the short term Argentina has better prospects for oil exports, with little need for additional infrastructure.

Nevertheless, many more projects are due to start producing at Vaca Muerta, says Carlos Ormachea, managing director of Tecpetrol, now one of the biggest players in the region. Although there are 25 pilot projects at Vaca Muerta in addition to the five blocks that are producing at commercial levels, the timing of their transition to large-scale production remains uncertain.

“Is it possible [to double production in five years]? Yes. Is this going to happen? It depends on a lot of things that go beyond the oil industry, ”Mr. Ormachea said. “It’s not an unattainable fantasy, but we need a lot more companies to join us.”


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