Doubts Linger on Argentinean Gas Production

An agreement between Argentine gas producers and the government to maintain domestic gas supplies until 2006 in return for higher gas wellhead prices is unlikely to result in new investment in gas production, a partner at Houston-based law firm King and Spalding, José Valera, told BNamericas. "They are going to maintain their current production, but this is not going to solve the problem in the long-term because I don't see the companies investing additional capital in exploration," Valera said.

Even if prices increase to the same level as before the devaluation of the peso - about US$1.40/mBTU - they will still be too low to encourage investment, he said. "I don't see [companies] putting new capital in Argentina when there are other countries where they could obtain prices in line with current market conditions, it makes no sense."

Under the agreement reached on April 2, gas prices for industrial clients will increase through four progressive price hikes between May 2004 and July 2005 and prices for residential customers will be liberalized by December 31, 2006. However, companies will likely wait until prices are "truly liberalized" before they start investment in gas exploration and that could take some years, while Argentina's economy recovers, Valera said.

The main problem is that Argentine consumers lack the spending power to pay for public services, so the government is trying to control prices as if it still owned the energy companies, which were privatized in the 1990s, Valera said.

In addition, the government's decision to cut gas and power exports to Chile and Uruguay is "killing the goose that lays the golden egg" because gas producers will only be able to invest in new infrastructure to meet domestic demand through revenues generated from exports, Valera said. "If companies are allowed to export at true international prices then it will be more palatable for them to ingratiate themselves with the administration and supply more gas for the domestic market at these controlled prices," Valera said. However, if companies are forced to supply the domestic market at low prices then there is no incentive for them to invest and the gap between supply and demand will continue to widen, he added.