Invited Contributor: Daniel Gustavo Montamat authored this piece exclusively for The Review. He was Argentina’s Secretary of Energy from 1999-2000; President and board member of YPF, the country’s national oil company from 1987-1989; and a director of the national gas company from 1985-1986.
Argentina’s energy imports in 2012 were $9.3 billion (all currency hereinafter in USD unless otherwise stated), similar to the figure of 2011, $9.4 billion, that alarmed the Cristina Fernandez, President, and which unlocked a series of measures that culminated in the expropriation of the country’s largest oil company, YPF, to Spain’s Repsol.
In 2013 energy imports continue to grow: up 52% in the first two months of the year alone, and this revives fears in private and official circles. Last April’s accident at the Ensenada refinery – which represents a third of the country’s refining capacity – further complicates the outlook. Depending on what economic growth rate you assume is correct, energy imports in 2013 may reach between $14 to 15 billion. The demand of dollars for energy imports is a threat for the country’s balance of payments, and the cost of these growing external purchases inflate the budgeted subsidies that further aggravate fiscal imbalances. To reduce energy imports and recover self-sufficiency one must implement a combination of long, medium and short term energy policies.
When YPF was expropriated, the government appealed to Argentina’s popular sentiment that it was done in the national interest of recovering energy independence. At that time I had written that this was akin to putting the cart ahead of the horse. The country had lost energy self-sufficiency as a result of wrong energy policies. To recover self-sufficiency you first have to change energy policies — not just for YPF, but for the remaining actors as well that represent the other two thirds of hydrocarbon production. If you take control of YPF and apply the same misguided energy policies you will have a chronicle of a failure foretold.
The core issue in the oil business is the debate between appropriation policies and distribution of income derived from the resource – not the current debate in pace that addresses ownership of the resources and assets and their exploitation.
When government policies become myopic and force upon the oil industry arbitrary interventions, it ends any consistency to the mechanisms of appropriation and distribution of profits. Participation in the industry’s income determines the degree of decision-making processes which determine amounts and quality of investment. When income is uncertain and its distribution uncertain, the businesses (both public and private) exploit what is already in production and minimize investment in things like exploration, which replaces reserves. The long term plan to regain energy self-sufficiency (and even begin to export again to the region) implies a need to assure YPF and to the other actors of the industry rules that return long term certainty and institutional predictability to the distribution of Argentine oil profits. The price of $7.50 per million British Thermal Units (MMBTU) for incremental gas that the government now offers (with penalties if base production targets are not met) and the reduction of export taxes to the industry are moves that have no real significance in solving the problem.
An alternative energy policy focused in reducing dependence on imported energy and getting back on the road to self-sufficiency will have to present new exploratory challenges and to encourage new productive developments taking into account the experience of other players in the region (such as Colombia, Brazil, Peru). The predictability the state of affairs and income distribution (i.e., government participation YPF’s role and that of other actors) suggests long term commitments and provides signals of unfettered prices free of bureaucratic bungling. The investments needed to revert the drop in productivity and to replace the spent reserves are enormous — but the potential of resources (both conventional and non-conventional) in the Argentine basins await.
According to updated analysis that takes into account a learning curve, the Vaca Muerta basin would only be in condition to deliver some 300,000 barrels/day of oil (in 2012 it produced 568,000 a day on average) and some 50 million cubic meters of gas/day (in 2012 it produced 120 million m3/d) by the end of this decade. That is to say, after the current government administration ends and – even further out — towards the end of the four year presidency of the next one, with a different energy policy Argentina can reduce significantly its energy imports in a significant way and return to self-sufficiency. But in the short and medium term we will have to live with shortages. To reduce the impact of these upcoming energy imports on the overall economy we need to focus on two things: energy efficiency, to reduce the amount of energy that each economic unit requires), and we will have to become better at buying imported energy than we have been to date.
