Argentina to Cut Energy Subsidies to Address Fiscal Crisis

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Argentina’s new government will cut energy subsidies and devalue the peso by 50% in a bid to deal with a massive fiscal deficit.

The government will also cancel tenders for public works, the new economy minister told media, as quoted by Reuters. According to Luis Caputo, this shock therapy would cause pain over the short term but “The objective is simply to avoid catastrophe and get the economy back on track,” he said in a speech.

Argentina is home to the second-largest shale formation in the world, the Vaca Muerta. Oil and gas production there is on the rise but it is taking time to turn the country into a large enough producer to start feeling the benefits fully.

In fact, a couple of months ago the government threatened oil producers to ban exports unless they ensure adequate supply for the domestic market amid fuel shortages. Local media attributed the shortage to a dollar deficit that prevented the government from securing enough import fuel, causing long lines at gas stations and closing some as they ran out of fuel.

Meanwhile, the previous government granted Argentina’s oil and gas companies a preferential forex rate to stimulate more business in the sector. “We made the decision to recognize 25% of what (energy companies) export and bring to Argentina to invest using the CCL value so that they increase investment levels over the next 60 days in the oil and gas sector,” the then-economy minister said in September.

The new government’s plans for the oil and gas industry specifically have yet to be made public but it is safe enough to assume it could be treated as a priority growth area.

According to Rystad Energy, oil production at the Vaca Muerta could top 1 million barrels daily by 2030, as long as there are enough pipelines to carry oil and a sufficient number of drilling rigs. If that panned out, it would help the Neuquen region, where the Vaca Muerta formation is located, become a net oil exporter and contribute as much as $20 billion in total revenue by 2030.

OilPrice.com – Charles Kennedy