Argentina’s Energy Dilemma

BUENOS AIRES – The expropriation of nearly all of the Spanish company Repsol’s stake in Argentina’s energy producer YPF, announced in a vehement speech by President Cristina Fernández de Kirchner, has raised legal alarms worldwide. In fact, the move will not resolve the country’s energy problems in the absence of enormous inflows of investment to the sector.

Repsol acquired complete control of YPF in 1999; in February 2008, it transferred part of its shares to the Petersen Group, which today holds 25%. Repsol currently holds 57%, with the rest owned by stock-market investors. The Argentine government intends to expropriate 51%, leaving Repsol with a 6% stake.

In the 2008 sale of shares, the two majority stockholders agreed to distribute at least 90% of future profits in cash. That decision was intended to allow the Petersen Group to service the debts to banks, and to Repsol itself, that it incurred with its share purchase, for which it made no initial payment.

This is an extraordinarily high dividend in the world oil industry. In the past decade, YPF’s reserves diminished significantly, along with those of most oil companies operating in Argentina, because investment in exploration was greatly reduced.

At the same time, natural gas accounts for 51% of energy consumption, compared to 32% for oil and barely 17% for coal, renewables, and hydroelectric and nuclear power. Worldwide, gas accounts for barely a quarter of total energy consumption – for example, 27% in the United States and just 9% in neighboring Brazil. Argentina has the world’s largest fleet of vehicles running on compressed natural gas; families use gas intensively; most electricity is generated with gas; and the petrochemical industry is based on it.

Of course, in a few other countries (Qatar, Algeria, the United Arab Emirates, Iran, and Russia), gas also accounts for more than half – or even more than 60% – of energy consumption. But there is an enormous difference: all of these countries have reserves that will last another 70-100 years. Argentina, by contrast, is a highly gas-dependent country with diminishing reserves – equivalent to less than eight years of production.

Covering this drop in reserves – more than half of gas reserves and a fifth of oil reserves have been consumed – with imports implies an annual cost of more than $300 billion. Indeed, after two decades of cheap, abundant energy and exports of surplus output, a new cycle of expensive, scarce, and imported energy has begun, as oil production has fallen by one-third since 1998, and gas production by 15% since 2004.

Argentina’s greatest challenge today is to try to regain energy self-sufficiency through significant investment in exploration on land, as well as in the Atlantic Ocean. At the same time, the country must modify its consumption model through greater reliance on hydroelectric, nuclear, and wind energy. While there is great potential for new non-conventional resources, all of this is expensive, requiring annual investment of about 3% of GDP over the next five years.

It is very likely that, in the short term, growing imports of expensive liquid natural gas and other fuels will continue to exert pressure for change. Last year, the external energy deficit was more than $3 billion, and this year it is expected to double.

The important question is whether the Argentine government’s decision to nationalize 51% of YPF’s shares is the best way to recover self-sufficiency in oil and gas production, and to attract the capital needed for exploration and development of conventional reserves. Argentina has particularly high potential for production of non-conventional gas resources as well, given that it holds the world’s third-highest level of such reserves, after China and the United States. But, as with the country’s conventional resources, these reserves will not produce themselves.

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