Energy efficiency generally gets a lot of good press but in the short run loses votes. Energy demand in recent years (as a measure of final consumption/output) has grown at a faster pace than production itself. Following world trends it should more slowly that production grow below world averages (the rate of energy intensity is 1.1 in Argentina, while the world average is at 0.70). There is yet a lot to be done at the residential level, in commercial buildings and in industry to reduce energy consumption. Yet we can see that with energy prices so subsidized by the government we’ve done more to promote extravagant energy consumption more than anything else. A gradual restructuring of prices of the energy basket coupled with a special social rate for the less fortunate will go a long way to reset the benefits and adoption costs of these technologies.
In the short run, some changes in the management of the purchasing process of imported energy can provide massive savings. The billions of dollars spent on imports are used to buy natural gas (by ship and via a gas pipeline coming from Bolivia), diesel, fuel oil, and naphthas. There are diesel and gasoline purchases that are tax exempt carried out by businesses that know the loopholes. With local prices aligned with international reference points, tax exemption of energy imports make no economic sense. The system of energy taxation needs to be revised and brought up to date. ENARSA, the government energy company, is the intermediary in gas purchases from Bolivia and under the agreement the price is adjusted quarterly taking into account a basket that follows the price of this fuel in international markets. Argentina pays between $1 and $2 more per technical unit (MMBTUs) than Brazil, although by geographic proximity we should be paying less. We negotiate with Bolivia hurriedly and badly, and since now we are now increasing our purchases, are in a position to propose a restructuring of prices to put us closer to those paid by Brazil.
But one of the greatest savings that we could achieve are in the purchase of liquefied natural gas (LNG), which comes by ship, is by simply placing more transparency to the tender process. In 2008 Argentina began to import LNG by ship – also negotiated under time constraints – eight shipments, of which only six took place. At that time Repsol took charge of the operation, which included renting a regasifying ship and the necessary overhaul of the Bahia Blanca port to arrange for supply discharge logistics. Since then purchases of LNG have done nothing but increase and responsibility for purchasing was passed to ENARSA. In 2011 the Escobar port also began to accept LNG (although it has more difficult access), but is at least closer to demand. In closed tenders (i.e., by invitation only), some traders and other international firms that passed the technical requirement filters would compete on pricing for provision to one of the two ports. During all of 2012, a total of 65 shipments were contracted (30 to Escobar, 35 to Bahia Blanca) at an average price of $15.50/MMBTU. At the end of the year ENARSA ceded to YPF the LNG contracting process under a “provision management mandate” plus payment of a commission of $30 million pesos (about US$6 million at official exchange rates) (plus a premium for any savings). YPF is outside the legal umbrella that covers LNG imports. Before year end YPF had put to tender 70 shipments under an entirely closed procedure.
This process did have fortuitous results for the country: purchases were at prices higher than those obtained by ENARSA the year before. If an open and competitive tender had been carried out, with economic and technical requirements, and covering the period 2013 to 2015 which included a baseline of assured cargos (between 40 and 50), they would have been able to obtain better prices and finance terms. But the LNG procedures have additional costs that could also be reduced. The two regassifying ships charge a rent which annualized totals some $68 million. If we are certain that these ships are here to stay, why not to put that service out to bid as well to lower costs? Additionally, port costs for unloading LNG themselves are too high. While in Europe and Brazil they are about $150-200,000 per shipment, in Argentina they cost over $500,000 in Bahia Blanca and about $600,000 in Escobar. The supplier pays for only 15% of port costs; the balance is for ENARSA’s account. The shipping agent receives payment in hard currency in New York even though the labor and service provided are entirely Argentine. A competitive, transparent, and efficient management system could save the government coffers between $800 million to one billion dollars a year.
We will have to make do with an energy deficit for some time, but until new policies can make Argentina self-sufficient, increased focus on energy efficiency and more transparent and efficient purchasing mechanisms should allow for a reduction in the cost of imports.
© Latin American Energy Review 2013
About the Author:
Daniel Gustavo Montamat was Argentina’s Secretary of Energy from 1999-2000; President and board member of YPF, the country’s largest oil company from 1987-1989; and a Director of the national gas company from 1985-1986. He is author of a number of books on Argentina’s energy and economy and often quoted by the press.
Mr. Montamat obtained a master’s degree in economics from the University of Michigan, USA, and a PhD in economics from the Universidad Católica de Cordoba, in Argentina.