Argentina's bid for freedom: The shift from self-sufficiency to an open economy

Argentina is shifting from a focus on self-sufficiency to a free market economy to boost production and exports in key sectors such as energy and mining.

This is being done through the Javier Milei government's framework law known as Ley Bases and an incentives regime for large investments (Rigi) that guarantees a series of tax and exchange rate benefits and stable rules of the game for 30 years.

Investors are optimistic and the expectation is more income, jobs and industrial development. But there are challenges along the way and the consequences will probably be felt by the next government.

BNamericas talks about these issues with Juan José Carbajales, a former hydrocarbons undersecretary and current director of Argentina's petroleum and gas institute (IGPUBA), as well as head of consultancy Paspartú.

BNamericas: How do you see Rigi as a driver of investment and exports?

Carbajales: This is impossible without Rigi. The framework law and Rigi provide fiscal, tax, exchange rate, stability, and export authorization benefits for 30 years, which can even be extended for 20 years in some cases. In addition, from the third or fourth year, as the case may be, up to 100% of the foreign currency generated by exports may be used abroad.

It also makes it easier to import machinery and inputs without requiring domestic supply. Furthermore, it allows for dispute resolution through arbitration abroad. Rigi is tailor-made for investors.

BNamericas: Where is Rigi's focus?

Carbajales: In natural resources, especially in energy and mining, leaving energy broken down into subsectors, such as upstream, midstream, oil pipelines, gas pipelines, treatment plants, compression plants, gas separation plants for LPG and the liquefaction plant that is necessary for LNG.

In other words, the entire value chain is encouraged by the regime and, at the same time, is free of obstacles.

BNamericas: The Rigi regulations increased investment amounts for hydrocarbon projects, with certain nuances. Tell us what they are about.

Carbajales: In some cases, the US$200mn per project threshold was respected, but a distinction was made in the upstream oil and gas sector to favor projects destined for export. In gas, a distinction was made as to whether the exports would go to regional markets, via gas pipelines, or whether they would be used for liquefaction for sale abroad, such as LNG. In these last two cases, the amounts were raised.

In the first case, US$300mn and in the second, US$600mn. In this last subsector, it was determined whether the objective will be to gain new markets because, for example, exporting to Chile is not new since it was already being done.

On the other hand, in LNG it’s different because Argentina, although it had a small experience with YPF in 2019, it was not in a systemic way.

BNamericas: What is the basis for the export prioritization approach?

Carbajales: Rigi has a chapter called "long-term strategic export project" that targets projects with a minimum investment of US$2bn, of which US$1bn must be invested in the first year and the remainder in the second year. In general, all projects are required to have 40% of the investment made in the first two years. The focus is on immediate implementation.

BNamericas: One of the criticisms of Rigi is that it doesn’t consider benefits for investment projects of less than US$200mn, which in mining leaves out initiatives for improvements or operational continuity.

Carbajales: That's true, but a project can be made up of different production units and different assets, and each one can be less than US$200mn, but as long as there is some overall project. There is also a requirement regarding distance, such as in the case of a deposit and a processing plant that must be next to each other.

BNamericas: Another aspect of divergence is the requirement to hire local suppliers of inputs and services, which hinders the exchange of experiences and specialized labor.

Carbajales: The hiring of local suppliers should be up to 20% of the investment, but it does not mention the number of personnel.

The criticism is on the side of technology. The regime is not designed to promote technological development or to transfer technology and know-how. Nor is it linked to sustainability, the level of emissions or improvements in efficiency.

Although these aspects were discussed during the approval process, they were not included in the text.

BNamericas: How will the lack of infrastructure be managed to allow for industrial development?

Carbajales: That is the great Achilles heel, the backbone infrastructure, the oil pipelines, gas pipelines, treatment plants, the YPF and Petronas LNG liquefaction project, etc. That is why the investments are large scale and long term, since today the conditions for that magnitude are clearly not given.

The LNG project had been announced last year by YPF and Petronas, but now Rigi is accelerating the investment, as well as for the copper mining projects that were in the pipeline and that had not yet been decided on. Not so much in lithium because there are many projects under development.

As the program is designed, the government will be able to show rapid investments, but the great challenge will be in the next government because the works, the start-up and the inauguration of the plants will occur later.

The regime lasts for 30 years, and once a project is approved, the rules cannot be changed. Before the rule was to supply local demand and then export, but that formula is disappearing and a new paradigm is emerging focused on free exports, free production and free price setting.

BNamericas: What was the origin of this new paradigm?

Carbajales: In the abundance of [hydrocarbons formation] Vaca Muerta, we have more than enough resources for our internal demand and if we export, we will generate the dollars that the economy needs.

BNamericas: What challenges will Rigi pose for the next government?

Carbajales: By granting stability for 30 years, Rigi becomes a state policy that goes beyond administrations. I’m concerned about the fact that today 40% of the investment is required in the first two years and only after three or six more years will operations begin. This indicates that there will be no more investment afterwards because the works will already be done.

We experienced this with the Argentine mining sector, which also had a 30-year stability regime created in the 1990s. Another challenge will be not to change the rules halfway through, along with developing the infrastructure.

BNamericas: Wouldn't national planning be necessary to regulate the expected industrial development?

Carbajales: The Ley Bases is a deregulation law. In this framework, the State withdraws from various functions and the private sector enters the field. This means that, if there is planning, it will not come from the State, but rather it will be the industry, the private sector and the market that manage it.

