Argentina’s uncertain energy future

Argentina’s uncertain energy future

Despite natural resource potential and recent policy changes to encourage investment, Argentina faces challenges in the energy sector as global oil prices are low, investor confidence remains shaky and neighboring countries offer a less risky alternative.

In early December the price of oil reached a historic low not seen since the last months of 2008, with leading forecasts predicting that it will remain the same for the foreseeable future. This situation is creating a new set of challenges for resource-dependent Latin America, particularly for countries like Argentina, which have been looking to develop their shale energy potential.

Currently, Argentina is going through a very difficult period. The country’s economy is in a fragile state, with inflation at 40%, chronic high unemployment and flight of foreign investment. Meanwhile, the current government has become deeply unpopular, largely as a result of ill-designed socioeconomic policies, growing insecurity and a series of highly publicized corruption scandals.

Under this mounting pressure, in recent months, President Cristina Fernández de Kirchner’s administration has enacted controversial policy reforms as a desperate attempt to attract much-needed investment and help kick-start its ailing energy sector. But under current conditions, it is unclear whether it will succeed in securing enough investment in the near future.

Until now, attempts by the Fernández government to inject foreign capital into its vast oil and gas deposits has been met with skepticism.

The country has a history of state intervention in the energy sector, to which has recently been added the decision to expropriate Yacimientos Petrolíferos Fiscales (YPF) in 2012. This has set a very bad precedent for any potential new ventures.

Although the current government has taken a series of positive steps to amend this, by reimbursing the lost capital to YPF shareholders and easing capital restrictions, these are unlikely to provide enough guarantees for the risks still facing potential newcomers.

The country’s sovereign debt default earlier this year has further eroded investor confidence. This dynamic is poised to complicate even more the already difficult business environment, particularly for foreign operators already subject to myriad restrictions and currently exposed to a broad spectrum of reputational risks.

The new energy policy framework is generous for foreign companies, as it streamlines the regulatory system, provides new fiscal incentives and extends the length of concessions for shale and offshore projects.

Nevertheless, these changes might have a short shelf life. The looming elections in October 2015 are expected to bring a new government, which is likely to claw back on key concessions. All opposition parties as well as Fernández’s own FPV party have been critical of the new energy policy which they consider to be too generous. So even if the FPV holds on to power, there are no guarantees for continuity.

With its considerable energy potential from shale deposits such as “Vaca Muerta” Argentina offers an unparalleled opportunity for companies with the right mix of technological know-how, deep financial pockets and political connections. However, under the current complex domestic conditions, and compared to the more stable political and economic environment offered by other countries in the region, the rise of Argentina as a regional energy powerhouse might have to wait a bit longer.

About Author

Sergio Rojas

Sergio is a contributing analyst for several risk management consultancies in Canada and the UK. He holds a Masters degree in International Relations from the London School of Economics, and Bachelor degrees in Commerce and Political Science from the University of Alberta and Carleton University in Canada.