Argentina
Analysis

Snapshot: Energy challenges, opportunities for Argentina’s next government

Bnamericas

Can Argentina’s next government unlock the country’s economic potential, including in the sphere of energy, and finally bring some long-term stability?

That’s one of the million-dollar questions surrounding the cash-strapped nation.

Whoever takes the reins, investors will probably observe from the sidelines until the thick cloud of uncertainty thins.  

In the energy sector, Argentina sits on abundant renewables and hydrocarbons resources and could potentially become a major exporter of green hydrogen and its derivates in the next decade. 

The main carrots needed to tempt energy investors are the prospects of sustained macroeconomic and regulatory stability and requisite infrastructure – or at least a feasible development plan – along with political will and the necessary support in congress.

While the chances of pro-market reforms appear much greater than prior to the last election, the political landscape is fragmented, which could impact government lawmaking efforts. On top of that, the economy is sputtering – and there’s no quick fix that wouldn’t send huge shockwaves through the country.

In Sunday’s PASO mandatory open primaries, libertarian outsider candidate Javier Milei of the La Libertad Avanza (LLA) coalition secured 30%, the largest share of the vote and likely reflecting much voter disgruntlement with the political establishment, followed by representatives of the two traditional political blocs. Incumbent economy minister Sergio Massa of the Peronist coalition Unión por la Patria secured 21.4%, while Patricia Bullrich of the center-right Juntos por el Cambio  (JxC) grouping polled 17%. The three will contend for the country's top job in October. 

Rating agency Moody’s said the mostly likely outcome was a change in administration and a shift toward more liberal economic policies. 

“Such a shift will pose significant challenges for whoever wins the general election in the fall,” Moody’s added. “During the rest of the year, and throughout most of 2024, the Argentine economy will continue to experience high volatility, strong pressures on prices and the exchange rate, and limited foreign exchange availability, conditions associated with persistent credit fragility.”

US bank Wells Fargo, estimating that Milei has a 65% chance of victory, echoed this: “A Milei victory keeps policy uncertainty elevated for an extended period of time; however, a fractured legislature prevents Milei from implementing his full agenda. As a result, he has limited success with his more radical proposals.”

HYDROCARBONS

In terms of hydrocarbons, there is general support in congress for development of the sector. Differences will surround issues such as taxation, duties and state and private sector involvement.

Regulatory stability and an easing of forex controls are typically called for by the sector. 

A Milei government would push for deregulation and a central role for the private sector, including in midstream infrastructure development. 

A Bullrich administration would likely take a similar, but more moderate, approach, while a Massa government could be more market friendly than that of incumbent President Alberto Fernández but, arguably, without zeal for major reform.

Under the current government, oil and gas output has climbed and major debottlenecking projects have been built or are under construction. The big opportunities rest in oil exports and the establishment of an LNG-exporting industry, along with piped gas exports to Brazil and Chile. 

A major buildout of infrastructure would be needed to support the requisite output growth. And in the case of year-round firm exports of gas to its neighbors, Argentina would need to provide ironclad supply guarantees. 

RENEWABLES

In the sphere of renewables, Milei has previously said he was a climate change denier.

However, a bullet point in his coalition’s campaign statement indicates pragmatism: “Incentivize investment in communications, oil, gas, lithium and renewable energies that generate genuine jobs and inflows of foreign currencies for the country.”

It also states: “Promote new sources of clean and renewable energy (solar, wind, green hydrogen, etc)." Burning waste to generate power is also cited as a goal.

Milei has proposed strengthening ties with the West, which may result in external political pressure to decarbonize, while companies operating in Argentina are already starting to embrace renewables and a 20% clean energy goal for 2025 is established in law.

The current administration has focused chiefly on the oil and gas sector, to help pull in dollars and substitute imports, and a Massa government would likely continue along a similar avenue. Barring a relatively small auction for renewables plants, clean energy has largely remained on the policy sidelines during the current administration. 

Bullrich, whose coalition helped create a boom in renewables growth in Argentina, has indicated new auctions would be held and supported private sector financing of generation and transmission assets.

A major clean energy opportunity in Argentina is supplying offtakers under private power-purchase agreements. However, a hurdle to development of this segment is a lack of spare capacity on high-voltage transmission lines. Argentina has a multibillion-dollar transmission gap that would need private sector help to plug.

WHAT’S NEXT

Argentines head to the polls on October 22 for the country’s presidential and legislative elections. A runoff election is scheduled for November 19 if a second round is needed. To obtain victory in the first round, a candidate needs to secure 45% of the vote or garner 40% and be 10 points ahead of the runner-up.

Since PASO elections tend be indicative of how candidates perform in official elections – and given the dire state of the economy – a Milei or Bullrich victory is on the cards. That implies a more market-friendly administration is on the way, but economic and policy-implementation challenges await the next president.

Center-right Mauricio Macri tried to change the course of the ship, initially achieving some success. During the tail end of his term in office, in 2018, amid concerns of climbing inflation, a domestic drought and rate hikes in the US, investors got cold feet, followed by pressure on the peso. Macri took out a multibillion-dollar loan from the IMF to try to steady the ship – a hefty debt that needs repaying.

Research firm Capital Economics wrote that “it’s hard to overstate the extent of the economic mess that the next president will inherit … And history shows that even more market-friendly administrations (such as the Macri administration) have struggled to address Argentina’s economic problems.”

This was echoed by Moody’s: “The results from this weekend, in which three political forces captured roughly a third of the vote share, imply that – in spite of a strong showing of right-wing opposition parties – a fragmented political landscape will create challenges for the next president, testing the future government's ability to implement forceful adjustment measures to address the economy's imbalances.”

The energy sector, in need of private sector cash, will likely need to wait until the dust settles, policy is presented and signals emerge over how cooperative or obstructive congress will be. By combining their votes, Milei's and Bullrich's respective coalitions could get legislation through congress – but that may imply a degree of consensus-building.

Mariano Machado, principal Americas analyst at risk intelligence company Verisk Maplecroft wrote in a report that "the three-way split heightens uncertainty on both the outcome of the first round in October and the expected run-off in November. Which two candidates eventually enter the second round depends on the effectiveness of the party machinery of each one of the top three contenders. While the two established coalitions have this machinery, yesterday’s result demonstrated that Milei’s direct appeal to disgruntled voters can defy the odds."

Subscribe to the leading business intelligence platform in Latin America with different tools for Providers, Contractors, Operators, Government, Legal, Financial and Insurance industries.

Subscribe to Latin America’s most trusted business intelligence platform.

Other projects

Get key information on thousands of projects in Latin America, from current stage, to capex, related companies, key contacts and more.

  • Project: Faina
  • Current stage: Blurred
  • Updated: 4 days ago
  • Project: Dos Santos
  • Current stage: Blurred
  • Updated: 4 days ago

Other companies

Get key information on thousands of companies in Latin America, from projects, to contacts, shareholders, related news and more.

  • Company: Agencia de Energía de Querétaro
  • The description contained in this profile was extracted directly from an official source and has not been edited or modified by BNamericas researchers, but may have been machine...