The government argues that the market is more efficient when it comes to allocating resources and that the sum of individual initiatives will allow the progress of the works.

BNamericas: Why is the LNG project promoted by YPF and Petronas key?

Carbajales: The answer is Vaca Muerta, which today accounts for more than 50% of the production and intended consumption of both oil and natural gas. When we talk about natural gas, we also refer to electric power because 60% of electricity is generated with gas and thermal sources. The Argentine economy revolves around Vaca Muerta, whose potential is unlimited and exceeds local demand for more than 100 years.

The LNG plant is important because it is led by YPF, the largest hydrocarbons producer and a mixed enterprise with 51% state ownership. This project is planned as a comprehensive project at the national level and is now being opened to the rest of the industry, with Petronas as a strategic partner.

Production is needed for the rest of the industry. For this purpose, three main gas pipelines are planned between Neuquén and the Atlantic coast, and a liquefaction plant will be built, which will have two floating vessels for liquefaction in a previous phase. One will be for YPF and Petronas, and the other for the rest of the industry. This project will mark a leap in the quality of gas production. YPF aims to double current production with an additional 80-100 million cubic feet per day.

Last year, the major project was the expansion of the Néstor Kirchner gas pipeline, the first section of which is ready and the second section is planned with the reversal of the northern gas pipeline and the compressor plants.

If Argentina carries out everything necessary and the final investment decision is made, which is estimated for mid-2025, we are talking about a 30-year project that will allow the energy sector to contribute US$30bn annually to the economy.

BNamericas: Has the debate over the location of the liquefaction plant, which was once considered for Buenos Aires, come to an end?

Carbajales: Last year, YPF announced that it was going to do it in Buenos Aires and had even reserved the land, but with the change in national government and the change of authorities at YPF, two other locations were discussed, Bahía Blanca in Buenos Aires [province] and San Matías in Río Negro.

When the Ley Bases was approved, the debate turned to which province would join Rigi, and since the province of Buenos Aires was reluctant to do so, YPF and Petronas quickly made the decision to opt for Río Negro, which had already joined the law and the regime.

BNamericas: Why is it important for provinces to join Rigi?

Carbajales: Although it’s the projects that adhere to Rigi and the national government is the one that awards the contracts, the importance of the adhesion of the provinces is to add additional benefits, such as gross income, stamp duty, local taxes, etc.

On the other hand, provincial adhesion also ensures the impossibility of changing rules or imposing new taxes.

BNamericas: Is it true that YPF is looking to divest its lithium business to focus on LNG and hydrocarbons?

Carbajales: YPF has an exploration project in Catamarca and through Y-TEC it has a laboratory in the city of La Plata and in Jujuy it has made progress in a partnership with a Chinese company to develop components and cathodes for lithium batteries. These were the first steps and perhaps one of the few actions where there is a nation-province articulation. Something that the mining regions of the NOA where there is lithium [Salta, Jujuy and Catamarca] have tried to do and have tried to articulate with the nation-state.

YPF intends to focus on businesses that generate more profitability. For the first time, YPF will export crude oil, beyond what is exported to Chile through the trans-Andean oil pipeline. Therefore, it is interested in boosting production and exports.

It is currently building Vaca Muerta Sur and has the Argentina GNL project, in addition to the subsidiary YPF Luz for renewable and electricity generation projects. Therefore, it is said that it will focus on its conventional objectives where there is guaranteed profitability and that has a name and surname: Vaca Muerta.

BNamericas: What about petrochemicals? Will they also benefit from Rigi?

Carbajales: Everything is in place for this to happen, both for the industrialization of petrochemicals and fertilizers, especially because the countries in the region have a deficit, so there are markets to serve. The same occurs with LPG, gas in cylinders, because Chile and other countries in the region import LPG.

BNamericas: Public works slowed down in the first half of the year after the government stopped allocating public resources, causing companies such as Tenaris and Acindar to temporarily halt their plants.

Carbajales: The government was categorical in saying no to more public works as part of its adjustment and cutback measures. This affected the steel sector and had an impact on construction and the provinces.

Due to the urgency, the national government began to negotiate with the provincial governors since there were works that were very advanced and it was more expensive to stop them than to finish them. This maximalist vision from the beginning is now being revised, although the government's priority will continue to be to lower inflation and it is possible that public works will not have the same imprint as they had in previous governments.

BNamericas: What will be the role of the Rigi project evaluation committee?

Carbajales: The application of Rigi depends on the economy ministry, which delegated the function to this advisory committee that will evaluate the projects and recommend which ones to approve or reject. We hope that it will not be too bureaucratic.

BNamericas: What are the main points of the framework law on hydrocarbons?

Carbajales: Among the 200 articles, a large part is covered by Rigi, but there are two chapters that modify the hydrocarbon regime and, on the other hand, the regime of natural gas, the electric sector and public companies.

The hydrocarbons chapter is the most important because it breaks with the historical rule of self-sufficiency and does so by prohibiting itself, as a State, from having to grant export authorizations. In this way, both production and exports and price setting become free. With this, crude oil and gas can be freely exported in the long term.

BNamericas: Are there risks with this deregulation of hydrocarbons?

Carbajales: There could be a certain shortage in the domestic market because all companies will be focused on exports, and if international prices are higher when exporting, those values will be transferred to the domestic market and there will be a rise in local prices.