As the Commonwealth contemplates a gas export restriction, Government advisers would be wise to consider the example of Argentina to understand the risks of severe unintended consequences.
Having been a successful gas producer and exporter for many years, Argentina is now an importer of both natural gas and LNG, at significant economic cost to the nation – and it has its own Government to blame.
This is how the story goes:
Following several major gas finds and subsequent deregulation and privatization policies enacted by the Argentine government in the 1980s and 90s, domestic natural gas production began to soar, quickly outpacing demand. Looking to capitalize on this wealth of resources, Argentina turned to exporting the surplus via pipeline, building seven pipelines between Argentina and Chile alone from 1996 to 2001.
In 1998, Argentina began exporting gas via pipeline to Uruguay, and then to Brazil in 2000. In the case of Brazil, natural gas was transported to a 600 megawatt thermoelectric power plant, the first step in a larger project aimed at supplying southern Brazil with Argentine gas to directly compete with Bolivian supply.
However, when Argentina suffered a severe economic crisis in 2001, the government began subsidizing electricity and natural gas prices for both residential and industrial consumers. In fact, the energy sector was the largest recipient of government subsidies at this time, accounting for 56 percent of the total spending.
With government subsidization, consumer energy prices remained locked at low levels even as the economy recovered, resulting in lower investment in exploration and production in the country. By 2004, production fell below domestic demand, as lower investment meant old reserves were not being replaced, triggering the 2004 Argentinean “gas crisis.”
In response to domestic shortages during this time, the government again intervened, significantly reducing gas exports to Uruguay, Brazil and Chile through increased export taxes, quantitative export limits and the suspending of new export authorizations. By doing so, Argentina created several problems with the countries that depended on Argentine gas, most notably Chile which received the entirety of its natural gas supply from Argentina.
More detrimental to the Argentine economy than regional political issues though, was the impact this government intervention had on the country’s reputation in the international market. The president’s ability to exert so much control over the country’s production and exports further de-incentivized companies to invest in energy development in Argentina and cast doubts on trade with the country.
Unfortunately for Argentina, the export restrictions failed to ensure domestic demand was met and the country began importing gas again from Bolivia in 2004. Argentina also turned to importing LNG in the late 2000s in order to meet growing demand. By 2008, Argentina again become a net importer of natural gas – a major change from just 5 years earlier when it was exporting over 6 billion cubic meters of natural gas annually.
As regulations drove out investment and led to a decrease in production, the country’s demand continued to rise, resulting in the need to import more natural gas via pipeline and LNG. As a Wilson Center report notes:
“By 2013, Argentina imported 396 billion cubic feet (Bcf) of natural gas, roughly a 1,300 percent increase from 2004 volumes – for which it paid $11.4 billion (YPF, September 29, 2015)”
Looking forward, Argentina still suffers from the interventionist energy policies inflicted on the country over a decade ago. Since 2015, Argentinean President Mauricio Macri has tried to convince major player in the oil and gas industry to invest in the country’s Vaca Muerta shale field – one of the largest shale formations outside of North America. The field, Macri hopes, will help the country wean itself off of LNG imports and expects to need investment about $15 billion annually to development the field over the next several years.
But while there is enthusiasm from the Argentine leader, the shale play has so far failed to bring in the necessary funding and given the country’s recent energy policy, many are unsure whether development of Vaca Muerta will reach fruition.
Given the economic difficulties caused by price and export controls in South America, Australia would do well to think twice before walking down the Argentine road.