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Introduction

Since 2001, Argentina has tried to achieve the goals of promoting domestic production and supporting consumption of energy simultaneously. In a departure from the deregulation of the 1990s, Argentina’s government imposed a pricing regime to maintain the stability and affordability of consumer energy prices in order to stimulate economic growth and preempt the possibility of hyperinflation. Exports of energy were curtailed through a system of capital controls and export duties. As consumption rebounded following the 2001 economic crisis, producer prices remained below the prices for energy imports, thereby discouraging investment and volume growth. In response, the government instituted a system of producer price controls and subsidies to encourage investment, making up the difference between producer prices and controlled prices through federal budget outlays. Argentina’s regulatory system accomplished its goal of stimulating demand and limiting exports, however, in doing so it introduced distortions in the market that prevented the market from balancing with domestic production. The Argentina case study provides a lesson for countries seeking to accomplish contradictory goals through regulation, establishing a need for professional technocratic regulation, rather than regulation by decree, and flexibility in overcoming the interaction effects caused by intervention in the markets.

Energy Regulation between 1989 and 2015

            Following a period of liberalization and deregulation in the 1990s, Argentina’s energy sector has been increasingly regulated since the 2001 economic crisis. The energy sector operates under the basic 1967 Ley de Hidrocarburos (Law No. 17.319),[1] which establishes hydrocarbon reserves as the patrimony of the nation and grants the Executive wide powers to grant concessions and regulate energy. The energy sector became heavily regulated until the Menem administration (1989-1999) pursued a vast liberalization of the economy. During this time, the Congress promulgated the Ley de Reforma del Estado (Law No. 23.696)[2] in 1989 with the aim of privatization and deregulating industry. The Menem reforms enabled private participation in oil and gas, deregulated prices, and culminated in the full privatization of YPF, a process that started with Law No. 24.145 of 1992.[3] During this time, Argentina’s economy and energy sector underwent rapid growth. Despite the oversupply in the international oil markets and the weakness of Brent prices, Argentine oil production increased 76% between 1990 and 2001, while gas production more than doubled as presented in Figure 1.

Figure 1

1

Following the 2000-2001 economic crisis, the Argentine government took a much more interventionist role in the energy sector and economy in general. Seeking to stimulate economic growth and prevent a return to hyperinflation, the short-lived Duhalde administration (2002-2003) issued Decrees 310/2002 and 809/2002, which established export restrictions on oil and oil products, including a 20% export duty.[4] Export duties were extended to gas in 2004. The administration further began controlling energy prices, particularly freezing rates in the electricity sector.[5] Law 25.561, passed in 2002, established emergency control measures over the exchange rate and prices.[6] Further clarifying its role through Resolution 1104/2004, the Ministry of Energy and Mines established formulaic pricing for energy.[7] Both the Nestor Kirchner (2003-2008) and Cristina Fernandez de Kirchner (CFK, 2008-2015) administrations maintained the price controls. Although export duties were introduced as temporary emergency measures, they were effectively made permanent in 2007 through Law 26.217.

Consumer Prices and the Impact on Demand

While the price controls did appear to stimulate economic growth and promote stability in the early 2000s, the lack of political will to raise consumer prices stimulated demand beyond what would have been commensurate with economic growth. As a result of the price control legislation coming into force after 2001, energy prices were denominated in pesos and remained nearly fixed, in spite of wide fluctuations in the USD prices of commodities. Natural gas prices, as presented in Figure 2, remained close to their 2003 level until 2013, despite peso inflation averaging 17% per year between 2000 and 2014.[8] Figure 3 shows vehicle fuel prices at the official exchange rate, representing an unreactive pricing system. Faced with punitive export terms and pressure from the government to maintain prices, producers had no choice but to direct domestic production to the market at low prices.

