Significance

Shell's decision to raise fuel prices in response to rising international oil prices has been attacked by President Kirchner, reflecting rising concerns about inflation.

Implications

Kirchner's rhetorical attack on Shell threatens to further undermine investor confidence at a time when greater investment is needed to avert future fuel shortages.

Outlook

As well as a less-confrontational approach by the head of state, higher levels of investment by gas and oil producers will require increased legal and regulatory stability, including a reduction in export taxes and a clarification of the terms for participation in joint ventures (JVs) with the new state energy company, Enarsa.

President Calls for Shell Boycott

President Néstor Kirchner yesterday called for a national boycott of Anglo-Dutch oil firm Shell for its decision this week to raise its fuel prices by up to 4.2%, in response to rising international oil prices The president's comments followed a sharp outburst against the company the previous day in which he accused the company of 'a lack of collaboration' with Argentine society. Kirchner's reaction to the latest hike in domestic fuel prices reflects concerns over increasing inflationary pressures, which threaten to undermine living standards for millions of Argentines living under, or close to, the poverty line. Consumer prices overall rose an accumulated 2.4% in the first two months of this year, representing a sharp pick-up over previous months and the year-earlier period - when the increase was only 0.5%.

According to local press reports, consumer groups have welcomed the president's initiative and threatened to extend the boycott to other products, such as meat, if there are further price rises. Meanwhile, groups of piqueteros (demonstrators consisting of the poor and unemployed) were yesterday reportedly protesting outside Shell's headquarters in the capital, Buenos Aires, and had blocked access to several service stations in the capital. They were expected to be joined by consumers.

The decision of other fuel retailers Repsol-YPF and Petrobras not to adjust their prices at present has led to the singling out of Shell but the president's reaction ignores the differences in their respective situations. Prices have been liberalised in the downstream oil sector. Nevertheless, following the devaluation of the Argentine peso in January 2002, refining and marketing companies have faced government pressure to keep domestic prices down. Initially, they did this through fuel price accords that were periodically renewed; however, this mechanism broke down in 2004 as the widening disparity between domestic prices and record high international prices sharply reduced refining companies' profit margins. This has particularly hurt Shell and Esso - companies with downstream assets that do not participate in the domestic upstream sector. Shell had even been considering the possibility of selling its assets in Argentina but announced in February this year that it had decided to remain in the country . In contrast, companies such as Repsol-YPF or Petrobras have been able to partly offset any losses related to artificially low oil prices in the domestic market through exports, although the government has also curtailed companies' oil-export revenues through the imposition of an oil-export tax.

President's Rhetoric Threatens to Harm Climate for Investment

The president's decision to 'name and shame' Shell will be seen by many as another attack on foreign investors in the country. Kirchner has previously criticised foreign-owned utilities for failing to invest sufficiently, describing their warnings that the country could face an increasing number of power shortages unless the government agreed to unfreeze tariffs as an attempt to blackmail the government into conceding their demands. A programme of public hearings with several foreign-owned utilities is set to start in April, despite them not having reached an agreement with the government over the renegotiation of its public-service contract (PSC). Kirchner also laid the blame for last year's gas shortages on the failure of foreign gas producers to invest sufficiently, failing to acknowledge that government policy also bore some of the responsibility. These rhetorical attacks on foreign investors in the energy sector have no doubt helped to encourage the targeting of foreign energy companies by some more radical piqueteros, including an incident in May 2004 when small explosive devices were thrown at the building housing Repsol-YPF's Buenos Aires headquarters during a demonstration by unemployed protestors, and the occupation of the building by unemployed protestors in June 2004.

In addition to Kirchner's populist rhetoric, increased government interference and frequent rule changes in both the hydrocarbons and electricity sectors have increased regulatory uncertainty since the 2001/02 economic crisis, and the attack on Shell threatens to further undermine the climate for investment at a time when greater investment is needed to avert future fuel shortages.

Outlook and Implications

Concerns over domestic gas supplies in Argentina being insufficient to meet internal demand have led to the imposition of new restrictions on gas exports to neighbouring Chile this week. According to local press reports, on Wednesday (9 March 2005) Argentina announced that it would cut gas exports by up to 10 MMcm/d, while Chile's CNE has warned that further supply shortages are possible up until the end of April. During last year's gas crisis, the largest cuts in exports to Chile were seen in May 2004, when Argentine gas exports to Chile were cut by around 50%. On top of concerns about gas supplies, refiners have warned of the possibility of gasoil and diesel shortages in the coming months. Shortages in the domestic diesel market could, in turn, threaten to delay the collection of the wheat harvest in the province of Buenos Aires.

Although the government's concerns about rising inflation are understandable following the country's painful experience of hyperinflation in the past, President Kirchner's rhetoric threatens to alienate foreign companies.

Insufficient investment in increasing gas production was blamed for the gas-supply shortage that forced Argentina to reduce gas exports to Chile in 2004 and import power and gas from Brazil and Bolivia. Although the slight increase in gas production seen in 2004 can be attributed to some recent improvements in the operating environment for gas producers, continued restrictions on gas exports and the need for further increases in the gas price at the wellhead are a disincentive to greater production. Consequently, the rise in output has been insufficient to match the growth in demand, and the supply outlook remains uncertain over the coming months. Meanwhile, oil producers have been hit by increased export taxes and low domestic prices, discouraging them from ramping up E&P in order to take full advantage of high international oil prices, leading to fears that Argentina could lose its status as a net oil exporter without increased investment in oil exploration.