Growing political risk in Argentina hinders attempts to attract investment

By Irenea Renuncio

The Argentine government’s decision on 9 August to increase natural gas wellhead prices by 300% has gone mostly unnoticed by investors, who are increasingly worried about the country’s growing political risk. The business environment continues to deteriorate amid growing policy unpredictability and resource nationalism, which is further enhanced by the new Hydrocarbon Sovereignty Decree.

Increase of gas prices unlikely to calm investors

President Fernandez is trying to attract investment in the energy sector amidst growing concerns over the industry’s exposure to government intervention, which was marked by the April nationalisation of Repsol’s YPF shares.

Policy unpredictability, resource nationalism and disregard for property rights have all become features of an increasingly politicised business environment, undermining government attempts to attract private investment. This was reflected in the 10 August decision by Moody’s to downgrade the ratings of Pan American Energy LLC and Petrobras Argentina, declaring that the companies are increasingly vulnerable to government intervention in the country.

A few days before, on 27 July the government had announced Hydrocarbon Sovereignty Decree 1277 which creates a national hydrocarbon planning commission tasked with assessing private companies’ investment plans and setting “reference prices for the sale of hydrocarbons and fuels”.

Although President Fernandez has defended the creation of the new Hydrocarbon Sovereignty Decree and hydrocarbons commission, which she says will “ensure free and fair competition in the sector,” the new institution is seen by energy players as a government tool created to further facilitate control over private energy companies.

Under the new decree, energy companies will have to submit detailed investment plans by 30 September, with the commission having the ultimate say over whether the plans are inconsistent with the current administration’s energy targets. More worryingly for investors, the commission will set reference energy prices, with companies becoming exposed to the current administration’s short term political goals.

YPF to become increasingly politicised

Meanwhile, the newly nationalised YPF runs the risk of becoming increasingly dominated by Fernandez’s political agenda rather than pragmatism. YPF’s new CEO Miguel Galuccio has announced a new 5 year plan that will require the investment of USD$7 billion annually to reverse Argentina’s declining oil and gas production. However, the ambitious plan, which relies heavily on the exploitation of shale gas resources located in the Vaca Muerta field is unlikely to be viable without the support of foreign energy players.

YPF announced on 31 July a strategic partnership with Venezuela’s PDVSA. The news increased concerns over Fernandez’s increasingly cosy relationship with Leftist Venezuelan President Hugo Chavez and unsettled rather than reassured the markets. Under the partnership YPF will take part in exploration at Venezuela’s Orinoco oil belt and will have access to Venezuela’s resources and expertise, but PDVSA lacks the technological capacity to help Argentina exploit its shale gas resources.  Moreover, mismanagement and corruption are notorious within Chavez’s PDVSA and YPF’s partnership with the former will only increase fears of contagion.

Resource nationalism: the new reality of Argentina’s energy sector

Argentina’s current business environment is becoming tainted by growing political risk, with investors continuing to get cold feet over the increasing radicalisation of Fernandez’s policies. While resource nationalism may pay political dividends for the President in the short term, the prospect of dwindling investor confidence is likely to ultimately harm Argentina’s economy in the medium to long term.

The new Hydrocarbon Sovereignty Decree confirms investor’s worst fears after the nationalisation of YPF: resource nationalism has formally been streamlined into government policy and government intervention is only likely to increase. While speculation continues over the future exploitation of the country’s shale gas resources, it is unlikely that any privately owned energy company would feel confident in partnering with the newly nationalised and increasingly politicised YPF.