Argentine Presidential Chief of Staff Jorge Capitanich said Monday that a proposed reduction in state energy subsidies will help increase investment in the sector, making it possible to boost gas production and scale back imports.
"What is most important for Argentina is to generate the conditions for the substitution of imports," he said at a televised press conference, adding that one of the country's leading challenges is to reduce energy imports.
"What we are doing is giving a permanent stimulus to replace energy imports to achieve energy self-sufficiency," he said.
Argentina started subsidizing electricity and natural gas for consumers and businesses in 2002 to help rebuild the economy after it collapsed in 2001. The economy recovered robustly between 2003 and 2011, but the government struggled to peel back the subsidies on concerns of a public outcry.
The low rates, however, discouraged investment, leading to a steady decline in the production of gas, which meets half of national energy needs.
Gas production has dropped 20% to 114 million cubic meters a day from a peak of 143.1 million in 2004, while consumption has surged by 33% to 126 million cu m/d over the same period. This led to shortages and subsequently a drop in energy exports and a surge in imports, led by diesel and gas. In dollar terms, energy imports rose 23% in 2013 compared with 2012, while exports fell 24%, according to Indec, the national statistics agency.
Capitanich said boosting upstream activities was a priority for the government.
"As we increase exploration and production, we will be able to substitute imports," he said.
He said that this goal was behind a move to take YPF, the country's largest energy company, under state control in 2012. YPF is now investing $37.2 billion in a 2012-17 plan to increase oil and gas production 36% by squeezing more out of maturing reserves and developing the country's large shale resources.
Capitanich said a reduction in subsidy payments -- he singled out electricity and gas -- wouldn't have much of a cost impact on consumers. He did not say how much the subsidies could be reduced or when, but suggested it would likely be based on those who can afford to pay more.
According to the Argentine Association of Public Budget and Financial Administration, the government paid more than 110 billion pesos ($14.1 billion) in subsidies in the first 11 months of 2013, of which 64% went on energy, largely for importing diesel, fuel oil and gas for the power sector.
On Friday, Economy Minister Axel Kicillof raised the possibility of a reduction in energy subsidies, buoying expectations of an increase in the wellhead price of gas.
The government pays the subsidies to gas and power distribution companies to keep a lid on the rates they charge consumers, primarily households.
That in turn has kept down the wellhead price of gas, which is averaging $2.50/MMBtu, less than the $5-8/MMBtu that producers say is needed to develop shale gas resources estimated at among the world's largest.
The government is seeking to encourage drilling for the resources to turn around the decade-long decline gas production. It launched a program last year to allow producers to sell the output from new developments at $7.50/MMBtu while supplies from existing fields remain at $2.50/MMBtu.
