Argentina weighs new price subsidy, but freezes gas tariffs

Gas pricing and market regulation are again under discussion in Argentina. The coronavirus pandemic has weakened an already vulnerable economy, with the impact felt in the gas market. To maintain low gas prices for end-users, the new administration has imposed a “tariff freeze” until the end of 2020.

Mauro Chavez, principal analyst, Latin America gas, at Wood Mackenzie, said: “Enargas, the national gas regulatory agency, uses an exchange rate of ARS$42/US$1 for gas prices to regulated users when nowadays the exchange rate is over ARS$70/US$1.

“In addition to this, Enargas has not revised its transportation and distribution tariffs since April last year.

“Argentina has been in a similar situation before. In 2002, the country’s economy was struggling. Then, the government capped prices to end-users in an attempt to support the economy.

Investment

“However, price regulation proved uneconomical for producers, and upstream investment stalled, causing supply to go into decline.”

The drop in production eventually created supply shortfalls, and ultimately the government introduced gas price subsidies in 2013 to revive the country’s exploration and production sector.

Argentina appears to be reviving the approach adopted in 2002, Chavez said.

“The new administration is introducing intervention to cap gas prices to support the country’s struggling economy. As history has shown us, there will be a supply decline response,” he said.

“Unlike before, these days 40% of production is from steep-declining unconventional fields. This indicates that supply shortfalls will be steep and swift. The country is likely to need another liquefied natural gas (LNG) regasification terminal as soon as next year, and LNG imports are likely to rise to US$3 billion in 2022 from US$ 0.4 billion in 2019.

"As LNG imports are paid by state-run IEASA with transfers from the national treasury, this could add more stress to Argentina’s capacity to pay external debt.”

Chavez added: “The government is considering reverting to an old recipe to counter declining production trends: a gas price subsidy programme for producers (Plan Gas 4). This programme would provide a price of US$3.5 per million British thermal units for four years for projects that maintain their production levels as of May 2020.”

Contract mechanisms

Wood Mackenzie has identified a number of concerns with Plan Gas 4: introduction of state payment risks; insufficient pricing for greenfield projects; long-term uncertainty; unfair competition; and indiscriminate cross-subsidy.

“There are other market pricing and the contracting mechanisms which could be more efficient while providing the oversight the Argentinian gas market needs,” Chavez said.

“Among the contracting mechanisms that could be employed, adopting long-term contracts with mixed currency pricing, complemented by short-term auctions to address imbalances could provide a robust framework for the country’s gas sector.

“Most importantly, contracting mechanisms need to have continuity and scheduling to provide foreseeability.

“Price discovery mechanisms could result in higher prices than the current frozen tariffs, but it will not require a subsidy for production. Instead, the state could strengthen the coverage of the ‘Tarifa Social’ programme to alleviate the pressure of gas expenses on low-income households. Another option is to apply cross-subsidies between higher and lower income consumers, as used in Colombia.”

Optimal solution

He said policymakers have a number of pricing and contracting mechanisms and policy tools at their disposal, including price caps and subsidies for producers.

“The optimal solution will likely be a combination of approaches, based on the principles of the Gas Law 24.076 of 1992, that are sustainable regardless of changes in the economic environment, oil prices and government administrations,” Chavez said.

“Argentina has the natural resources to provide competitive energy services to its population and industries. Despite good intentions, government intervention in markets can have unintended consequences.”

Chavez added: “The combination of the energy transition, and the potential Argentina has in both the Vaca Muerta and its conventional plays should prompt a shift to a market driven by efficiency. This would drive investment, employment, royalties and help the trade balance, ultimately benefiting Argentina as a whole.”

 Argentina Gas Prices – Part II: Market Distortions, Plan Gas 4 and Alternative Pricing Mechanisms