Argentina’s Energy Secretariat has delayed the enforcement of a 90-day freeze on diesel and gasoline prices that President Mauricio Macri proposed Wednesday, a move seen as appeasing the concerns of oil companies that it could slow drilling activity and production growth.
The price freeze «will be done in agreement with the companies,» the department said in a one-sentence statement late Wednesday that provided no guidance on how this could pan out.
Macri early Wednesday announced the cap as a part of a raft of measures to help consumers and small businesses after a 25% depreciation of the peso against the dollar this week accelerated an inflation rate already above 55% annual, threatening to push the economy deeper into recession in its second year.
The plunge in the currency came after a primary election Sunday raised concerns that Macri’s conservative coalition may not win a second four-year term at the October 27 general election, which could bring back the anti-business policies of the populist regime that ruled from 2003 to 2015.
Even so, the price freeze did not sit well with oil companies. Based on calculations reported by the local press, the cap would cut crude prices for refiners 30% to $45/b from Friday.
Ahead of the decision to delay the measure, Energy Secretary Gustavo Lopetegui said he wasn’t in favor of it, but said the freeze is inevitable given the threat of faster inflation.
«It would have been preferable not to do it,» he told S&P Global Platts on the sidelines of a chat he gave on the country’s energy prospects late Wednesday at the University of CEMA in Buenos Aires.
He said oil companies «will have to carefully evaluate everything» before making decisions, including not only the price freeze but the possibility of a return of populism.
«Capital goes to where there are rules that companies are used to playing by,» he said in his talk. «If a company has been playing baseball for 100 years and you propose that it is better to play badminton because it is more fun, that company is going to go to another market where there are resources and they play baseball, because they don’t want to learn how to play badminton.»
Argentina, he said, is attractive because it has large oil and natural gas resources, including in Vaca Muerta, one of the world’s biggest shale plays, as well as talent. The country has been producing oil for more than 100 years and has universities that are training future engineers.
«If you implement the correct rules and respect them, investment will come,» he said.
IMPACT ON PRODUCTION
With the price freeze, Lopetegui said oil production won’t be immediately affected, but it could reduce investment going forward.
That is partly because the market rout has pushed up the cost of capital for doing business in Argentina, which Lopetegui said had already been high at 14% to 15%.
«If we could cut the cost of capital, there would certainly be more drilling,» he said.
That may not happen anytime soon. With more analysts forecasting that Argentina could default on its debts in the next few years for the second time in two decades, this could keep borrowing rates high and stem investment.
Lopetegui said it is still too early to say if investors could shift their focus away from Argentina, but there are a growing number of warnings that new projects could be shelved.
«Everybody is going to wait,» said Luciano Fucello, country manager for Houston-based services company NCS Multistage.
He suspects companies will put new drilling plans on hold, but said there is a buffer of wells for completion that could sustain production, but may not increase it.
FOCUS ON VACA MUERTA
Fucello said some international players could shift their investment focus to assets outside Argentina, while those that operate primarily in Argentina, such as state-backed YPF, likely will funnel most of their capital to the lowest-cost projects, in particular Vaca Muerta.
Lifting costs are around $18/b in Vaca Muerta, making it cheaper to develop than maturing conventional reserves in the south where lifting costs are $40/b because of the need to use costly secondary and tertiary techniques, he said.
While Vaca Muerta is more capital intensive, «it is more predictable» in terms of what can be found and put into production, Fucello added.
Another threat of the economic and political volatility is that midstream projects could stall, raising the risk of future bottlenecks.
While there is ample capacity in pipelines for increasing oil production and deliveries, gas is tight.
The government is holding a tender this year to build a more than $1 billion pipeline over the next two years to boost gas transport capacity by 40 million cubic meters/day, or nearly 30% of national output of 140 million cu m/d.
«I think we are going to go ahead with the gas pipeline,» Lopetegui said, saying that financing has been lined up through the recent sale of two power plants by the state. «The only way to continue to develop gas in Vaca Muerta is to have a way to evacuate it.»
Still, companies may wait until after the election before investing because of the uncertainty of future energy policies.
Alberto Fernandez, a favorite to become the next president, is a moderate, but analysts say he is surrounded by populists who may favor bringing back the interventionist policies of 2003-2015, such as capital, currency, pricing, and trade controls that hit the country with energy shortages.
Fernandez on Wednesday said he doesn’t want to bring back capital controls and favors a weaker exchange rate.
«I come to look for something new,» he said in a televised press conference. «I do not come to restore a system of the past, of which I have been critical.»
Indeed, one of his potential picks for economy minister, Guillermo Nielsen, said Wednesday on Twitter that Macri’s price freeze is «unacceptable,» adding that free-market pricing is a key to develop Vaca Muerta.