Figure 21.png

Figure 31

Demand for controlled products, gasoline and transportation fuels, natural gas, and electricity, grew faster after 2001 than over the period 1990 – 2001. Compound annual growth rates for fuel and product demand are presented in Figure 4. As presented in Figure 5, demand for oil products, gas, and electricity grew rapidly in relation to its 2002 level, in total reaching 150% of 2002 demand by 2013. Consumers expanded structural demand for energy, leading to a large growth in residential energy demand per capita, as show in Figure 6.  The low fixed costs for products disrupted the distribution business, garnering complaints from the Argentine gas distributors trade group, citing the inability of distributors to maintain operations at current prices; GasNatural Fenosa, for example, depended on federal assistance of 515 million pesos for operation and maintenance in 2015.[9]

Figure 4

Growth in Demand by Product and Sector CAGR 1990-2013 CAGR 1990-2001 CAGR 2002-2013
Transport – Oil Products 1.5% 0.8% 3.2%
Residential – Gas 3.9% 4.1% 4.2%
Residential – Electricity 5.7% 6.4% 5.9%
Commercial – Gas -1.2% -5.0% 2.9%
Commercial – Electricity 6.5% 9.3% 4.6%
Industry – Oil Products 5.4% 12.9% -0.2%
Industry – Gas 2.3% 1.7% 2.8%
Industry – Electricity 3.7% 4.4% 3.6%

Figure 5

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Figure 6

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Regulatory Impact on Industry

            The regulation of the wider economy and energy sector in particular created large distortions in supply and demand that led to a severe decline in the upstream sector, in terms of investment, production, and wells drilled. Figure 7 presents private investment in the energy sector over the 2000s. Since consumer prices were fixed and could not react to increasing demand, prices in the upstream sector remained depressed, depriving the market of signals to raise production and seek new supply. The aforementioned export duties were introduced as a measure to maintain domestic supply for the market, yet only served to extinguish exports. Over the five year period following the 2002 introduction of export restrictions on oil, crude oil exports declined by 79%, despite production only falling by 12% over the period, as shown in Figure 8. Similarly, gas exports collapsed five years after export duties were introduced in 2004, falling 87% while production only decreased 7% (Figure 9). Imports of gas rose 36% during the period. The inability of producers to sell at realistic market prices, in either the domestic or international markets, disincentivized investment and production. Restrictions on repatriations for foreign firms, currency controls, and denomination of energy prices in pesos made Argentina even more unattractive as an upstream market.

Figure 7

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Figure 8

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Figure 9

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Regulation of Production

Seeking to address the deteriorating energy balance and decrease the outlays of foreign reserves to purchase energy in the international markets, the government sought to stimulate domestic production through a complex system of subsidies and producer pricing regulations. Wellhead prices for natural gas prices remained below $2.30/MMBtu until 2012 as a result of import competition and fixed consumer prices. Relative to international benchmarks, wellhead oil prices were also depressed as a result of an autarkic market and consumer price controls.

During the CFK administration, the Ministry of Energy and Mines declared Resolution 24/2008,[10] introducing the Gas Plus program, which enabled producers to receive prices greater than the controlled prices agreed to between the Ministry and producers. Similarly, the oil market received tax credits through the Oil Plus program, as part of Decree 2014/2008. Seeking to eliminate gas exports to keep the domestic market supplied, Resolution 127/2008 further raised the gas export tax to 100% of the highest price between Bolivian and LNG imports. Natural gas was subject to greater taxation as a result of its systemic importance to the Argentine economy, penetrating all sector including transport, and thus was deemed more important for retaining for the domestic market. This taxation stands in contrast to oil, which was taxed to a lesser degree and provided foreign currency export revenues for the government.

As the problem of domestic production became more acute by 2012, the government took more drastic steps through Decree 1277/2012, establishing the Commission for Planning and Strategic Coordination, and Law 26.741, nationalizing YPF-Repsol. The Commission gained pervasive powers to regulate the energy sector, including price-setting and approvals of private investment plans. The ultimate intention of the Commission was to ensure that firms were investing in the upstream sector in accordance with government plans for production. The expropriation of YPF similarly sought to bring greater control over the largest E&P player in the country in order to develop resources more quickly, particularly prolific unconventional reserves.

