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20 | THOMAS ANDREW O’KEEFE THE CRISIS IN THE ARGENTINE ENERGY SECTOR AND ITS REGIONAL IMPACT | 21 Law 24.076 of May 1992 established the general regulatory framework for the transport and distribution of natural gas by private firms. Production of nat- ural gas, however, remained subject to Argentina’s 1967 Hydrocarbons law (Law 17.319). The Secretariat of Energy was given jurisdiction over the exploration and production of natural gas and the authority to determine conditions for the export or importation of natural gas. The Ente Nacional Regulador del Gas or ENARGAS was entrusted with regulatory oversight of the transport and distri- bution of natural gas and the approval of rate changes. Until 2002, rates for natural gas were based on its wellhead market price as well as a fee for transport and distribution services. The charge for transport and distribution services was set by ENARGAS for five-year periods in U.S. dollars and adjusted every six months for inflation based on the U.S. Consumer Price Index. Any increases in federal, provincial, or municipal taxes were automatical- ly passed on to the consumer. In addition, transport and distribution firms could petition ENARGAS for increases within five-year periods based on unforeseen circumstances. Increases in the market price of natural gas at the source could only be “passed through” to the end-user if authorized by ENAR- GAS following a public hearing. In January 2002 the federal government used the recently approved Economic Emergency Law to convert rates for natural gas into Argentine pesos on a one-to-one basis (even though the real rate of exchange was closer to three pesos for every dollar) and froze them at 2001 levels. Legally, the freeze did not cover the price of natural gas charged by producers, which could still be sold at market rates (albeit in pesos). The failure of ENARGAS to approve any pass- through of price increases to end-users, however, meant that natural gas prices for domestic sales (where the bulk of Argentine production was directed) became frozen as well. This situation created an important incentive to export, although this was tempered by a 20 percent export or retention tax introduced in 2002 (increased to 45 percent on exports to Chile in July 2006). Furthermore, in 2004 the Secretariat of Energy began restricting natural gas exports until national demand was satisfied. Given severe shortages in Argentine gas supplies since 2004, exports to Chile have frequently been interrupted dur- ing the winter months, forcing Chilean companies to shut down production. During the winter of 2007 in the Southern Hemisphere, supplies to residential users in Chile were also affected for the first time. In mid-2004 the federal government negotiated a schedule of increases on the wellhead price for natural gas sold to larger industrial and commercial users. As of July 2005 businesses have been paying the full market price for natural gas. The federal government is still negotiating, however, increases in transport and distribution rates for larger industrial and business customers. Negotiations have been complicated by government demands that the private sector firms first drop their international arbitration claims against Argentina for losses sustained in the 2002 following the forced conversion of utility charges into pesos at an artificial rate of exchange and price freezes. Some see this negotiating stance as a ploy to force frustrated foreign firms to sell their assets to politically well-con- nected Argentine firms at bargain basement prices. In mid-2005 and again in January 2007, the Kirchner administration imposed a hefty special tax over the transport rate for natural gas purchased by businesses in order to pay for pipeline improvements. Natural gas rates for residential users were to remain frozen until after the December 10, 2007, inauguration of the new president, Cristina Fernández de Kirchner, but this has yet to occur. Given that the bulk of Argentine natural gas is consumed domestically, the federal government’s 2002 intervention in the market mechanism for determin- ing prices undermined any incentive for producers to explore and expand natu- ral gas reserves. It also destroyed any incentive for transporters to increase capac- ity, although constraints in transport capacity were already a problem through- out the 1990s. Furthermore, artificially low natural gas prices induced a surge in demand that eventually outstripped supply. All of these factors have con- tributed to severe gas shortages since 2004 and have required that the federal government restrict natural gas exports as well as import natural gas and substi- tute fuels to run power plants.1 The irony is that the federal government has “subsidized” the purchase of these foreign fuel substitutes with general revenue collected from taxpayers, while refusing to allow natural gas producers in Argentina to pass on the true cost of their fuel to this same group of Argentines. The federal government prefers to exercise control over this revenue flow rather than allow it to go directly from consumers to the private sector producers. The federal government has also used tax revenue to overcome pipeline constraints and developed an electronic spot market for natural gas, thereby allowing large customers to negotiate contracts directly with producers. It would be unfair to lay the entire blame for the current problems affecting Argentina’s natural gas sector solely on the 2002 intervention in market rates. Since the late 1990s, no new gas fields were developed in Argentina. This was, in part, the result of the recession that engulfed Argentina beginning in 1998. But some observers also attribute this to the 1999 sale of YPF (responsible for 60 percent of Argentine natural gas production) to the Spanish firm REPSOL. Soon after acquiring YPF, REPSOL was said to have been more interested inPDF Image | Energy and Development in South America
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