Author: Marguerite Gabriele
Institution: Jackson School of Geosciences, University of Texas at Austin
Date: February 2008
Energy sustainability is a major issue in the world economy. Argentina presents a good case study of a country with depleting domestic natural gas reserves due to escalating domestic energy consumption and increasing export natural gas levels. Argentina is the largest gas producer in South America (Essex, 2006). The Argentine natural gas economy can be secured through various measures to prevent another energy crisis similar to the 2004 Argentine energy crisis and to ensure a strong and sustainable rate of consumption for both Argentina and to its exporting partners. This work addresses the concerns of Argentines who work in the natural gas industry in both the public and private sector combined with current literature to argue for three solutions. State efforts to encourage international investments for exploration, search for diversification strategies to decrease dependence on Bolivian natural gas imports, and instigate a gradual yet steady increase of natural gas prices are solutions to ensure the sustainability of the Argentine natural gas economy. Argentine legislators have begun to address the first issue of lack of exploration. (Morgan, 2006). However, additional legislative reforms are essential to ensure the future viability of the Argentine natural gas economy.
Energy resources are not confined to international borders. Naturally, each nation is inclined to protect its own resources first; nevertheless, the future of energy resources is a matter of global responsibility. Years after the 2004 Argentine energy crisis, concerns remain for each aspect of the Argentina natural gas economy.
Today the level of consumption of natural gas in Argentina is the highest in history and has the highest level of demand compared to all other types of energy. In the Energy Information Administration's (EIA), International Energy Outlook of 2006, it was predicted that the demand of natural gas in Central and South America will increase 3.9% annually in the next few years. The Argentine government has attempted to address rumors that there will be another energy crisis in the natural gas sector by declaring that the growing demand can be resolved simply by allowing the natural gas economy to "run its course." However, energy demand has increased by 40% since the era of privatization (1990-1992) and it is expected to increase by 8% in 2006, almost double the rate of the majority of developed nations (EIA, 2006).
Whether the natural gas economy is on the brink of a crisis or not, the present imbalance of the economy threatens the national energy system (Figure 1). It will be necessary to increase the level of investment in exploration to satisfy growing demand. Direct international investment will be necessary to take advantage of the hydrocarbon potential of sedimentary basins and to further develop the natural gas market. The purpose of this paper is to discuss the current processes and trends in the natural gas economy and will propose possible solutions to ensure ongoing strength and viability in such an important area of the Argentine economy. Many analysts have been focusing only on parts of the situation; this paper is one of the first efforts to look at the situation from a holistic point of view. The following sections will describe: (1) what is driving the increase in natural gas consumption, (2) current natural gas supply in Argentina, (3) the future of Argentina's domestic supply, and (4) possible recommendations and future policy directions. Argentina, a major economy of the Americas, can be a useful case study in addressing the increasingly important issue of energy sustainability in other countries as well as at the global level.
Feeding Argentina's Transitional Economy
The overall level of consumption of Argentine natural gas is rapidly increasing to meet both industrial and compressed natural gas demands to feed Argentina's transitional economy. Natural gas is a key ingredient of Argentina's entire energy market; natural gas represents 55% of the country's energy matrix. This level represents one of the highest levels in the world (EIA, 2006).
The consumption of natural gas in Argentina is divided into five categories: industrial (35%), electric generation (28%), residential (23%), compressed natural gas (9%), and commercial use (5%) (BP Global, 2006). Noteworthy is the fact that industrial demand and compressed natural gas are the largest and one of the smallest categories of consumption. As Argentina's economy continues to recover, more and more natural gas will be needed to satisfy the demands in both of these crucial areas.
If the predictions of the Argentine Secretary of Energy are correct, the level of demand will increase by a conservative annual rate of 3.7% till 2010 (Secretary of Energy, 2006). The rate of consumption will increase from 754 cubic meters to 1083 cubic meters per person till 2010 (EIA, 2006). With statistics and analyses pointing to the increasing trend of rising consumption, the Argentine government must make swift and effective plans to satisfy the demand of its transitional economy to avoid another energy crisis. Between 2006 and 2020, analysts determine that Argentina needs 5 to 6.5 Tcf (trillion cubic feet) of natural gas to satisfy unprecedented rates of consumption (Pucci, 2006) (personal communication). In response, Argentina has negotiated new contracts to import natural gas from Bolivia as a quick-fix solution.
