Argentina has failed to take serious policy action to solve the depressed domestic hydrocarbon production.
BY JEREMY MARTIN
With the onset of winter in the Southern Hemisphere, Argentina has begun its annual Tango with an unwilling dance partner across the Andes in Chile. A relatively early and potent cold snap triggered what has become an unfortunate yearly energy dance between the two countries. More specifically, disruptions of Argentina’s commitment to export natural gas to its neighbor, natural gas supplies that make up almost 80 percent of Chile’s demand and that Argentina is contractually obligated to provide.
Over the last two decades, the development of natural gas has been a critical element for the increased economic and physical integration of Latin America’s Southern Cone. Natural gas pipelines have been built that interconnect and integrate Bolivia, Brazil, Argentina, Chile and Uruguay. For many years they have fostered important economic development utilizing a native energy resource.
NATURAL GAS PROPONENT
Argentina was an early proponent and eagerly embraced the importance of natural gas for its economy. It was significant in terms of upstream development in the country’s energy provinces such as Neuquén and Santa Cruz, but also as a means of a reliable source of domestic energy – almost 90 percent of Buenos Aires’s taxis run on compressed natural gas and roughly 50 percent of the country’s natural gas goes to electric power generation.
Chile similarly turned its economy toward natural gas, though they have little to no native supplies. Without reserves, but with a willing and able neighbor to sell them natural gas, Chile and Argentina brokered several agreements. Seven pipelines eventually linked the two countries at the hip energetically and politically, though the latter did not manifest itself for many years. Indeed, as the gas began to flow, Chile altered its national energy matrix and its power generation jumped to almost 50 percent from gas-fired plants. Both countries were lauded for their forward looking energy policies and economic models.
Fast forward to this winter: In late May and June, the government of President Nestor Kirchner took the politically expedient decision to divert natural gas intended for export to Chile and have it instead sent to Buenos Aires to satiate that city’s demand for heating as thermometers plunged. The choice made by Argentine authorities to again break its bilateral agreement with Chile for supply of natural gas caught many by surprise. It should not have.
CUTTING CHILE'S GDP
Each time Argentina cuts supplies, the effects are felt throughout Chile from the average citizen in Santiago to the country’s economic engine, the mining industry. Recently, the consequences were also seen in the increased smog enveloping the capital city due to power generators having to switch from cleaner burning natural gas to dirtier sources such as diesel and fuel oil. Yet most startling are the numbers proffered by Chile’s Central Bank: In 2006, the interruptions in natural gas supplies caused the country’s GDP to lose almost half a percent.
The Kirchner government has demonstrated since the first cuts in supply to Chile in 2004 that it has no qualms about making short-term decisions that clearly do not consider possible impacts for its neighbors. At this point, it should not come as a surprise when the government acts as it does.
Worse, this year’s finger-in-the-dike approach by the Kirchner government even failed domestically. Blackouts have rippled through Buenos Aires and many of the city’s taxis continue to find it difficult to refuel their compressed natural gas tanks while the government battles with service stations over prices. However, the largest burden of Argentina’s energy dilemma has fallen on the country’s industry. Power and natural gas supplies to industrial users have been severely restricted in the last few weeks. The impacts range from unplanned layoffs in the short term to the real possibility of a potential drag on the four years of vital economic growth in the country.
Many of the economic policies implemented to jump-start the economy in the aftermath of the country’s economic collapse of 2001-2002 still remain. The devaluation of the peso and subsequent freezing of tariffs is a well known tale, but bears repeating. Neither is inconsequential when assessing the chaos that exists today.
Companies saw their investments lose two-thirds of value overnight. The government maintained a confrontational approach toward energy companies. Demand naturally soared as most tariffs and rates went unchanged for years. Meanwhile, private energy investment reacted to the market signals being sent by the government and investment and production slowed significantly. The government thus proceeded with their precarious energy balancing act. Band aids such as cutting supplies to Chile, importing natural gas from Bolivia, and receiving fuel oil from Venezuela were all used. Yet no true long-term national energy policy was ever set forth.
In a recent story, Argentine daily La Nación rhetorically asked whether the country’s energy dealings were apathetic or strategic. Sadly, the former would be far more comprehensible than the latter, though neither useful for Argentina and its citizens.
ROBBING BOTH PETER AND PAUL
Earlier this month, eager to stave off yet another energy crisis by cutting gas exports to Chile, President Kirchner and Planning Minister Julio De Vido tried their best to rob Peter to pay Paul, but apparently only succeeded at robbing both Peter and Paul and paying no one.
Regrettably, Argentina’s continued severing of bilateral agreements underscores a larger point: interconnection not only brings the positive your neighbor has to offer, but also the less desirable. Indeed, natural gas pipelines across the Southern Cone have demonstrated that they are also ample enough to easily pass the specter of geopolitics through their network. And today’s situation in Argentina is at its core about domestic politics trumping international agreements, especially during an election year.
Besides the obvious near-term impacts, there is a particularly distressing aspect of the most recent cuts and concurrent predicament in Argentina. A clear reactionary pattern for handling energy crises has been set by the current Argentine government. Yet no serious policy action has been taken to address the core of the problem: economic measures that have depressed domestic hydrocarbon production and greatly fostered growth in demand.
A policy that relies on hope for warmer weather, rain and magical production of natural gas is not policy but political folly. Such policy-making will not only gravely affect Argentina, but will also negatively impact the strides made in regional integration in the Southern Cone.
Jeremy Martin is director of the energy program at the Institute of the Americas, a non-profit institution based at the University of California San Diego. He wrote this column for Latin Business Chronicle.
© Copyright Latin Business Chronicle