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Financial Times: Ration-hit Argentina admits energy crisis

By Jude Webber in Buenos Aires
Published: July 4 2007 03:00 | Last updated: July 4 2007 03:00

Argentina has at last admitted that the energy sector – the Achilles’ heel of its economic policy – is in trouble.

For the first time, President Néstor Kirchner used the word “crisis” to describe the severe shortages that have forced the government to ration gas for factories to guarantee enough energy for heating homes.

Low rainfall has caused problems for hydro-electric dams. Industrialists, who have already made temporary lay-offs, have begun warning that they will have to start cutting jobs soon.

Argentina’s ultra-cheap energy tariffs have fuelled runaway demand and helped the economy bounce back from ruin in 2002 to four years of spectacular growth of more than 8 per cent.

“We have to cut [gas supplies] where it hurts least,” Alberto Fernández, cabinet chief, acknowledged last month – a reference to the government’s desire to avoid hitting domestic supplies four months before presidential elections.

Mr Kirchner says the country’s dramatic growth has created bottlenecks. But he has largely blamed energy companies for failing to invest enough to boost gas production, and transport companies for failing to deliver enough energy.

The crunch has now been felt at the heart of the economic boom – Mr Kirchner has called carmakers a “backbone” of growth and the industry is leading the increase in manufacturing output. Yet car parts factories have been hard-hit by gas rationing.

The government, which is now forcing factories to switch to more expensive diesel or fuel oil instead of gas, has taken steps to boost capacity. But the problem is when demand for heating or air conditioning peaks.

Energy problems have multiplied since a bitterly cold spell in May forced Argentina to halt all gas exports to Chile. When temperatures fell again a few weeks later and gas restrictions returned, irate taxi drivers paralysed the centre of Buenos Aires in protest at a sudden withdrawal of their fuel, which is a third cheaper than petrol.

The government has now deployed internal trade secretary Guillermo Moreno, its former price policeman, to squeeze more gas from the system.

According to one report last week, he even threatened energy companies with taking over their fields for 180 days if they failed to supply enough gas – something that raised worrying parallels with interventionist behaviour in Venezuela and Bolivia. The government also fined Shell on Monday for what it says are insufficient diesel supplies.

But analysts say that instead of praying for rain to ensure hydro-electric plants can keep working, the government should raise tariffs.

“You can’t deny that the government has had a solution for every problem,” said Dante Sica, a former industry secretary.

“But they are partial solutions, not a reorganisation of the sector. Now it’s being forced to look at an integral solution, which will include the tariff question,” he added.

Sale points to change in pricing policy

The decision by Spanish-controlled energy major Repsol-YPF to sell a quarter of its Argentine unit, YPF, has raised expectations that the government may be prepared to allow energy prices to rise next year, Jude Webber reports.

Frontrunner for the purchase is Enrique Eskenazi, dubbed the president’s banker because he owns several banks including the Banco de Santa Cruz in Néstor Kirchner’s home province as well as construction interests. He is expected to pay some $300m (€221m, £149m) upfront as part of a total $3bn-$4bn purchase of 25 per cent of the former Argentine energy monopoly, with the rest being financed by international banks. He expects the deal to take months to close.

The rationale for paying such a sum for a minority stake in a company with mature fields and dwindling reserves is unclear, unless Mr Eskenazi expects to see a change in the government’s price policy. “It’s an awful lot of effort and an awful lot of money otherwise,” said Fausto Spotorno, chief economist at private consultancy OJF & Asociados.

Because of Argentina’s artificially low domestic tariffs, companies such as Repsol-YPF have to import diesel at international prices and sell at a loss within Argentina to meet demand.

Copyright The Financial Times Limited 2007

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