Production Subsidy Structure

The Commission, acting under a series of decrees, laws, and resolutions passed between 2012 and 2015, created a complex series of pricing regulation that sought to simultaneously subsidize both producers and consumers. In particular, Resolution 1/2013 set the wellhead price of natural gas to $7.50/MMBtu for production exceeding levels planned by the Commission. The federal budget covered the difference between the $7.50 price and the market price, which typically remained below $3/MMBtu, leading to large expenditures on energy. The remaining resolutions are summarized in Figure 10. The Commission established differential pricing for producers based on the final use of the gas, the date of operation, and the resource basin. Wells operating before 2013 may receive a price between USD $4/MMBtu and $7.5/MMBtu, depending on the production curves and whether or not the gas is reinjected. Projects streaming after 2013 sell into the market and receive the difference from the government to equal a wellhead price of $7.5/MMBtu.[11] Basins make a further difference, with the highest prices reserved for Neuquén Basin shale. Production for CNG networks receives a price of 0.89 ARS/m3.  The complexity of the subsidy structure, not only introduces uncertainty over its maintenance by political forces and added transaction costs, but also ensures that only large producers are able to meet their investment targets and field the legal expertise to capture the subsidy rents.

Figure 10

Law Effect
Decree 929/2013 New E&P projects can export up to 20% of production tax-free
Resolution 60/2013 Price range for incremental volumes for small gas producers set to between USD $4.00 and $7.50/MMBtu.
Law 27.007 Amends 1967 law extending length of concessions and lowers investment requirements
Resolution 139/2014 Defines rights of acquired companies to subsidies
Resolution 123/2015 Better defines participation in subsidy program
Resolution 185/2015 More firms eligible for production subsides

The oil sector, historically offering terms similar to international oil prices, attained a large degree of support following the 2014 oil price collapse. The CFK government retained pricing support at $77.5/bbl[12] at the wellhead in order to encourage investment and prevent an increase in unemployment in sensitive provinces. The Macri administration, coming into power at the end of 2015, lowered price support to USD $67.5/bbl for light Neuquén crude and $54.90/bbl for heavier San Jorge basin crude.

The combined total of energy subsidies, for both the upstream and consumer segments, began to take up an increasing portion of the federal budget. The budgetary cost in 2015 amounted to $18.4 billion USD, primarily requiring servicing through foreign reserves. After the accession of the Macri administration, Decree 272/2015 abolished the Commission and its duties were transferred to the Ministry of Energy and Mines. The Macri government began to unwind the subsidy structure, lowering guaranteed prices at the wellhead as previously mentioned and permitting free exports and imports and repatriation of 70% of export revenues. The pro-market agenda has already attracted investment, though years are likely to pass before the investment materializes into production growth.

Argentina: A Case Study in Regulation

Argentina’s energy regulations are the result of a series of incremental regulatory measures seeking to react to the problems caused by the initial energy price controls. The primary regulations of 2001 intended to stabilize prices and stimulate economic growth were successful, while export taxes did diminish exports, providing the domestic market with stranded supply intended for export markets. However, the temporary measures became permanent in practice and began to severely distort the market. Fear of political unrest ensured that only additional regulation, rather than amendments and rollbacks of previous measures, were possible. In accordance with basic economic principles, the price ceilings on energy resulted in a supply shortage as producers found it uneconomical to continue investments. Subsequent regulations sought to spur investment through a series of command-and-control measures and subsidies. However, each incremental regulation failed to bring about a balanced energy market.

