What has been the outcome of Argentina’s energy policies in the last decade, and what policies does Argentina need to implement to develop its hydrocarbon potential?

The energy sector in Argentina has faced political pressure, price controls, and energy consumption subsidies that increase demand but do not incentivize investment. As a result of these shortsighted policies, Argentina has lost energy self-sufficiency. Although Argentina has vast unconventional resources, it cannot develop this hydrocarbon potential with domestic savings alone. Argentina needs international investment and a predictable energy policy to attract it. However, Argentina’s incentive structures and the misguided view that oil prices would stay at $100 per barrel have caused investors to prioritize the exploration and production of oil over gas.

Investors need predictable signals of how the rules of the game are going to evolve. Constantly changing rules concerning rent distribution will cause companies to overproduce and limit new investment in developing new reserves. When regulations abruptly change, exploration is the first item that exploration and production (E&P) companies cancel. Whereas production offers immediate rent, exploration only offers potential rent. Provinces must offer E&P companies predictable prices that are free from discretional political intervention and that follow international reference.

How will rising interest rates affect Argentina’s oil and gas industry?

Argentinian companies have limited opportunities to borrow in the domestic market, and exchange-rate controls make it difficult to borrow internationally. Therefore, rising interest rates do not pose serious debt-service problems for Argentine companies. Yet higher interest rates will mean higher financing costs. Despite near-zero interest rates, Argentine companies face a premium of 8% to 10% in international capital markets due to Argentina’s country risk. If interest rates go up, Argentina may face financing costs so high that investors will be unwilling to invest in further projects. Argentina needs to reduce its country risk to reduce interest rates to a level that can compete at least with other countries in Latin America.

What effect do energy subsidies have on the economy and investment in the oil and gas industry?

Energy subsidies in Argentina make relatively lower energy prices possible, especially subsidies of natural gas consumption. However, subsidies cost around $15 billion per year and represent around 3% of GDP. Phasing subsidies out will be a significant challenge for Argentina, but they also affect investment in the oil and gas industry. Low electricity and natural gas prices stimulate energy demand, but the problem is that current prices do not cover production costs. New price signals must attract more investment, or the only investment will be government investment with public funds.

How should oil and gas rents in Argentina be distributed?

When it comes to distributing rent, consumers should not be at the negotiating table. The participation of consumers in the negotiation of rent distribution introduces price-distorting subsidies. To avoid energy prices deviating from international price references and ignoring opportunity costs, only the government and oil companies should be present at the negotiation table.

Provincial governments acquire economic rents through royalties, license extension fees, and provincial taxes. The national government acquires rent through income and export taxes. Nevertheless, the national and provincial governments must appropriately compensate companies in light of the risk and cost of a project. For example, given the risks and high costs associated with offshore exploration and production, companies must receive a portion of rent in the order of 60% to 70% to attract investments. Other projects can have risks and costs so low that companies only expect around 30% of the rent.