Higher Rates Needed to Avert Crisis in Argentina in 2005

Nothing much can be done to avoid electricity and gas rationing this winter in Argentina, but the government should raise rates to encourage investment and avoid more drastic cuts in 2005, analysts at Standard and Poor's Buenos Aires office told BNamericas.

In 2004, "demand is growing very fast and we will not be able to increase the gas supply very much," analyst Pablo Lutereau said. "We will have more cuts for a longer time this winter, but it's not going to be a serious threat to the economy and we will make it through. Yet if the situation continues, it could threaten the economy's recovery in 2005-2006," he said.

President NÚstor Kirchner's administration has been negotiating with private companies for the last six months, but now "the problem is knocking on the door," Lutereau said. "We don't have a lot of room to maneuver." Argentina's main gas producers and government officials were scheduled to meet on Wednesday to discuss a solution to the country's energy crisis, local newspapers reported.

The government wants the companies to increase their gas exploration investment plans in return for higher prices at the wellhead, but both investments and prices have to increase simultaneously in order to solve the crisis, Lutereau said. Companies will invest if they know their projects are going to be profitable, but that means the government has to give "the right indication of the scarcity of natural gas in the market today," the analyst said. Spot market prices of more than US$1 per mBTU are much higher than regulated prices capped at US$0.60/mBTU. Yet even if the companies and the government reach an agreement, gas and power supply cuts are inevitable this winter, according to Lutereau.

Gas supply cuts are normal on some days during the winter when demand peaks, but this winter the cuts to interruptible contracts are expected to last longer and hit a broader spectrum of users, "which is the definition of a shortage," Lutereau said. Gas to some industrial users was even cut during the summer now ending, which has never happened since Argentina became self-sufficient in gas supplies in the early 1990s, he said. "This is an indication of the winter we will have." The situation will have to become "much worse" to affect gas and power supplies to residential users, which would be the last to be impacted, but Argentina's economy could suffer a slowdown, Lutereau said.

Gas export contracts to Chile are unlikely to be affected in 2004, but 2005 could be a different story if nothing changes soon, he added.

Meanwhile, Argentina suspended an electricity export contract last week with Uruguay and has started cutting power to industries with interruptible contracts, which is "no surprise" given the low investment in the sector, said S&P analyst Sergio Fuentes. "The vulnerability of the system increases as demand continues growing and investment remains low," Fuentes said. "It's difficult to predict when these events will happen, but it's easy to predict the vulnerability [of the system] to these events." Argentina could import some power from Brazil but the interconnection's limited transport capacity means it would only be able to import a small part of the national grid's peak demand, he said.

Argentina's total installed capacity in the national grid is about 22,000MW, of which about 12,000MW is thermoelectric, including a large number of gas-fired generators. The problem for gas-fired generators is that their prices are frozen at about 30 pesos/MWh so they cannot pass on the higher costs of natural gas to their customers. This means they cannot compete with industries for dwindling gas supplies, especially export-oriented ones that have revenues in US dollars. Some thermoelectric generators are equipped to burn alternative fuels in the winter when gas supplies are low, but burning these fuels more often and for longer means higher costs throughout the system, Fuentes said.

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