(S&P Global Platts, 20.Aug.2019) — Argentina’s newly installed economy minister, Hernan Lacunza, said Tuesday he will focus on stabilizing the currency as the key to pulling the country’s economy out of recession and reducing inflation, yet he will face pressure from oil companies who are concerned that a 90-day freeze on crude and refined product prices could slow production growth and hit profits.
“The main objective is to guarantee the stability of the exchange rate,” Lacunza said in a televised press conference after being sworn in.
The official, who also oversees energy affairs, said Argentina is in “a complex moment,” adding that tensions are running high among the populace as well as in financial markets and businesses in the run-up to an October 27 general election.
Lacunza, who previously ran the economy of Buenos Aires, the country’s most populated province, was appointed to the post after Nicolas Dujovne resigned Saturday. He comes to the job after a week of market volatility left the peso 25% weaker against the US dollar, fueling an acceleration in inflation already running above 55% and dimming President Mauricio Macri’s chances to win a second four-year term.
In response to the market rout, Macri rolled out measures to limit the fallout on the populace, including a 90-day cap on oil and refined product prices.
The cap, which took effect Friday, has led oil producers and refiners to warn that tighter profit margins or even losses could force them to sideline rigs and lay off workers. This could slow the development of Vaca Muerta, the country’s biggest shale play, which has been driving production growth over the past few years and setting the country up to become a global exporter, they warned.
In the 20-minute press conference, Lacunza, who did not take questions, said his biggest concern is for the general population.
“It has been several decades since a third of Argentinians could break out of poverty,” he said. “That is what worries us most.”
MEETING WITH OIL SECTOR
While Lacunza did not say anything about his energy policy, it likely will not change in general terms from his predecessor’s, given that Gustavo Lopetegui was retained as energy secretary.
Lopetegui is due to meet with oil sector and energy officials from oil-producing provinces later Tuesday on the price freeze and its fallout. The cap has cut crude prices by around 30% compared with August 9, sparking discontent in the sector.
On Friday, Alejandro Monteiro, the energy minister of Neuquen, home to most Vaca Muerta’s acreage, said the provincial government was considering taking legal action, adding that there is room to work out measures that will limit the fallout on oil activity and investment.
Monteiro said he and some company representatives had sat down with Lopetegui to discuss ideas last week, following the announcement of the freeze and before it was put into force, but to no avail.
“We understood that we had a dialogue channel to build a solution, but we were not listened to,” Monteiro said in a statement.
He warned that this lack of discussion would hurt the confidence of companies needed to sustain investment growth in Vaca Muerta.
On Tuesday, Alberto Weretilneck, the governor of Rio Negro, a province neighboring Neuquen, said on Radio La Red that he would present an injunction to the Supreme Court to halt the price freeze if it is not modified.
LOBBYING
The oil sector is expected to seek changes in the price freeze that have less of an impact on revenue from oil and refined product sales.
“We still need to see how it is going to shake out,” Alejandro Penafiel, vice president of growth and capital at Madalena Energy, a Canadian-based junior player in Vaca Muerta, said Tuesday on a conference call with investors.
He said there is a lot of lobbying going on by the industry.
“It’s still a bit too soon to tell in terms of really what sort of impact it is going to have on realized pricing,” he said. “It is still a very fluid situation.”
Before the price freeze, domestic crude prices were priced at a $7-8/b discount to Brent ICE, the international reference price followed in Argentina, Madalena CEO Jose Penafiel said on the call. With the change, the local price is a discount of $15-20/b.
He said the company will seek to offset the wider pricing differential through cost reduction.
Juan Jose Aranguren, who as the national energy secretary from 2015-18 had lifted the controls on oil prices that had been in place since 2002, said the freeze is “a disincentive to investment.” While the cap is only for 90 days, investors fear it could be extended or become the policy used by future administrations, making them think twice about investing in Argentina, he said Tuesday in a report by his consultancy Energy Consilium.
Aranguren added that there are options to ease the impact on oil companies while limiting the impact on consumers from higher pump prices, such as by lowering the fuel tax. Another is to lower export taxes – at a little less than 10% – on crude and products so that companies can offset some of the losses by exporting at higher prices.
PRODUCTION IMPACT?
While most of the opinions have been critical of the price freeze, at least one group came out in support. The Argentine Energy Institute, a think-tank, said in a statement over the weekend that it is more important to limit the impact of the devaluation on inflation than to protect business interests.
It added that it doubts that the freeze will cut overall oil production or affect the development of Vaca Muerta, which it said accounts for 18% of the country’s around 500,000 b/d of output.
“The companies that produce in Vaca Muerta have not shown that this temporary freeze prevents them from producing,” it said.
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