Wednesday, January 30, 2008

Engery Problems and Solutions in Argentina

Recent energy discoveries in Argentina have highlighted long run potential, but at the same time underlined the vulnerability and weaknesses in the policy of the current administration. Pan American Energy, the second largest oil and gas producer in Argentina, recently announced the country’s biggest hydrocarbons discovery in recent years and a $1bn investment programme in the field which is near its existing Cerro Dragón one in the southern province of Chubut. The company estimate the field contains 100m barrels of oil equivalent.

Pan American Energy also said it was drilling a second well in the northern province of Salta, ”which, if successful, would confirm the existence of a very large gas deposit”, and was looking closely at gas prospects in Tierra del Fuego and offshore.

However discovery - whilst being the mother of invention - is still a long way from bringing new discoveries into production, and in the meantime the energy model championed by President Cristina Fernández and her husband, former President Néstor Kirchner - of keeping domestic energy prices and utilities tariffs artificially low to boost an economy recovering from a debt and devaluation crisis in 2001-2002 - looks increasingly unsustainable.

In the short term the policy has proved capable of "fuelling" economic growth rates of more than 8 per cent, but it has served as a serious disincentive to investment in new reserves, led to declining production and lay behind the major energy crisis which Argentina experienced last summer.

In the power sector insufficient extra capacity has been brought online to keep up with runaway demand fuelled by electricity rates that are about a quarter of international levels. Industrial clients have come under pressure to use less energy in order to avoid politically damaging power cuts for residents when temperatures peak.

In the fuel sector, it has meant shortages, despite refineries working at capacity, higher export tariffs designed to guarantee domestic supplies, and even a temporary ban on fuel exports.

Analysts estimate that some $3bn-$3.5bn a year investment in oil, gas and electricity is needed to keep the economy growing at 5 to 6 per cent. But national oil production hit its lowest level in 2005 since 1998, and gas production, which has been rising steadily, dropped off in 2005 compared with 2004, according to the latest official data.

Ms Fernández’s first month and a half in office has been marred by the spectre of regular power cuts or rationing that a timid energy saving plan she announced last month has failed to banish. And there is no indication yet when tariff rises expected to start this month will actually materialise, especially against a backdrop of mounting inflation.

This week the La Nación newspaper quoted data from Cammesa, the electricity wholesale market regulator, showing Argentina spent $4bn in the last four years subsidising electricity tariffs, buying fuel oil and diesel, and importing electricity from Uruguay and Brazil – enough to have built six 800MW power stations and to have had a net energy surplus this year. Cammesa had no comment on the figures.

Argentina is moving ahead on plans to build a pipeline costing $1.9bn to import 27.7m cubic metres of gas a day from Bolivia by 2010, but Bolivia needs more investment yet in its own energy sector to meet the ambitious goal.

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