Clarification: Argentina's natural gas cap could cost investments

25 August 2016 16:38 Source:ICIS News

Clarification: The following story has been clarified regarding details of the legal decisions leading up to the revisions in Argentina’s natural gas subsidy reductions. Paragraphs one, 12 and 14 explain the decisions.

HOUSTON (ICIS)--The Argentina Supreme Court's decision to roll back natural gas price increases might be good news for residential customers, but could freeze much-needed commercial investments to increase production.

“With the run-around, the perception of investors is not very good,” said Argentinean polyolefins consultant Jorge O Bühler-Vidal, who favours some of the proposed increments, but not all of them. “It gives a sense of instability.”

Andres Di Pelino, director of the school of economics at Argentina's University of Belgrano, agreed.

"Every time there is uncertainty ... this delays the investment projects, and ruins the arrival of new investments," he said.

"The government became entangled in a maze of succession of adverse legal action," Di Pelino said, "and failed to find an administrative solution to the matter."

So the Supreme Court put order to that maze, Di Pelino added.

He said the government could have avoided chaos by calling public hearings – something that the Supreme Court now has ordered.

Argentina’s government announced an increase on natural gas and electrical bills in April in a move to cut back on subsidies, draw investors to increase natural gas production and to cut down on imports by reducing end-user consumption.

Domestic power rates have been unchanged for years.

But some of the increases since April have been dramatic. In some cases, rates went up 1,000% for households and 1,600% for companies.

Angry customers and various organisations – including opponents of President Mauricio Macri – demanded that the court system block the increases.

Facing the opposition the government proposed to cap the price increase at up to 400% for households and up to 500% to companies.

A federal tribunal in La Plata, Argentina, stopped the price hikes in July, prompting the government to appeal to the Supreme Court.

On 18 August, the Supreme Court upheld the La Plata decision and ordered the government to scale back rates down to 31 March levels. But the Supreme Court decision extends only to residential users, leaving industries and business out and therefore liable to pay the natural gas hike proposed of up to 500%.

According to a study done by the University of Belgrano, the court decision will cost the government about Ps 20bn ($1.3bn).

“The failure of Macri & company is that they never explained it … in a simple and clear way why to increase [the rates],” Bühler-Vidal said.

Using the example of a taxi driver, the consultant said: “If the cost of gasoline, the wear and tear on the vehicle, is not compensated by the [fare paid for a trip], it is not worth having a taxi.”

So is the case for many companies seeking to invest in Argentina’s natural gas production. Allowed rates were so low before that it was not worth investing in production, Bühler-Vidal said.

If natural gas prices are too low, companies are unable to recover their costs, he said. If companies cannot recover their costs, they don't drill new gas wells.

In fact, Argentina – once a gas exporter, now an importer – has been reducing its reserves and production over the past several years.

According to the Instituto Argentino del Petroleo y del gas (IAPG), domestic natural gas production has been falling (see the graphic), although it increased slightly in 2015 thanks to shale and tight gas production.

INSET IMAGE: Stove fueled with natural gas. (Stock Connection/REX/Shutterstock)

Hence, the government is set to pay producing companies $7.50/MMBtu (at the wellhead), slightly more of international prices and prices of imported natural gas. For example, the government pays $5.40/MMBtu for its imports from Bolivia.

Di Pelino said that natural gas prices are not as easy to set as crude oil prices.

"[Natural] gas prices depend upon geographies, countries, continents," he said.

"One thing is to drill the gas from the well, and another thing is to put the gas in the transportation system, whether it is a pipeline or a vessel," Di Pelino added. "That is why when we talk about gas prices, different prices coexist at the same time. There is not a unique price."

Di Pelino said that is why the government recognizes the need for power and gas companies to get a higher price. for companies. Total natural gas production in Argentina is allocated: 30% for industrial consumption; 30% for thermoelectric plants; and about 40% for commercial and domestic use.

Subsidised natural gas prices also have caused domestic consumption to be one of the highest in the region.

According to local news agency Telam, Argentina has the highest gas consumption per capita in South America.

The Supreme Court decision refers mainly to domestic consumption, but does not impact the petrochemical industry, said Alfredo Friedlander, executive director of the Instituto Petroquímico Argentino (IPA).

Natural gas prices to the petrochemical industry is agreed through contracts with its suppliers, Friedlander said.

The next step for the Argentina government is to follow up with the Supreme Court's ruling to hold a public hearing on residential rates. That proceeding is set for 16 September.

Focus article by Marianela Toledo

By Marianela Toledo