Argentina’s financial crisis is an opportunity to rethink its energy plan
As Argentina confronts its massive financial crisis, a silver lining hides in plain sight. The country has an opportunity to rethink its faltering energy plan, which is overly dependent on unconventional (fracking) oil and gas reserves in northern Patagonia’s Vaca Muerta or “Dead Cow.” The current political and economic climate, however, threatens to turn this great Argentine asset into a liability.
The Overseas Private Investment Corporation (“OPIC”), a U.S. government entity that secures funding for projects in developing countries, has announced two new investments for fracking in Argentina. This decision is, at best, premature as the country’s energy plan and energy markets are dysfunctional.
Argentina can prudently use its Vaca Muerta’s oil and gas reserves — along with abundant solar and wind resources — to stabilize the economy. A new plan would allow the country to chart a path toward energy independence and economic stability.
The current 2018 energy plan is unrealistic. It calls for a doubling of natural gas and oil production within five years. The production growth assumes making available large subsidies for mostly foreign private companies. Profits from exports will, in theory, enhance the economy, create jobs and provide fiscal stability.
The plan, however, is failing to meet its production goals. Most of the capital is coming from the government not investors. The recent upheaval includes large stock losses and bond downgrades for domestic energy players. It threatens the continued participation of foreign investors. And the high price of oil and gas is a bitter reminder that abundant reserves do not mean lower prices for a population pummeled by inflation and a shrinking peso.
Why rethink the plan?
- Fracking is not financially viable. Fracking has created a production boom. But it has been a financial bust in the United States. Numerous unconventional oil producers have gone bankrupt after a decade of negative cash flows.More bankruptcies are expected. Worker layoffs will follow.
- Oil and gas production in Argentina is already substantially below plan.The plan fails to account for high production costs, unavailable technological assets, unstable policies, weak foreign partners and a changing global market. Current conditions support more modest production goals.
- Government subsidies for natural gas production have created a glut. Natural gas is the largest component of Argentina’s energy mix. But it is seasonal. Government subsidies that initially increased production have now led to over-production. Producers are scrambling.
- Government subsidies have supported foreign companies that have not delivered benefits to Argentina. Natural gas production with government subsidies has proven ineffective. The subsidies also show that the largest investor in Vaca Muerta has been the governmentof Argentina — not foreign partners.
- Exporting natural gas and oil requires substantial government-funded infrastructure projects. Developing Vaca Muerta’s oil and gas reserves and supporting an export market will require $50 billion. Projects are stalled as foreign investors are saying “no”due to growing instability.
- Focus on exports is ill-timed.The plan relies on oil and gas exports to earn dollarized revenues. Argentina is seeking to become an international force when global markets are in a state of political turmoil, oversupply and low prices.
- Renewable energy penetration is gaining traction around the world. There are more opportunities in renewable energy than when the Plan was crafted two years ago. Argentine leaders should revisit the global market outlook and create a balanced energy plan that supports its domestic economic recovery with lower-cost alternatives.
The fundamental flaw in the plan is its assumption that abundant fossil fuel resources will generate jobs, lower prices, dollars and pesos that stabilize Argentine’s finances.
The benefits of abundant oil and gas reserves are neither automatic nor free. Extracting value from oil and gas reserves has never been more challenging. Technological competition is robust — between oil and gas producers and between renewable energy and oil and gas producers. Markets are unstable.
Argentina can harness its abundant resources — Vaca Muerta and renewable energy — to stabilize its domestic economy. The cloud over Argentina has a silver lining.
Tom Sanzillo is director of finance at the Institute for Energy Economics and Financial Analysis (IEEFA) with over 30 years of experience in public and private finance, including as a first deputy comptroller of New York State.
Kathy Hipple is a financial analyst at IEEFA and a professor of finance at Bard’s MBA for Sustainability program.