Macri reforms reshape Argentina's gas sector
When President Mauricio Macri took power in Argentina in 2015, one of his flagship energy policy programmes was to “normalise” the country’s gas and power markets.
Before then, under the provisions of the Economic Emergency Law of 2002, Argentina’s gas market was tightly regulated by the federal government, and gas prices were heavily subsidised.
Mauro Chavez, principal analyst Latin America gas and LNG at natural resources consultancy Wood Mackenzie, said: “Macri set in train moves to gradually reduce government intervention, restoring free market dynamics and pricing driven by competition.
“Despite the macroeconomic and monetary challenges, the progress the Macri administration has achieved in reshaping the gas market environment has remarkable, helped in no small part by the prolific shale gas resources of the Vaca Muerta.
So what has the Macri administration done to transform the gas industry?
- In 2016, it started an increased regulated price path for power and distribution companies, and natural gas compression for vehicles reducing gradually subsidies for end-users;
- In the same year, the gas regulator, ENARGAS, set an integrated tariff review plan for transport and distribution companies;
- In 2017, to boost domestic gas production, the Ministry of Energy introduced a price incentive for shale- and tight-gas production;
- In May 2018, Macri signed a presidential protocol with Chile's President Sebastian Piñera that allowed free gas exports to Chile without re-import commitments;
- In November 2018, the government allowed thermal power plants to procure their own fuel, rather than being obliged to purchase it from Cammesa, the Argentinian interconnected system operator. Two gas auctions for gas power plants were carried out for interruptible volumes last year and this year;
- In February this year, the government designed auctions for firm gas sales purchase contracts between domestic producers and distribution companies. This is a milestone towards allowing the market to set prices.
Chavez said: “The gas auctions are a real turning point for the sector. On 14-15 February, the country held two auctions for firm gas purchase contracts between suppliers and distribution companies on a national level.
“These were the first open auctions for contract volumes in this category since the government started working towards creating a more competitive gas market. Industry was generally very positive about the auctions. Around 10.7 billion cubic metres (cm) of gas was contracted for April 2019 to March 2020, representing deals valued at up to US$1.8 billion.”
He added: “The auctions involved a seasonality factor for higher volumes in winter months (May to September), and a take-or-pay of 70% equal to deliver-or-pay. To take account of exchange fluctuations, the auction terms use a fixed exchange rate for each update period (around six months). This means producers will need to acquire currency hedge contracts according to their currency portfolios.”
The weighted average price of the two auctions was US$4.56 per million British thermal unit (/mm Btu). The Neuquen basin was the most competitive arena, while across the country, bidding prices ranged from US$3.9/mm Btu to US$5.5/mm Btu.
There are still some challenges for distribution companies, as Wood Mackenzie estimates that volumes not covered from May to September 2019 will amount between 0.6 and 2.5 billion cm depending on a milder or colder winter scenario.
“Distribution companies will need to sign additional bilateral contracts with producers to cover these volumes or procure volumes in the spot market,” Chavez said. “We estimate that there will be a premium price for spot volumes in peak winter months (June to August) around US$7/mm Btu.
“Despite the challenge that remains, the new auction platform provides for a transparent and legitimate market price formation mechanism, allowing producers and buyers to plan their businesses and future investment.”
What about Vaca Muerta?
“The ramp-up of production from Vaca Muerta coupled with jointly with the lack of demand in summer (October to April) means that the market is likely to be oversupplied over the summer period,” Chavez said. “These fundamentals are driving new dynamics in the Southern Cone, some which we anticipated: a wave of interruptible gas-export contracts to Chile, Brazil and Uruguay; the small-scale Tango floating liquefied natural gas export project; and the renegotiation of the supply contract in place with Bolivia.”
Argentina’s IEASA and Bolivian state-run company YPFB signed an amendment to the gas sales agreement which increased seasonality this year and next. The new terms include a higher take-or-pay in winter (18 million cm per day) and a lower one in summer (11 million cm per day).
“Our analysis suggests this addendum is as a win-win deal, as Bolivia, which has a declining production profile, will receive a higher price for its gas while reducing export commitments, and Argentina will reduce its total payment for volumes in summer,” Chavez said.
One of the main challenges Argentina faces is ensuring it has adequate gas transportation infrastructure in place. “Our gas flows models results indicate that not only will the planned US$2 billion 1000 kilometre gas pipeline, running from Neuquen to San Nicolas, be required by 2022. Further expansion to other sections of pipeline will be essential to support a second ramp-up of Vaca Muerta production, as well as to increase gas exports to Chile and Brazil,” Chavez said.