Argentina oil

Argentina’s Controversial Energy Policies

Argentina Oil Natural GasAs noted in the previous post, the most economically productive areas of Argentina depend heavily on the extraction of oil and natural gas. Argentina, however, is not a major fossil-fuel producer, and its reserves of conventional oil and natural gas are modest. Although it still exports some crude oil and until recently sold large quantities of natural gas to Chile, Argentina has been a net importer of both gas and oil since 2011. Its economy is also heavily dependent on fossil fuels, with natural gas alone supplying 55 percent of its total energy supply. Considering Argentina’s high inflation rate and other economic difficulties, this situation generates considerable concern.

 

Argentina does, however, possess massive quantities of unconventional oil and natural gas. Such deposits are locked up in shale formations and are Shale Gas and Tight Oil by Countryonly economically recoverable through hydraulic fracturing (“fracking”). According to most estimates, Argentina’s shale gas reserves are second only to those of China, while its tight oil reserves are the world’s fourth largest. Most of the country’s shale gas and tight oil deposits are found in the Vaca Muerta (“dead cow”) formation, located mostly in Neuquén province. A year ago, optimism ran high in this region, as many experts predicted a boom similar to the one that had had emerged in the Bakken Formation of North Dakota. As noted in The Economist in 2014:

Argentina Vaca Muerta MapNeuquén is readying itself for a boom. Shopping centres have sprung up; so have clean new hotels that boast English-speaking staff and American-style food. Horacio Quiroga, the city’s mayor, compares its residents to expectant diners who have tied on their bibs. Argentina’s president, Cristina Fernández de Kirchner, is equally hopeful. “I shall no longer call [it] Vaca Muerta,” she said last year. “I shall call it Vaca Viva (‘Living Cow’).”

But at the same time, other observers were urging caution. Shale-gas deposits elsewhere in the world were proving more difficult to tap than those of North America, in part because of local geological particularities but also because of the large amounts of capital and high levels of technical expertise required for successful fracking. In most cases, substantial foreign investment would be necessary. Argentina’s history of fraught relations with overseas-based energy companies, however, has created major investment obstacles.

But despite such problems, significant investments have been made in in the Argentine energy field over the past several years. A recent report from the U.S. Energy Information Administration contends that outside of North America only China and Argentina have produced commercial volumes of gas and oil from fracking. As detailed in the report:

In Argentina, many international companies hold leases and have drilled wells in shale formations. Much of the initial activity has targeted shale oil and natural gas in the Neuquen Basin’s Vaca Muerta shale formation, located in west-central Argentina. National energy company Yacimientos Petroliferos Fiscales (YPF), the largest shale operator in the country, reported production in April 2015 of 22,900 barrels per day (b/d) of oil and 67 million cubic feet per day (MMcf/d) of natural gas from three joint ventures in Vaca Muerta: one with Chevron at the Loma Campana field, a second one with Dow Chemical at the El Orejano field, and a third joint venture with Petronas at La Amarga Chica field. In addition, China’s national oil company Sinopec and Russia’s national oil company Gazprom have recently signed a memorandum of understanding with YPF to jointly develop shale from the same basin.

Considering its economic difficulties, the Argentine government is not surprisingly eager to frack for natural gas and oil. The steep drop in the global price of oil over the past year, however, threatens the viability of the industry. Argentina has responded, as it often does, by manipulating the market. In particular, its government has fixed the local price of oil at US$ 77 a barrel, a figure almost twice that of the world market. Such policies aid producers, but harm consumers. As explained by Bloomberg Business:

South America’s second-largest* and most enigmatic economy is marching to its own drummer. In most of the developing world, governments subsidize fuel prices. In Argentina, motorists now are subsidizing oil and gas producers.

“This is not sustainable in the long term,” said Agustin Torroba, senior analyst at Montamat & Associates, an energy consulting firm. “It is the most expensive oil in the world.”

The policies of President Cristina Fernandez de Kirchner, whose second four-year term ends in December, are rarely considered conventional. In addition to energy, Argentina’s unusual approach to economic management includes currency and import controls, export taxes, reneging on sovereign debt commitments and general acceptance of 25 percent inflation.

 

As is true elsewhere, fracking has generated considerable controversy in Argentina, as can clearly be seen in the website ASF Argentina Sin Fracking. Opposition to the process by Pope Francis has gathered considerable attention, both in Argentina and abroad. In eastern Argentina, many communities have instituted fracking bans. As was recently reported in Free Speech Radio News:

The red carpet treatment for foreign energy companies has met resistance in various parts of Argentina.

