As the shale gas revolution sweeps across Latin America, many governments are beginning to see the industry—and the significant influx of foreign investment—as a quick stimulus to their sluggish economies. Argentina is no exception—with an estimated 16.2 billion barrels of shale oil and 308 trillion cubic feet (TCF) of shale gas in the Vaca Muerta shale formation, the government aims to capitalize on their newfound resource wealth.
Although foreign investment may help Argentina’s fiscal woes in the short term, it is by no means a panacea for the country’s economic problems, and could in fact encourage poor financial practices.
Efforts by the Fernández de Kirchner administration to attract foreign investment have begun to bear fruit, with various international oil companies and investment firms increasing their stake in Vaca Muerta projects. Argentina’s national oil company, Yacimientos Petrolíferos Fiscales (Treasury Petroleum Fields—YPF), has also made a series of joint ventures with oil companies that will provide the state-owned energy company with much-needed cash and technical expertise to develop unconventional energy projects.
In addition to an infusion of financial capital, both YPF and international oil companies have been lobbying the Argentine government to create a more favorable legal framework for investors interested in shale oil and natural gas projects. The administration has undertaken efforts to rewrite the 1967 hydrocarbons law, which would simplify taxes, royalties, and licenses and effectively reaffirm Buenos Aires’ control over natural resources. Such a law would be a direct rebuke of the 1994 constitutional amendment that recognized subsoil hydrocarbon resources as property of the provinces where they are located.Although the Fernández de Kirchner administration looks to move forward with the new legislation, there has been some push-back from provincial leaders who have a large stake in the development of shale resources. Current Neuquén Governor Jorge Sapag has come out against the proposed legislation, claiming that the new law would introduce more problems than it would resolve. Under the new proposal, provinces would receive royalties of up to 12 percent on any future investment—effectively reducing provincial gross sales, turnover and stamp taxes, as well as federal tax proceeds.
While this legislation is being promoted as a way to increase foreign investment and stimulate the economy, the hydrocarbon bills will effectively allow the central government to re-affirm its authority over the nation’s energy policy.
This struggle for power between the federal government and the provinces is not new in Argentina. Throughout the twentieth century, Buenos Aires and the provinces fought over government revenue and policy-making authority. Now, with the possibility of massive infrastructure investment and oil revenues, the Fernández de Kirchner administration could use new revenue generated by the hydrocarbons law to address the central government’s fiscal troubles.
Despite the administration’s optimism regarding Argentina’s newfound resource revenue, there is no guarantee that the potential energy windfall will lead to positive adjustments in the federal government’s economic policy. From 2003 to 2008, when Argentina’s economy grew at an average of 8.4 percent annually, public expenditures exploded. In line with the government’s policy of promoting economic development along with social equality, the federal government provided direct subsidies for energy, transportation and food. From 2005 to 2011, subsidies grew from $1.6 billion to $18.1 billion. The groups that benefited most from this growth in public spending have been union members and pensioners, who saw their wages increase to ensure that their purchasing power remained steady with rising inflation.
Still barred from capital markets after missing an interest payment on its restructured sovereign bonds in July, Argentina hopes to finance public spending on the prospect of another commodity boom, rather than address some of its inherent structural problems. While President Fernández de Kirchner continues to place blame on the “vulture funds”, long-term economic problems will have to be addressed with some reduction in wage adjustments and price control mechanisms.
However, this is unlikely in the near future, as groups that benefit from these price controls and wage adjustments support the current government. Even with presidential elections next year, both leading candidates look to maintain support from groups who benefit from these policies, indicating that the next administration will continue to follow the same economic policies once the energy revolution begins to take effect in Argentina.
