The principle causes of Argentina’s energy difficulties is a combination of frozen prices (for residential users) and mature oil and gas fields, which have led to stagnant investment and falling output levels, particularly for the natural-gas sector. During the first half of 2006 natural-gas extraction fell by 0.2% year on year, while consumption continued to increase at a rate close to 9%. This imbalance has raised concerns over the future reliability of natural-gas supplies, and shortages have emerged at times of peak demand. In May a high level of residential consumption triggered by low temperatures led to supply shortages for industrial users, power-generating plants and compressed natural-gas stations.

In order to ease constraints, gas transport capacity is being increased, including a major expansion of the San Martín II natural-gas pipeline, to 16m cu metres per day, due for completion in 2007.

Gas from Bolivia

However, the main source of new natural-gas supply will be an increase in imports of Bolivian gas. At the end of June, the Argentinian and Bolivian authorities signed a memorandum to increase the amount of natural gas supplied by Bolivia from 7.7m to 27.7m cu metres per day for 20 years. The agreement includes an increase in the price paid for Bolivian natural gas from US$3.4 per million British Thermal Units (BTU) to US$5/m BTU until December 2006. From January 2007 natural-gas prices will be set according to a formula, the details of which are still under negotiation. The formula will reflect the price of substitutes and may raise the price paid by Argentina up to US$5.5-US$6/m BTU. Argentina started to import small volumes of natural gas from Bolivia again in 2004.

A preliminary agreement over the terms of the long-term contract for an additional 20m cu metres per day was reached in September, and will make it viable to start the construction of the Gasoducto del Nordeste Argentino (GNA), to be jointly financed by the state-owned energy firm, Enarsa, and the Bolivian state petroleum company, Yacimientos Petrolíferos Fiscales Bolivianos (YPFB). The construction of the new pipeline will take three years and require investment of around US$1bn.

International fallout

The agreement with Bolivia has had international repercussions. It was made before Brazil’s state-owned oil company, Petróleo Brasileiro (Petrobrás), Bolivia’s largest gas field operator, had concluded negotiations over new operating contracts with the Bolivian government. In May Bolivia announced it would nationalise petroleum and natural-gas fields and refineries necessitating new contractual arrangements with private oil companies who would become minority stakeholders in the fields and pay higher taxes. The higher price agreed by Argentina and Bolivia also had a knock-on effect on the price charged for Argentinian natural-gas exports to Chile. Imports of Bolivian natural gas are made by Enarsa, which purchases the fluid at US$5/m BTU (compared with a domestic price that is, on average, US$1.5/m BTU). To prevent Enarsa from recording a loss and subsidising Chilean importers, in late July the Argentinian authorities raised the export tax rate charged on natural-gas sales to Chile from 20% to 45%. The higher tax will increase the price paid by Chilean importers to around US$4.5/m BTU, compared with the previous US$2.5/m BTU, angering Chilean authorities.

At present, Argentina is exporting close to 14m cu metres of natural gas per day to Chile, down from a total contract volume of 24m cu metres per day. Chile cannot directly purchase Bolivian natural gas because of the lack of any physical transport infrastructure between the two countries. A long-standing territorial dispute between the two countries has blocked the development of a gas line to Chile for a decade.

Short supply

Meanwhile, continuing a trend that started in 1998, the extraction of crude petroleum fell by 4.8% year-on-year in the first quarter. Lower output levels have been accompanied by a steady contraction in the stock of proven reserves: in 2005 total reserves fell by 4% as a result of low investment in exploration and drilling. Although international petroleum prices have reached record levels, the export tax rate charged on exports cuts domestic oil prices 45% below the international level. This has discouraged investment in Argentina and created distortions in regional energy prices, leading to the type of conflicts that emerged with Chile concerning the supply of natural gas.

In contrast with crude petroleum production, processing and production of refined products has risen, but refineries are close to full capacity. During the first three months of 2006 the output of refined products rose by 3.1%, triggered by a 31.6% rise in fuel-oil production. Increased production of fuel-oil was needed to meet higher demand arising from the interruption of natural-gas supplies to industrial users and, especially, power generating stations.

In May, shortages affecting agricultural producers in Northern provinces required imports of fuel. Petrobrás imported a total of 20,000 tonnes from Brazil and Enarsa did the same from Venezuela. There were also imports of gas-oil from Russia to supply power generators.

Natural-gas shortages have raised the dependence of the power generating system on liquid fuels. During the winter season, higher residential consumption of natural gas forced the use of fuel-oil and gas-oil in thermal power generating stations, placing more pressure on the domestic liquid fuels market. During the first six months of 2006 electricity generation increased by 6.7% year-on-year, but in the absence of investment in new generation capacity output has reached a ceiling.

Power plans

Over the last five years no new major power generating station has been added to the power grid: the last was Genelba (in the province of Buenos Aires), which started to produce electricity at the end of 2000. In order to respond in the medium term to the increase in the demand for electricity, the authorities have encouraged the construction of two combined-cycle power generating stations that will contribute 1,600mw to total electricity supply (close to 10%) in around two years. The plants will be built in Buenos Aires and Santa Fe by power generating firms, Endesa (Spain) and Total (US). The initial offers to produce the turbines were submitted on August 18th by Alstom (France), Siemens (Germany), Mitsubishi (Japan) and General Electric (US).

The total investment required will reach close to US$900m and the resources will be supplied by Foninvemen, a fiduciary fund created by the Secretary of Energy by pooling all the debts of Cammesa (the administrator of the electricity sector) owed to major electricity generating firms, which will be the majority owners of the new plants. The project will also be financed by contributions from large industrial users and pension funds. The provincial governments of Santa Fe and Buenos Aires have also approved legislation to reduce the local tax burden.

A public bid to build, operate and maintain a third transmission line has been called, to carry electricity from the Yacyretá hydroelectric dam in the north-eastern province of Corrientes. The line will connect with transformer sub-stations at Rincón Santa María (in Corrientes) and General Rodríguez (Buenos Aires), with a total investment cost of around US$1.1bn. The new line will transport additional electricity generated from a planned increase in the water reservoir level at Yacyretá from its present height of 77 metres to 83 metres. The increase in power generating capacity will raise output from Yacyretá from a current 18% of total electricity demand to 26%. Construction of the transmission line is planned to conclude in December 2007.