Argentine energy imports at root of falling peso

By Al Greenwood

HOUSTON (ICIS)–Argentina’s growing imports of natural gas and fuel have caused its reserves of dollars to dwindle, leading to this week’s devaluation of the peso, the worst since the months after the nation’s economic crisis in 2001.

The currency traded at peso (Ps) 8.00 to the dollar on Friday, weakening from Ps6.885 on Tuesday, according to Banco de la Nacion Argentina.

On Wednesday and Thursday, the speed of the peso’s depreciation rivaled that seen in March 2002, immediately following Argentina’s economic crisis in 2001, according to the newspaper La Nacion.

At the heart of Argentina’s fiscal problems is energy, said Mark Jones, Joseph D Jamail Chair in Latin American Studies at Rice University in Houston. 

Despite Argentina’s rich energy resources, the country’s policy has discouraged their exploitation, Jones said.

This has caused Argentina to spend increasing amounts of money to import energy in a method that is both haphazard and inefficient, said Jorge Buhler-Vidal, director of Polyolefins Consulting, a consultancy located in New Jersey.

Rising energy imports are draining the country of dollars, which it needs to prop up the value of the peso. Ultimately, the country relented and allowed the currency to depreciate.

For several years, the government has been propping up the value of the peso as a way to control inflation, since a weaker peso would make imports more expensive, Jones said.

Argentina has had among the highest inflation rates in the western hemisphere, with private estimates placing it at 25-30%.

The government adopted several steps to control inflation. It capped energy prices and used its reserves of dollars to support the peso. However, both tactics have pressured the country’s finances.

The cap on energy prices discouraged companies from developing new reserves. Argentina, once an energy exporter, became an importer.

Imports of liquefied natural gas (LNG) reached 4.60 billion cubic metres (bcm) in 2012, up from 3.93bcm in 2011 and 1.69bcm in 2010, according to the Energy Secretariat.

Such imports are ruinous to the country’s treasury because they are purchased in dollars and sold to consumers at subsidised rates.

For natural gas, Argentina had been buying LNG at $15-18/MMBtu and selling it to consumers at massively discounted prices. Some consumers paid about $2/MMBtu.

The country has also adopted an inefficient method of purchasing LNG, Buhler-Vidal said. Instead of developing permanent regasification infrastructure, the country rents ships. This discourages many sellers from dealing with the country, since they want to avoid the complications involved with delivering LNG to regasification vessels, he said.

Moreover, the country buys LNG on the spot market, even though it regularly imports the fuel, Buhler-Vidal said.

The imports of LNG and other hydrocarbons have caused the country to lose dollars the country needs to prop up the peso.

Outside of exports, Argentina has limited means of obtaining dollars. Since the country’s default in 2001, Argentina is effectively barred from raising money from foreign markets.

That is why energy plays such a key role in the country’s finances, Jones said. Rising imports are eliminating the country’s trade surplus and exhausting its reserves of dollars.

Argentina’s overall trade surplus fell to $9.02bn in 2013, down more than 27% from $12.4bn in 2012, according to INDEC, the country’s statistical institute.

Energy imports played a large role in the country’s shrinking trade surplus. Imports of fuels and lubricants reached $11.4bn, up about 23% from $9.27bn in 2012, INDEC said.

Meanwhile, Argentina’s foreign reserves have fallen from $52.2bn in 2010 to $30.6bn in December 2013, according to the Argentine Central Bank.

Jones does not expect the recent peso devaluation to solve the country’s long-term problems.

Argentina will either have to devalue its currency further or set up some sort of multi-tiered exchange-rate regime, he said, because the peso is still overvalued.

The country’s unofficial exchange rate, called the blue dollar, stands at Ps11.70, according to the business newspaper Ambito Financiero. That is still well above the official rate of Ps8.00

“There is a realisation that the blue dollar has gotten out of control,” Jones said. “The devaluation is a recognition of that.”

Argentines have already lost faith in the currency, Jones said. For them, “it’s a question of how quickly they can get rid of the peso and with what kind of haircut”.

Some are doing whatever they can to either buy dollars or buy hard assets, Jones said. The later, of course, drives up inflation.

Reversing Argentina’s declining energy production could help alleviate the peso’s ills.

Gas output reached a peak of 51.6bn cubic metres in 2006, according to the Argentine Energy Secretariat. By 2012, it had fallen by nearly 15% to 44.1bcm.

Despite the country’s substantial shale gas reserves, estimated as the second largest in the world, Argentina will not likely become a net exporter of gas anytime soon.

The government takeover of YPF from Repsol has made outside companies wary about investing in the country.

High inflation makes shale gas operations expensive. Argentina also lacks the skilled labour needed to develop its shale resources and the infrastructure needed to ship the water necessary for hydraulic fracturing.

Moreover, companies face numerous impediments to importing the equipment necessary for shale gas production.

Although companies such as Chevron have announced investments in Argentina, they are nowhere near the billions required to develop the country’s resources, Buhler-Vidal said.

Instead, those relatively minor investments are intended to maintain a foothold in Argentina, he said. Once the business climate improves, producers will start making larger investments.

From the time those investments start, it will likely take five years for production to begin, Buhler-Vidal said.

That countdown is unlikely to start until Argentine President Cristina Fernandez de Kirchner’s administration leaves office at the end of 2015, he said.

Meanwhile, Argentina’s plastics market is scrambling to respond to the peso’s sudden devaluation.

Plastic processors do not know if their credit terms will shorten to 15 days or remain at the typical 60. Companies that sell imported material may begin selling it in US dollars.

Some in the vinyls market said that resin sales have been suspended until the currency situation is clarified.

Additional reporting by Ron Coifman and George Martin