Recent negotiations with Bolivia will increase the maximum level of imports from 7.7 m3/day (million cubic meters per day) to 27.7 m3/day during the next twenty years (Gorriz, 2006). This new development leads to the debate of whether or not Bolivia could satisfy new exploitation commitments after recently nationalizing its industry. Despite concerns of foreign dependence on gas supply and financial security of the project, there are also market risks to consider. The President of Bolivia, Evo Morales, has expressed interest in continuing price increases of Bolivian natural gas. He argues that Brazil and Argentina have benefited from paying very low prices for Bolivian natural gas rather than its true market price. In June 2006, Argentina paid $5/BTU (per one million of British thermal units), a dramatic 50% increase from previous prices. Bolivia plans to use international natural gas prices to determine the price of natural gas that it sells to Argentina (Minutti, 2006) (personal communication). If Argentina continues importing Bolivian natural gas, whose price will depend on international increases, it will be beneficial to develop additional diversification strategies. To compensate for the need of importing natural gas, Argentina should develop its exploratory potential at least as a partial solution. The dependence of importing natural gas from Bolivia in the long run is not a solution to resolve the question of the sustainability of natural gas.
The Outlook of Argentina's Natural Gas Supply
To answer the question of how Argentina can reduce its dependence on foreign imports and keep up with growing domestic demands of natural gas it is necessary to first compare the level Argentina is capable to supply independently. The producing basins are: Northwest, Cuyo, Neuquen, Gulfo San Jorge, and Austral (Pucci, 2006) (Figure 2). If the businesses that currently control these basins continue drilling at current levels and if the projected amounts of natural gas reserves remain the same, production levels will not even be close to current levels in the long run. If current exploitation levels remain constant without additional exploration, these five producing basins will have reserve lives from barely five to thirteen years (Lopez, 2006), an unacceptable level of sustainability.
In total, the maximum reserve/production ration of the productive basins with the same production levels of today is approximately 13 years, until 2019 (Lopez, 2006) (Table 1). Analysts estimate that these basins will last approximately 8.6 years without additional exploration, and they are currently searching for methods to lengthen the reserve lives of these valuable producing basins (Lopez, 2006). A simple approach would be to reduce production and increase exploration in the five producing reserves; however, the Argentine government does not currently have direct authority over levels of exploration and production in the basins.
Strong evidence points to a relatively high, constant level of production in the short-term. The current level of the total production of natural gas in Argentina is approximately 141,295 Mm3/day (million cubic millimeters per day) (Lopez, 2006). ). It is evident that the level of production is calculated in relation to the level of reserves; this concept is beneficial to extend reserve lives. In the end, the level of production is high and businesses do not have plans. Production ratios in relation to the reserve ratios were high in 2005: Northwest 10.5, Cuyo 4.8, Neuquen 6.7, Golfo San Jorge 12.15, and in Austral 12.88 (Lopez, 2006). As for now, current production is not slowing down. (Table 2) The production levels of the first half of 2006 are equal to ½ of the 2005 production levels, although the probable quantities are relatively low.
The Argentine Congress recently responded to the problem of the low exploration levels with new laws promoting exploration and exploitation, offering IVA (aggregate value tax) refunds. Companies will receive a refund of 21% of the value of the equipment they are using to explore and exploit gas, and also companies will benefit from import tax exemptions (DEF, 2006). The Argentine government can impact the situation of exploration only indirectly; nevertheless, the most important factor of the future security of the natural gas economy is the intentions businesses to explore. The Argentine government has tried to increase exploration through legislative incentives, but legislative attempts only have a minimal effect on increasing exploration rates.
The Future of Argentina's Natural Gas Reserves
The Argentine government has begun to recognize the potential of marine exploration, in spite of the fact that environmental conditions in marine areas elevate the investment risk and the time required to explore these basins. Businesses and government partnerships have attempted to resolve increased exploration risk of the marine basins, while at the same time allowing the Argentine government a share of the profits. Currently ENARSA, a company managed by the argentine government to promote the natural gas economy, has a 35% stake of partnerships with Repsol YPF, Petrobrás, Sipetrol, and Petrouruguay to explore the marine basins of Colorado, Golfo San Jorge and Austral (Espasande, 2006) (personal communication). To understand the importance of unexplored and underdeveloped sedimentary basins it is necessary to recognize their relation to the hydrocarbon potential of all the basins sedimentary in Argentina.