Authorities in around 50 municipalities have enacted local fracking bans in response to public pressure. This has, in turn, created a power struggle between national and local officials over what steps communities can take to prevent energy projects.

“We want to have the right to protect our water from pollution, to keep living in our hometowns,” says Ignacio Zabaleta with the Assembly of Fracking-Free Territories, a network of groups opposed to the extraction technique. “It’s a response to the sidelining of the will of the people. It’s about people who have lived in certain areas for centuries being displaced for the benefit of two or three corporations and for the benefit of corrupt and immoral officials.”

Most of the municipalities that have rejected fracking are in the province of Entre Rios, home to part of the Guaraní Aquifer — one of the world’s largest underground bodies of freshwater. The aquifer spans the borders of Argentina, Brazil, Uruguay and Paraguay.

 

Argentina will be holding a presidential election in late October of this year. Some observers think that the outcome could significantly influence the country’s economic and energy policies. A recent Stratfor report, however, argues to the contrary. Its forecast runs as follows:

  • Regardless of election outcomes in October, Argentina’s next government will begin liberalizing its economy, potentially loosening restrictions on the repatriation of funds, reducing the enforcement of price controls and reducing subsidies.

  • Despite slight changes to Argentina’s regulatory framework, the government will continue to bar some investment and businesses to stem capital flight and to maintain a positive trade balance.

  • Though the next administration may begin laying the groundwork to attract greater energy investments, the country’s barriers are unlikely to be completely lifted during the next presidential term.

* This assertion is questionable. Although most data assembled by international economic organizations place the Argentine economy above that of Colombia in both nominal and purchasing-power-parity terms, a 2014 International Business Times article came to a different conclusion:

Argentina, once the third-strongest economy in the western hemisphere, extended its decades-long decline by ceding the No. 3 spot among Latin American economies to Colombia later this year — thanks to the second-weakest currency in the region, soaring inflation, weak economic growth and chronic political problems, Capital Economics said on Monday. Brazil and Mexico remain No. 1 and No 2, respectively.

 

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Argentina’s Striking North/South Economic Divide

Argentina GDP by Province MapAs previously noted, Argentina is characterized by a north/south socio-economic divide, with the south being much more prosperous than the north. This regional disparity is visible on the HDI map included in the most recent post, but it is more clearly marked on other maps of economic development.

Consider, for example, GDP per capita by Argentine province (2008 data). As more than an order of magnitude separates Argentina’s least economically productive province (Chaco, at US$ 2,015) from its most productive province (Santa Cruz, at US$ 30,496), I have used a two-color scheme to call attention to the disparity, with the wealthier provinces mapped in blue and the poorer provinces mapped in red. The basic geographic pattern here is clear: the south has high per capita economic output, that of the center-east is slightly above the national average (with the exception of the city of Buenos Aires, which is very high), and that of the far north is low.

Argentina monthy salary by province mapBut as has been discussed in previous GeoCurrents posts, per capita GDP is not necessarily the best way of measuring actual economic conditions, especially at the sub-national level. The map of average monthly salary is more representative in this regard. As can be seen, income levels vary significantly over Argentina, but not as much as might be expected on the basis of provincial GDP variation. Here the lowest figure is US$ 945 in Santiago del Estero and the highest is US$ 2,646 in Santa Cruz. On this map, the north/south divide is clearly evident. One surprise here is the very low standing of Tucumán. Known as “El Jardín de la República” (“Garden of the Republic”), this agriculturally productive province is heavily dependent on sugar, a lagging industry. But according to the Wikipedia, Tucumán’s economy has been growing strongly in recent years.

Argentina vehicle ownership mapSimilar geographical patterns are apparent in regard to other economic indicators. The “vehicles per 1000 inhabitants” map shows a nice north/center/south differentiation; there are almost five times more vehicles per Argenina poverty mapcapita in Santa Cruz than in Santiago del Estero. The map of income poverty exhibits the same pattern, with strikingly high levels of poverty in the far north.

 

 

 

Argentina Population Density Map

 

 

 

 

 

 

 

 

Some aspects of Argentina’s north/south economic bifurcation are easily explained. Much of the south is very sparsely populated but rich in natural resources, particularly oil and natural gas, a situation that often generates high levels of economic production. As the map on the left shows, Santa Cruz and Chubut in particular have low population densities, and as the map below it shows, both provinces are heavily dependent Argentina GDP from Mining Mapon mining (especially oil and natural gas extraction), as is Neuquén, located a little further to the north. As noted in the Wikipedia, Santa Cruz, Neuquén, and Chubut have the least diversified economies in Argentina. Sheep ranching was formerly an economic mainstay in these generally arid provinces, but this industry has been battered by low global wool prices (Argentina is the world’s fifth largest wool producer, with roughly 3 per cent of the market, following Australia, China, the United States, and New Zealand.)

