INSIGHT: Argentina: the new face of the petrochem market

By Marianela Toledo

HOUSTON (ICIS)–Argentineans said yes last year to presidential candidate Mauricio Macri’s slogan of “Cambiemos,” or “Let’s Change.”

Since his election, change has come fast and furious.

His government has depreciated the domestic currency by about 40%, removed the country’s restrictive foreign-exchange controls, lowered taxes on exports; reduced energy subsidies, and put an end to the long battle with creditors over a debt default in 2001 that now allows the country to access international capital markets.

Now the face of Argentine business is changing, too. A whirlwind round of mergers and acquisitions has swept the competitive landscape (see the chart), entwining ownership of the country’s energy distribution and chemical feedstock production.

The new ownership positions cross industries, entangle related partnerships and connect various industries into ownership by a few families and partnerships. 

“It certainly looks convoluted,” said Jorge O Bühler-Vidal, at Polyolefins Consulting, LLC, based in New Jersey.

Prominent Argentine businessman Marcelo Mindlin, the head of Pampa Energia, the country’s largest electrical power provider, producer of natural gas and a chain of gas stations, in May bought a 67% stake in Brazilian state-run oil company Petrobras’s operations in Argentina for $892m. 

Grupo Inversor Petroquímico (GIP), an investment firm, bought Petroken in February for $184m and, by doing so, put all of Argentina’s polypropylene production, along with its other holding, Petroquimica Cuyo, in one hand.

GIP has also acquired Transportadora de Gas del Sur (TGS), the biggest gas transporter in Argentina.

Meantime, YPF – which is working in a joint venture with Argentina’s sole polyethylene (PE) producer, Dow Chemical, to develop shale gas in the Vaca Muerta formation – continues to be the main feedstock supplier for country’s polypropylene, polystyrene and polyethylene producers.

“At this time, Petroquimica Cuyo and Petroken are still being operated independently. But it seems reasonable that at some point in the near future operations will be merged,” Bühler-Vidal said.

“I believe the main interest from Mindlin/Pampa in Petrobras is its energy assets, not necessarily its petrochemical operations.”

Meanwhile, Dow Chemical remains dependent on ethane supplied by a partnership that includes its competition: Compañía Mega (owned 38% by YPF, 34% by Petrobras and 28% by Dow) and TGS, which is 51% owned by Compañía de Inversiones de Energía S.A (CIESA) with the rest listed on public stock exchanges in New York and Buenos Aires.

But that may not last.

“I believe that the Petrobras participation in Mega will be acquired by Dow and YPF, or perhaps by Dow alone,” Bühler-Vidal says.

What do all of the changes of ownership and tangle of partnerships mean?

“It looks to me that the PP, PS and PE businesses still remain under independent ownerships, while gas transportation and liquids processing have a more intermingled ownership, are still relatively independent,” the consultant added.

Bühler-Vidal says that YPF is concentrating in its core business, oil and gas exploration, extraction, and processing. As a consequence, further inroads into petrochemicals would be an unnecessary distraction.

“All of these companies have a common interest, successful production of abundant and relatively low cost natural gas, that will allow them to serve the general industry and consumers, but also to run and expand capacity in the PE and PP businesses,” Bühler-Vidal says.

Gas production provides Dow with a fuel as well as a feedstock for its petrochemical complex in Bahia Blanca, Argentina. Like the US and Mexico, Argentina relies on gas-based ethane as a feedstock for ethylene, unlike much of the rest of the world, which relies on oil-based naphtha.

If Argentina can increase gas and ethane production, it could potentially achieve a feedstock advantage similar to producers in North America.

Argentina is estimated to hold the second-largest reserves of shale gas in the world, according to the US Energy Information Administration (EIA).

And more investments are on their way since the previous administration expropriated, in 2012, from Spanish energy company Repsol the latter’s majority stake in YPF.

Vaca muerta

After YPF returned to government hands, several agreements were made with local and international companies to extract oil and gas from Vaca Muerta (dead cow) shale formation, in the Patagonian Province of Neuquen, Argentina.

Among them are YPF agreements with Chevron to drill 132 wells; and Dow Chemical and Shell Argentina are to drill another 16 wells each. YPF has also made agreements with the local Pluspetrol.

There are also proposed agreements with Petronas and Gazprom.

In addition, in May of this year, YPF announced it was teaming up with Pampa Energia and Petrobras to shale gas exploration in provinces of Neuquen and Rio Negro.

Jorge Salazar–Carrillo, a professor of economics at Florida International University (FIU) who has research interests in economics of Asia and Latin America, says that recovery in Argentina has restarted thanks to president Mauricio Macri economic policies and more investments are expected for the country.

“Argentina will be back to the international markets,” he said, adding that the country now has access to international lenders who can invest in the infrastructure needed to develop some of the projects.

The currency devaluation under his administration should help promote Argentine exports, necessary to acquire US dollars.

Additionally, earlier this year, the Macri government announced it will subsidise crude oil exports as long as the Brent price is below $45.50/barrel in order to incentivise investments.

But those moves mean that consumers are paying more now for the gas they pump into their car tanks. Consumers have also faced drastic increases on their cost of living expenses, which includes higher electrical bills and natural gas, food and other transportation costs.

As a consequence, petrochemicals consumption, in general, has declined constantly from January to July.

In June, for example, retail sales fell by 9.8% compared to the same month last year, according to the Confederación Argentina de la Media Empresa.

The drop in consumption prompted some resins processors cut production by 10-15% this year, compared to previous year.

In addition, not all workers’ salaries were adjusted to the devaluation, cutting their purchasing power.

Salazar Carrillo says is still hopeful about Argentina’s future saying the removal of some subsidies were necessary measures to take back the control of the country.