Argentina appears to have adequate geological conditions to be a significant natural gas supplier. Currently Northeast is the largest unexploited sedimentary basin on Argentine soil. The Office of the Secretary of Energy has promoted Northeast as the most promising basin to be exploited out of the nineteen not exploited today. Out of the productive basins, Golfo San Jorge has shown promise due to the source rock analysis in the central and western part of the basin.
Malvinas and Colorado have shown promise for exploitation. Analysts are also optimistic about exploitation in the marine sedimentary basins in the southern tip of Argentina, such as the Austral basin. Specifically, the basins of Malvinas and Malvinas Oriental show strong exploration potential; these basins were highlighted in the U.S. Geological Survey World Petroleum Assessment 2006. (Schenk, 2006)
The future of exploitation of natural gas points to the marine basins. Today fifteen sedimentary basins that are completely marine basins or that straddle the coast are recognized. Natural gas businesses have turned their attention to the non-productive basins, Colorado, Malvinas, North Malvinas, Rawson, and the productive basins, Austral and Golfo San Jorge. Marine basins also appear to be the frontier of hydrocarbon exploration and exploitation; however, at this point there is low level of exploratory drilling in marine basins. For example, the marine basins, Rawson and San Julian each only have one exploratory well. The largest marine sedimentary basin, Argentina, has no exploratory wells nor has it yet been seismically measured (Schenk, 2006). The exploitation possibilities of the twenty-four basins enhance the possibility of Argentina being a self-sufficient natural gas supplier while expanding its current export market.
Pricing Natural Gas
International investors analyze exploratory risks and the anticipated price of natural gas when they make decisions to invest in exploration. Exploration budgets are closely tied to exploration risks. The price of natural gas is inversely related to international investment risk: when the price of natural gas increases, investment risk in exploration decreases gas companies, in the quest for profits, search for methods to share, reduce or insure against financial risks that are all to common in high-risk exploration.
Today the price of natural gas in the Southern Cone region of South America (Chile and Uruguay) is rising, making exploratory potential more attractive. All things being equal, as the price of natural gas increases, exploration investments will increase as well. Although Argentina would benefit greatly from competitive natural gas prices, the national price is significantly lower than that of the rest of the Southern Cone. This price imbalance hinders the future expansion of the Argentine natural gas economy. Comparatively deflated selling prices of Argentine natural gas serve to dissuade a strong continuation of international investment.
The Argentine Secretary of Energy has indicated that there are no plans to increase the price of natural gas in the near future (Gorriz, 2006). The government has set a firm stance against any price increases that may adversely affect consumer pockets. Tight government control of natural gas prices appears to be a reaction to the Argentine economic crisis in 2001. These measures force natural gas companies to sell natural gas at regulated prices well below regional levels.
The industrial sector maintains a relatively low price, approximately U$S 2.00 /MM BTU, the electric sector is priced at U$S 1.00 /MM BTU, and residential consumption prices stand at U$S 0.50 /MM BTU. The Argentine government imports Bolivian gas at U$S 5.00 /MM BTU with expected price increases in the future. Domestic market signals, such as high consumption levels, and international market signals, such as higher regionally priced gas elsewhere, indicate that increased domestic natural gas prices will be beneficial (Minutti, 2006) (personal communication). In the next two or three years a constant price increase in the industrial sector from U$S 2.00 /MM BTU to U$S 3.00 /MM BTU, a constant increase in the electric sector from U$S 1.00 /MM BTU to U$S 1.60 /MM BTU, and a slower increase of residential prices for only the highest consumers from U$S 0.50 /MM BTU to approximately U$S 1.00 /MM BTU will allow the natural gas market to recover. Higher prices will prove to natural gas industry businesses that more exploration will afford them larger profits. Natural gas demand will decrease due to slightly higher prices for industrial, electrical, and residential consumers, and domestic natural gas will be more in line with regional prices. It can be argued that consumers will feel the adverse effects of higher natural gas prices; however, the proposed increases are not drastically higher and the increase can be introduced gradually.
Energy analysts are hopeful that the Argentine government will raise natural gas prices in the future. They believe that price increases are the best way to prevent a crisis similar to the crisis in 2004. In response to the very low prices of natural gas, demands surged and were largely unmet, causing severe shortages. Sustainability of the economy will suffer in the medium and long run if levels of exploration remain low while exploitation levels remain high. If the prices of Argentine natural gas do not keep pace with regional prices, the economic growth of Argentina cannot be sustained.
