The current state of the Argentine energy sector

I. INTRODUCTION

Prior to the 1990s, the Argentine energy sector (oil, gas and electricity) was run by state owned companies. In 1989, Law no. 23,696 set out the principles of the government-led industry reform, ordering the decentralization and privatization of state-owned companies that undertook commercial activities. The Federal Government launched the following measures: (i) privatization of YPF and Gas del Estado; (ii) permits for exploration and concession agreements to exploit oil fields were granted to private and foreign companies;2 (iii) oil companies were considered the owners of the production and could export it or sell it in the local market; (iv) hydrocarbons prices were not controlled; (v) export taxes and restrictions were eliminated; (vi) oil producers had the right to dispose of 70% of foreign exchange earnings from exports.

The integrated state owned companies engaged in the natural gas and electricity industry were first divided into three different business units (generation, transport and distribution) and then privatized. The natural gas production and electricity generation industries were regulated as open markets and prices were not controlled. Transport and distribution of natural gas and electricity were regulated as public services and granted to private companies through concession agreements. Public services tariffs were calculated in U.S. dollars and stated in pesos and were adjustable according to international indexes.

In 2001 Argentina suffered a major economic crisis and devaluated its currency. In order to address the crisis, the Federal Government made several changes to the regulatory framework that came into place in the 1990s to prevent the increasing of prices and tariffs and to ensure the satisfaction of the domestic market.

In 2002, all tariffs for public utilities were frozen to protect consumers and users. This included a freezing of residential and industrial electricity and gas tariffs, which in turn froze the prices of oil and electricity paid to producers. The original framework of free market prices was replaced by a system of regulated prices. As hydrocarbons production declined, exports were not only taxed, but increasingly restricted, to the extent that exports were prohibited until the domestic demand had been satisfied. The right of oil producers to dispose of their foreign exchange earnings from exports was also restricted. This ultimately amounted to a practical prohibition of exports. The strong regulation over hydrocarbons prices resulted in a significant difference between domestic and international prices of petroleum (Chart 1).

The abovementioned measures discouraged investment in the entire energy sector and caused a decrease in production. The demand of energy continued growing each year but the supply was not enough to satisfy it so Argentina had to increase the importation of fuels.

Since 2011 Argentina has been dealing with the loss of energy self-sufficiency. The importation of fuel and electricity has increased in the last three years and has caused a negative impact on the Argentine trade balance (Chart 2).

To deal with energy crisis, the Federal Government has launched new initiatives to encourage investment in the sector, as detailed below:

  • Creation of promotional schemes to increase hydrocarbon production and electricity generation by setting higher prices than the regulated ones for the new energy produced. These new prices are paid by the Federal Government with public funds.
  • Execution of public works to improve the generation and transport of electricity.
  • Providing more favorable tax treatment for imported machinery and equipment to be devoted to the energy sector.
  • Gradually increasing prices of fuels.
  • Gradually increasing electricity and gas tariffs.
  • Creation of charges to be paid by users of gas and electricity for the establishment of Trust Funds for large energy investments.
  • Granting of exploration permits and exploitation concessions to develop new hydrocarbons blocks or to recovery previously exploited blocks.
  • Association of state owned companies with private companies to explore or exploit hydrocarbons areas, or to execute new projects for power generation.
  • Promotion of renewable energy to diversify the national energy matrix that is currently strongly dependent on hydrocarbons.

These were the first steps taken by the Argentine government that indicated a policy-shift to encourage investment in the sector in order to eliminate the hydrocarbon import deficit and become not only self-sufficient but a net hydrocarbon exporter. Below we set out additional measures which have been taken across the energy sector to broadly increase both investment and production.

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