Argentina: Has Argentina’s Recovery Run Out Of Gas?

By Carlos A. de Kemmeter and Juan Carlos Sanguinetti

This edition of Argentine Business Law Watch¹ reports on recent government rules responding to the Argentine energy crisis. As winter approaches and natural gas consumption increases, the Government has announced plans to curtail exports of natural gas and gas-generated electricity, as well as other measures to reduce domestic consumption. How can a country rich in gas reserves suffer a shortage? Why are Argentina’s neighbors, particularly Chile, extremely worried? Read on for answers to these questions and more.

Since Argentina devalued its currency in 2002, public utility tariffs have remained largely frozen. Providers of gas, electricity and water have been obliged to continue charging consumers in pesos without substantial tariff adjustments to reflect currency depreciation or the effects of inflation. Most, if not all, of these public utilities carry significant financial debt and are bound, under the terms of their license, to make capital expenditures to improve and maintain infrastructure. These obligations are generally dollar-based, making it difficult to pay them with a revenue stream of devalued pesos.

The result has been predictable. The utilities have defaulted on their financial debt and worked over the last two years to restructure these obligations. As for capital expenditures, many utilities have been unable or unwilling to comply with scheduled investments, pending the Government’s approval of a tariff increase. In the natural gas sector, this lack of investment has meant, among other things, a failure to meet increased capacity requirements—exacerbated by an incipient recovery of Argentine industry and an abrupt increase in natural gas-powered vehicles.

These and other factors have led to a daily shortfall of more than five million cubic meters and the specter that Argentines will return to an era, which, like devaluation, they once believed a thing of the past: natural gas shortages and even electrical blackouts, as much of Argentina’s electricity is gas-generated.

To address the insufficient transport capacity of existing systems, in February 2004 the Government released Decrees 180/04 and 181/04.² These decrees announced a "mechanism of curtailments" applicable to natural gas distribution companies "in the event of system restrictions." By this time "interruptible" gas supply (i.e., gas sold on a conditional basis subject to availability) to large industrial users was already being halted and it is widely reported that interrupted service will increase as the weather becomes colder.

Decrees 180 and 181 also empowered the Secretariat of Energy to determine categories of users, which, as of a future date, will be unable to acquire natural gas from distribution companies at a peso tariff, instead obliged to purchase gas directly from producers and resellers. Because producers and resellers are not subject to regulated tariffs, this measure will have a significant impact on the defined user categories who will soon be negotiating gas purchases on terms reflecting—or at least approaching—world commodity prices.

The Unión Industrial de Santa Fe, a confederation of manufacturers located around the hub of Argentina’s fertile pampas, was unwilling to await the Government’s curtailments— especially not while 13% of Argentina’s gas is exported to Chile. The Unión filed a constitutional challenge (amparo) against Decrees 180 and 181 and sought a temporary restraining order against any curtailment of their gas supply pending a final judgment. The complaint also requests an order requiring the Government to restrict natural gas exports to Uruguay, Brazil and Chile to the extent necessary to meet domestic demand. On March 12, 2004 a federal judge in Santa Fe granted the temporary restraining order, which was immediately appealed by the Government.

Meanwhile, as the Santa Fe case winds it way through the courts, the Government appears to have bowed further to local pressure. Last week, the Secretariat of Energy released Resolution 265/04³ , which "suspends excess gas exports . . . useful to internal consumption" and charges the Sub-Secretariat of Fuels with the task of devising a plan to ration gas exports and transport capacity. Despite the use of ambiguous language (there’s no definition of either "excess" or "useful"), the measure has dealt a blow to natural gas exporters—now coerced into subordinating lucrative export contracts to domestic buyers paying regulated tariffs—and their foreign clients.

With cold weather and peak consumption periods approaching, further rules are expected soon, including those to implement Decrees 180 and 181 and the export rationing program called for by Resolution 265. Let’s hope these rules don’t leave Argentina in the dark.

Many thanks to partner Carlos A. de Kemmeter and associate Juan Carlos Sanguinetti, specialists in administrative and constitutional law, for contributing this article.

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