It can be argued that the recent legislation of the Argentine Congress and the liberation of prices of the natural gas will increase the number of exploratory wells, but there is no guarantee that more exploration will result in more reserves. New legislation is an initial attempt to attract additional investment, but is not a guarantee that business will be able to find large quantities of natural gas. The question of whether future levels of exploration will satisfy demand remains unanswered.
The Impact of the Increase of Export Rates
The daily average of natural gas exports has increased by 1 million m3 from 2005 till 2006 (EIA, 2006). Growing foreign demands for natural gas imports indicate that Argentina has the potential to expand its current natural gas export market by continuing exploration. Some analysts decry a "bottleneck of supply", adding that insufficient supply levels in the past and present may restrict future export levels. However, it can be argued that Argentina's export market is more than the proper balance of domestic supply and foreign demand; the lack of development of gas pipelines for transportation between exporting/importing partners has hindered market advancement. In the medium term, Brazil, Chile, Paraguay, and Uruguay will continue to pressure Argentina for higher levels of natural gas exports. The construction of additional gas pipelines will be the result of this market pressure.
Despite setbacks of local financing of the transportation of the natural gas exports, Chile, Brazil, and Uruguay will continue to be strong export markets. This is due in part to the advanced natural gas market of Argentina in comparison to Chile, Brazil, and Uruguay. The future increase of the export market will exert strong negative and positive effects. The expansion of the Argentine export market aides regional integration in the Southern Cone, which can be a political strengthening tie among Argentina and Chile, Brazil, and Uruguay. At the same time the expansion of the export market contributes to record high production rates, in turn, depleting the natural gas reserves. At present, the total export market accounts for 18,082 Mm3/day; 7.8% of total natural gas is exported (Lopez, 2006).
The Argentine natural gas economy balance is clearly not in equilibrium; this imbalance threatens the sustainability of the economy (Figure 3). Rising levels of consumption emanating from Argentina's transitional economy, an expanding export market, and record rates of exploitation have offset the Argentine natural gas economy balance. The solution points to exploration; however, Argentina lacks sufficient investments in exploration even though the Argentine government is currently encouraging more exploration.
Overall, exploration in Argentina has decreased by 66% in the last 10 years. During that same period of time, exportation of natural gas has increased to Argentina's South American neighbors, specifically, Brazil, Chile and Uruguay. Because exportation and exploitation are escalating at record rates, businesses must increase exploration to ensure that they can meet the projected domestic and international demands. The balancing of the natural gas economy will secure the sustainability of the Argentine natural gas economy in the future. In order to achieve this balance legislation is necessary. Whether or not the new laws will adequately address the threatening lack of exploration in Argentina depends on how attractive business find these government incentives.
An effect of the imbalance of the natural gas economy is the dependence on Bolivian imports. The Argentine governement should search for diversification strategies to decrease dependence on Bolivian natural gas imports. Bolivian natural gas imports solve the growing question on how to solve record levels of consumption levels only as a quick-fix solution; however, the sustainability of the future of the economy still remains in question because of the risk of rising importation prices, and the questionable ability of Bolivia to import to match consumption needs.
In addition, the gradual increase of the price of natural gas is a promising option to balance the natural gas economy. Government reticence to increase the price of gas to protect consumer pockets are understandable; however, instead of a sudden and dramatic increase, a gradual increase in natural gas prices will have positive effects by easing consumption strains and indirectly promoting business exploration. If Argentina does not plan to raise the prices natural gas prices, there will be few options for a more sustainable natural gas economy. Most likely Argentina will opt to increase their participation in the natural gas industry, which will most likely not have such a direct effect as raising natural gas prices.
I thank the following people for interviews granted as part of the research: Julio Berlinksi, Professor of International Relations, University of Torcuato di Tela, Argentina; Carlos Bruno, Director of Repsol YPF, SA; Carlos M. Espasande, Director of the magazine, Mercado Electrico, Ex advisor to the Energy Commission of the Argentine House of Representatives; Ricardo Iglesias, Consultant Manager, Energy Consulting Services; Roberto Lopez, Manager of Statistics at IAPG; Daniel Malizia, Engineer of Geological Services Inc.; Nilda Minutti, Commercialization of Natural Gas Department of ENARSA, Consultant; Dr. Juan Carlos Pucci, Consultant and Author; Angel Ramos, Engineer, Transmission Department of ENARGAS; Vicente Serra, Director of National Fuels Office in the Argentine Secretary of Energy; Maria Eugenia Stratta, IAPG Librarian; Juan Manuel Velasco, President of the Ecology Commission, Representative in the City Counsel of Buenos Aires.
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