- Argentina's energy sector accounts for more than 6% of the country's GDP and has significant potential for growth. The country holds the world’s second-largest shale gas reserve and the fourth-largest shale oil reserve in Vaca Muerta. Argentina also has the third largest proven lithium reserves and more than 50% of its territory is suitable for wind and solar energy generation.
- Energy sources are still largely concentrated on fossils fuels, with gas (52%) and oil (33%) accounting for 85% of the total energy production. The other 15% is composed by hydropower, nuclear energy, mineral carbon, biomass, wind, and solar energy.
- Although Argentina is one of only four countries in the world that has commercially developed non-conventional resources, only 4% of those resources have significant investment opportunities ahead.
- Foreign investments in the sector have the potential to generate more than 140,000 industry jobs and 68 billion dollars of additional local economic activity.
- The energy sector will be one of the critical pillars to recover economic growth, reduce poverty and hunger, and create high-quality jobs. U.S. companies can make the difference here, as strong partners and investors.
- Macroeconomic instability, foreign exchange restrictions, and government control of energy prices aimed to combat inflation have deterred investments in the energy sector. In turn, the government has set a sizeable scheme of energy subsidies to compensate for the price controls and encourage investments. The energy subsidies, however, account for a significant proportion of the country’s persistent fiscal deficit, which makes the policy unsustainable over time. The uncertainties generated by these unresolved challenges have strongly affected the country’s attractiveness for new energy projects. In the past ten years, subsidies from the national government totaled almost $129 billion, double the amount of the loan granted by the International Monetary Fund to Argentina in 2018.
- In an effort to untap the growth potential of the energy sector, the government is setting up new regulatory frameworks. The Fernández administration has recently launched the Gas.Ar Plan with the objective to incentivize investment from oil and gas operators, substitute energy imports and boost regional exports of unconventional gas. In addition, the government is working on a new hydrocarbon bill that would provide the necessary incentives and safeguards necessary to ensure long-term certainty and attract investments. Such regulatory framework should be designed to provide stable, predictable, and transparent environment, and shield the sector from measures like exchange control and price freezes, thus helping to foster private sector investment and innovation.
- The availability of abundant unconventional gas resources in Vaca Muerta allows Argentina to have access to fossil fuels for electricity generation at very competitive costs. The high potential of Vaca Muerta, however, could undermine the energy transition and climate change mitigation efforts. The environmental agenda of President Biden has prompted the Fernandez administration to balance its stance and begin to promote alternative energy sources beyond Vaca Muerta. While it remains to be seen whether this will lead to policy shifts, the need to develop a constructive bilateral relationship has had an impact on the prioritization of the environmental agenda and renewable energies domestically. Both administrations should, in any event, promote realistic climate solutions that are driven by innovation and private sector investment. Interest in an updated regime to promote hydrogen has resurfaced in recent times. The government is also interested in developing the lithium industry to take advantage of the large reserves of the mineral in the country and the expansion of electromobility worldwide. In this context, the USABC and the Fernandez administration have an opportunity to support investments and foster cooperation to promote local industries that provide added value in the lithium battery and storage production sectors. Such balanced approach is also possible with the development of Vaca Muerta, for example through the implementation of globally recognized technical standards to reduce and prevent methane leaks, the introduction of energy efficiency policies and the use of natural gas as a complementary to intermittent renewable energy sources.
- Unconventional oil and gas and wind power are likely to attract the most investment in the future and become key drivers of the productive and technological development of Argentina. Argentina counts with solid local manufacturing capabilities, extended production networks, and high-quality service providers to supply critical equipment, knowledge, and components for the development of the energy sector. In looking to develop the sector, the administration should be mindful of minimizing compliance challenges related to public climate and sustainability disclosures and balance market demand for sustainable finance solutions with the primary objectives of unhampered market functioning, value creation, and market stability.
Argentina's energy sector accounts for more than 6% of the country's GDP. Due to its reserves’ wealth, Argentina has the potential to become a world-class energy supplier, joining the global energy markets via oil and gas exports. Moreover, it has some of Latin America’s most abundant renewable energy resources—steady winds in southern Patagonia, year-round sunshine in the remote northwest, and hydropower and biomass fed by rivers and expansive farmland. Despite its potential, and rising demand, the country has fallen behind many of its neighbors in turning these resources into a reliable power source. The lack of a public-private consensus on the energy agenda has hindered sustainable growth in the energy sector, as well as limiting integration and diversification.
The sector has stagnated during the past 20 years, with a meager impact on economic development. The erratic and unpredictable changes in energy projects have limited productive development. The cycle usually entailed unplanned processes with short-term growth which are interrupted by policy changes or an adverse macroeconomic which reduces incentives to invest (or both).
This situation, which in any other sector would have entailed a supply shortage, was navigated with a reduction in internal useful energy consumption and a decrease in exports, which contracted by 70.3% between 2000 and 2019. Domestic supply rose, but only by 4.2% between 2000 and 2019. In the same period, production fell by 3.9%. As last resource, the government increased imports at a moment in which international prices were at a maximum.
The recent macroeconomic environment has further deteriorated prospects for investment. Tight capital controls regulation, repatriation of profits imports restrictions, among other issues discourage investors from spending the capital required to develop non-conventional resources. Since President Fernandez took office, there has been an ongoing dialogue to implement a special regime for the energy sector (a new hydrocarbon bill) that addresses these challenges and attract investment.
Although the United States continues to be the top investor in Argentina, over the past 10 years – with a 23% share of the total FDI stocks–, Argentina has received a strong flow of Chinese investment, mainly with financing through the Export Import Bank of China (China Exim) and China Development Bank. Prospects for critical infrastructure around Vaca Muerta and additional nuclear generation foresee financing and development undertaken by Chinese companies.