Argentina provides a case for the need of an independent, institutionalized, and professional regulator that can balance the interests of consumers, producers, and the social goals of the government. In Argentina’s centralized political system, in which the Executive retains large powers to regulate and issue emergency decrees, requiring a 2/3 vote in the Congress to overturn, regulations were easy to issue and difficult to lift without checks and balances. Regulation by decree is inherently subject to political whims and only provides broad solutions to a particular problem. As such, the Argentine system continually introduced uncertainty into the energy market, preventing firms from modeling financial performance and investing, while constant changes precluded the institutionalization of a professional regulatory body. The complex multi-tiered pricing structure also added unnecessary opacity, complicating investment decisions and leaving room for patronage and moral hazard. An independent regulator, with formulaic, rather than set prices, would serve to introduce stability, particularly through cost-plus pricing. In particular, targeting bands of prices, rather than fixed prices, would allow limited price signals to give producers, consumers, and regulators insights into market developments. The top-down Argentinian regulatory model has not brought the energy market to balance, only eroded energy security, and its failures demonstrate the need for professional regulatory capacity for other countries seeking to manage the energy market.

Beyond the regulator itself, Argentina demonstrates the interaction effects of intervention in the markets. Additional regulation, rather than simply causing its intended effect, can often interact with preexisting market distortions to cause unintended consequences. Argentina’s government consistently sought to correct problems through additional regulation, which begot further issues and regulations. Often, the impact of a particular regulation is unpredictable, especially for energy, which impacts every sector of the economy. The interaction effects call for recognition of problems and the flexibility to address them, even at political cost. Argentina’s particular form of political populism may preclude the possibility of addressing such issues quickly and early, but the lesson may be applicable elsewhere. The economic impact of additional regulation makes a strong case for a technocratic regulatory body, with the power to reverse decisions as necessary; it is not expected that all regulations are correct or achieve their desired outcome each time. Maintaining simple, transparent, and flexible regulations can better achieve social goals than crystallized controls, even if it takes some power away from politicians.

Conclusion

            Argentina’s energy regulations throughout the 2000s demonstrate that even well-intentioned regulation can be subverted by top-down political processes and interaction effects, creating the need for an independent regulator and the ability to reexamine regulations, rather than introduce new ones to correct prior measures. In response to the 2001 crisis, Argentina enacted price controls to protect consumers from rising prices and stimulate economic growth. After a return to growth, price controls became fixed and permanent as the government feared political unrest resulting from their abolition. Low and fixed consumer prices, coupled with export restrictions, translated into producer prices that were insufficient to enable investment in the country, particularly given the general volatility of economics and politics. The government turned to making the energy market more autarkic before resorting to command-and-control measures and subsidies to correct the low producer prices caused by the initial regulations. Ultimately, the Argentine government oversaw a vast increase in federal energy subsidies while the country became a net importer of hydrocarbons. The Argentine case shows the inefficacy of broad centralized regulation by decree, necessitating an independent regulator to balance the interests of the government and market participants. The interaction effects of various decrees and controls further show that flexibility in implementing regulations is necessary to correct for unintended consequences. Argentina’s energy regulations evolved into capricious decrees that only worsened problems in the energy market, rather than solving them, demonstrating the need for pragmatic flexibility and a professional regulatory apparatus that can be applied beyond Argentina.

 

[1] Government of Argentina. “Ley de Hidrocarburos.”  23 June 1967

[2] Government of Argentina. “Reforma del Estado”  17 August 1989

[3] Government of Argentina. “Federalización de Hidrocarburos” 24 September 1992

[4] Government of Argentina. “Exportaciones” 13 May 2002

[5] David Mares. Political Economy of Shale Gas in Argentina. (Cambridge, MA: Belfer Center 2013).

[6] Government of Argentina. “Emergencia Publica y Reforma del Regimen Cambiario” 6 January 2002

[7] Ministry of Energy and Mines. “Aclaraciones y recomendaciones” 10 April 2016

[8] World Development Indicators. (Washington, DC: World Bank Group, 2016).

[9] GasNatural Fenosa. Interim Report January – September 2015 Results. 4 November 2015.

[10] Government of Argentina. “Gas Natural” 3 June 2008

[11] YPF. Form 20-F 2015. December 31, 2015.

[12]Argentina Cuts Wellhead Prices” ArgusMedia. 6 January 2016.

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