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Argentina is not expected to change its energy policies under a new Kirchner administration, sources said. As reported, the sovereign has been hit by the one-two punch of a lack of investment and governmental interference in the sector, coupled with abnormal weather patterns. The crisis has forced Argentina to cut 1200MW per day to industry from 4PM to 10PM in order to keep residential electric customers relatively unaffected by the crisis. 45% of gas demand cannot be satisfied during peak days, according to Ecolatina the consulting company founded by presidential candidate Roberto Lavagna.
If no immediate action is taken, Argentina could lose 15% of GDP growth by 2015, said Ruben Lo Vuolo, board member of Banco de la Ciudad and potential minister of the economy for presidential candidate Lilita Carrio. The crisis will cost the sovereign some USD 4bn this year in subsidies while the private sector is expected to lose USD 1.5bn, according to private studies and sources close to the government.
The energy crisis has its roots in the financial crisis of 2002. After freezing tariffs, the government never revealed the timeline for future hikes, constraining investment. Since then, the economy has grown at an average annual rate of 8%, but electricity tariffs for residential consumers have remained unchanged, remaining among the lowest in the world.
Although the government has tried to control consumption by penalizing excessive usage, the policy has failed. According to figures published in the 17 July Official Government Bulletin, residential clients of the three biggest power distributors in the city and province of Buenos Aires consumed 21% more energy compared to 2005. A CFO from the energy sector said the Kirchner administration never intended to restrict residential consumption as Buenos Aires urban areas account for half the votes required to win October’s presidential elections.
The government has been forced to supplement its local resources with costly imports. In addition to Bolivian natural gas, the government has already paid USD 703m in previous months for Brazilian electricity. While the sovereign must pay USD 54.5 per MW from Brazilian suppliers, local producers sell at USD 25 on the country’s regulated spot market. The country also pays USD 5 per 1M BTU to Bolivia while local producers are paid only USD 2. The final residential consumer only pays USD 0.30 after subsidies.
These costs have weighed on the country’s fiscal and trade balance. The energy crisis consumes half of the country’s annual fiscal surplus, according to local reports. For the first half of 2007, Argentina’s trade surplus was 18% lower that the same period last year. Argentina also imported 55% more gasoil, fuel oil, electricity, natural gas and bituminous coal in June than the same period last year, according to official statistics.
The agricultural sector, the powerhouse driving economic growth, has also been affected. Profertil, the main producer of urea, reportedly said that although it can currently satisfy demand for nitrogen-based fertilizers, it will not be able to satisfy future demand due to gas shortages. The company sells urea at a government mandated price of USD 300/ton plus VAT while international prices are between USD 400-USD 450. Should local consumers be forced to buy abroad, the differential could end up stoking inflation or further erode the fiscal surplus if new subsidies are introduced.
The government announced that some 1520 MW will be added to the system over the next year at a cost of over USD 1bn. By 2009 it expects to complete the construction of two additional thermo generators, which should add 800MW to the system. Yet the investments will do nothing to solve the sovereign’s near-term problems.
Cristina Kirchner, leading presidential candidate, said this week that the country should increase gas and fuel oil imports from Bolivia and Venezuela, respectively.
Candidate and former economy minister Roberto Lavagna wants to ration energy in the short-term. The candidate believes that clear rules should be established in the medium-term to encourage private capital investment.
Candidate Ricardo Lopez Murphy believes that Kirchner’s import-based strategy will fail and that a gas-based energy generation strategy may not be the most efficient. Since 2000, local gas reserves have declined while natural gas production has settled at around 52bn cubic meters per year since 2004, declining by 0.9% so far this year, according to Ecolatina.
Lopez Murphy believes that the country should invest USD 12bn-USD 15bn in the next 10-15 years. The Private sector would focus on hydro-electric investment while the government should build 20-25 nuclear power plants over the next 25 years.
Currently, 41% of the electricity generated comes from hydro, 55% from burning natural gas or oil, and the remaining 4.0% from nuclear generation.
Five executives interviewed by this news service expressed concern that Cristina Kirchner, the candidate widely expected to win October’s presidential elections, will continue her husband’s policies. A source close to the Planning Ministry confirmed that it is possible residential tariff hikes could occur in February 2008 at the earliest. Two government sources confirmed that energy demand will be controlled through government planning and selective rationing as opposed to price increases.
Recent events seem to indicate that a Christina Kirchner administration may take a more heavy-handed approach to regulation and two executives said they fear the onset of stricter price controls.
The government is also reluctant to allow foreign capital into the energy sector, hampering investment. The Kirchner administration is aiming to pass a law prohibiting foreign participation in utilities. So far, the government has used regulatory strategies to prevent the entrance of these players. Given this approach, there is concern that the administration’s central planning style has damaged the free market system and could curtail personal freedoms, a company executive said.
The executive recalled Friedrich Hayek’s arguments in ‘Road to Serfdom.’ The British economist argued that within a centrally planned economic system the distribution and allocation of all resources and goods would devolve into a small group which, incapable of processing all the information, would resort to coercion to achieve anything. Government coercion arrived years ago to the dairy sector which was unable to manage prices, he said, and is now beginning to widen in scope.
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