Argentina will continue to be reliant on foreign investment to establish a sustained trend of economic growth as the country deals with the twin challenges of the Covid-19 pandemic and economic recession. Particularly, the Argentine government is pinning hopes on the energy sector to join agriculture as a driver of exports and economic growth. This is an opportunity to promote innovation and encourage the Argentines to develop a strategic roadmap in the energy sector that incorporates climate change and sustainable development, to ensure greater resilience and response capacity in a post-COVID-19 era.
Vaca Muerta
The development of Vaca Muerta begun in 2011 and investments increased significantly between 2015 and 2019 –totaling $15 billion– with shale quality, production incentives, tax exemptions, and negotiated labor contributing to lower operational costs by approximately 30%.
Investment has stalled recently due to the macroeconomic crisis and regulatory and policy uncertainty. The major challenge for sustainable investments is the lack of international financing, which started to decrease in 2018 and was later worsened by the capital controls imposed by the government and more recently by the fall of international commodity prices due to the COVID-19 pandemic.
The largest upstream sector share (42%) is held by YPF, Argentina’s majority state-owned energy company, while Gas y Petróleo del Neuquén S.A. –Neuquén province-owned energy company– has 12%. The other 46% is held by major global and local exploration companies.
Vaca Muerta upstream opportunities include three kinds of investment. First, investments in exploration and production in shale oil & gas development wells. Second, opportunities in new shale oil and gas gathering systems, processing plants, and oil and gas trunk pipelines. Finally, investments to build LNG liquefaction and export facilities. It is estimated that Vaca Muerta will require an investment of $120 billion until 2030 ($8 billion per year).
The administration has adopted certain incentives to attract investment such as the Import Regime of Used Goods for the Hydrocarbon Industry (Decree No. 555/2019), the Import Regime of Goods Intended for Big Investment Projects (Resolution No. 256/2000), and a large scheme of incentives subsidizing the development of Vaca Muerta. In 2019, companies received around $423 million, nearly three times more than in 2018, which represents 12.1% of all government energy subsidies.
The Fernandez administration has recently launched the Gas.Ar Plan which seeks to subsidize production and increase supply of unconventional gas from concessions located in Vaca Muerta to reduce imports and increase exports. The program will initially be available for 4 years but may be extended by the government depending on market conditions.
The program will provide support for a total volume of 70 million m3 per day during the four years, with certain additional volumes for the winter seasonal period. The price to be paid to operators is designed to work as an incentive for investment and operators must file an investment plan on how they expect to reach the committed injection volumes and be bound to achieve a production curve per basin that guarantees the maintenance and/or increase of current levels of production.
Participating producing companies may be offered preferential conditions for exports for up to a total volume of 11,000,000 m3 per day, to be committed exclusively during the non-winter period. The benefits for exports will apply both to the export of natural gas through pipelines and to its liquefaction in the country and subsequent export as LNG.
Energy Subsidies & Tariffs
For years, the Argentine government has sought to cut costly energy subsidies first implemented in 2002 to protect consumers from soaring inflation following the 2001 financial crisis. The bill for energy subsidies increased tenfold as a share of GDP in less than a decade, making them the main source of a growing budget deficit. Fears of public backlash have mostly prevented the government from acting and the discretional management of energy prices resulted in distorted signals that led to overconsumption and underinvestment in the sector.
Since December 2019, under pressing macroeconomic conditions, Alberto Fernandez’s administration postponed the subsidy reduction program and redesigned it several times. In 2020, subsidies totaled $6334 million (1.7% of GDP) and rose for the first time in 5 years. While the 2021 budget foresees that this year there would be a level of energy subsidies similar to that of 2020, this would require energy prices to increase between 35% and 40%. However, the government has recently determined that the price increase will be of only 9%.
Lithium
Globally, Argentina ranks third in terms of largest proven reserves, fourth in lithium production, and first among U.S. sources of lithium imports. Most of the mineral deposits are found in the salt flats (or salares) of the northwestern provinces of Catamarca, Jujuy, and Salta. Argentina had nearly 40 lithium projects as of June 2019, from the expansions of the existing two mines, to another two under construction, and many more in both early and advanced exploration phases. The pandemic slowed various projects that were set to double the country’s installed capacity in 2021. Now the two mines under construction—Caucharí-Olaroz and Salar de Centenario Ratones—postponed production plans until 2022.
With an eye toward renewing the country’s transportation system, Productive Development Minister Matías Kulfas is set to introduce a bill to Congress that would foster the incorporation of small and medium sized businesses into the domestic value chain in battery and automotive manufacturing.
In October 2020, the Fernández government reduced the tax on mineral exports from 12% to 8% and, to further attract investment, the government has hinted at potentially implementing a progressive tax that could begin at a lower rate for new projects.
Hydrogen Promotion Regime in Argentina
In 2006, Argentina passed the Act 26123 to promote the use of hydrogen, introducing a series of tax benefits for companies and individuals, and establishing a fund that was intended to finance activities under the National Hydrogen Program. However, no regulatory decree was ever adopted and the law, which was never implemented, is set to elapse on August 24, 2021.
The technology subsidiary of YPF, Argentina's state-backed oil company, formed last year a consortium of more than 30 companies including IEASA as well as the oil and gas producers and refiners Pampa Energía, CGC and Trafigura to develop the local hydrogen sector with a view to produce and export supplies.
Interest in an updated regime to promote hydrogen has resurfaced in recent times. The most salient instance was when Argentina’s President Alberto Fernández mentioned that hydrogen would be promoted during his speech at Joe Biden’s Climate Leaders’ Summit. Secretary of Strategic Affairs Gustavo Béliz, supports exploring the role of hydrogen as an energy source and recently convened the forum "Towards a National Hydrogen Strategy 2030".