Although mining is vital for Tierra del Fuego in the extreme south, this province has a more diversified economy than the rest of the Argentine south. Tourism is increasingly significant, but manufacturing is more important. The strong position of manufacturing might seem improbably, given Tierra del Fuego’s peripheral location and harsh natural conditions. Argentina GDP from Manufacturing MapYet as it so happens, its very remoteness is one of the main reasons why it has such a large manufacturing sector. As explained in the Wikipedia:

Manufacturing, despite the province’s remoteness, contributes about 20% to output owing partly to generous certain tax incentives to local industry, a policy Buenos Aires has pursued to encourage immigration to less populated areas. A number of sizable factories have opened on Tierra del Fuego Island to take advantage of the tax benefits legislated in 1972, mainly home appliance and electronics manufacturers.

Recently, in the city of Río Grande, many international and Argentine companies, most notably the Korean company Samsung and the Argentine company Teltron, have set up factories that produce high-definition televisions (HDTV), CD-ROM-related articles, and low-cost GSM cell phones, built mainly from Argentine components.

In proportional terms, manufacturing is more important in Buenos Aires province and much more important in San Luis. The significance of Buenos Aires in this regard is not surprising, as the province and city of the same name unquestionably form the core area of the country, containing almost half of the total Argentine population (18.5 out of 40 million). The economic domination of manufacturing in San Luis, a province of mid-level economic standing, is less expected. But as explained by the Wikipedia, “Since 1983, … Governor (now Senator) Adolfo Rodríguez Saá has also overseen record investment by light manufacturers (mostly food-processors and bottling plants) and advances like the construction of Argentina’s most extensive expressway network.”

 

Argentina GDP from Agriculture MapIt is more difficult to explain the poverty of northern Argentina than the wealth of southern Argentina. This region, and especially the northeast, is heavily dependent on agriculture, although Argentina’s most agriculturally productive areas are located further to the south, in such provinces as Buenos Aires, Córdoba, and La Pampa. Whereas Buenos Aires province has a highly diversified economy, that of La Pampa is highly focused on farming. Considering its central location and rich farmlands, La Pampa has a surprisingly small population.

 

The relative poverty of Argentina’s most agriculture-dependent provinces is noteworthy, as the country has long been famed for its farming prowess and food exports. But recent Argentine governments have not been favorably disposed to agricultural interests, saddling farmers with export levies and other disincentives. As a result, Argentina no longer makes the list of the world’s top agricultural exporters, unlike neighboring Brazil. As is explained in a 2014 article in The Economist:

AGRICULTURE ought to be Argentina’s strength. Instead, incessant intervention has turned it into a source of weakness. The government has meddled in wheat production since 2006 by raising export taxes and setting export quotas. This interference, defended by the government as “protecting the tables” of Argentine consumers, has simply discouraged farmers from planting the crop.

The interventions show no sign of stopping. Last year’s unexpectedly poor wheat harvest caused the price of bread to double, prompting the government to suspend exports of the crop. Last month was the first December in 25 years that Argentina did not export any wheat.

Another surprise, to me at any rate, is the middling position of Córdoba Province in central Argentina in most of these economic indicators. Córdoba is agriculturally rich and has a reputation as a leading industrial center. As explained in the Wikipedia:

Since World War II, Córdoba has been developing a versatile industrial base. The biggest sectors are car manufacturing (Renault, Volkswagen, Fiat), railway construction (Materfer) and aircraft construction (Fábrica Militar de Aviones). Furthermore, there are textile, heavy and chemical industries and some agrobusinesses. Córdoba has been considered the technological centre of Argentina. The Argentinian spaceport (Centro Espacial Teófilo Tabanera), where satellites are being developed and operated for CONAE, is located in the suburb of Falda del Carmen. The software and electronic industries are advancing and becoming significant exporters; among the leading local employers in the sector are Motorola, Vates, Intel, Electronic Data Systems, and Santex América.

Heavy manufacturing and high-tech industries, however, have not fared particularly well in Argentina in recent decades, which may help explain Córdoba unimpressive economic figures.

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