Monday, June 17, 2024

OPINION AND ANALYSIS | 18-05-2024 06:15

RIGI and the ‘frack, baby, frack’ consensus

Argentina is not alone in the region in debating what to do with its resources or how the market and the government should engage with one another.

Earlier this week, Brazil’s President Luiz Inácio Lula Da Silva fired Jean-Paul Prates, the chairman of Petróleo Brasileiro (Petrobras) – Latin America’s largest company by market value – due to differences over domestic fuel prices and job-creating investment. In Peru, the board of the state-owned oil company Petróleos del Perú (Petroperu) called for the privatisation of the company to face mounting company debt. In Mexico, the future of Petróleos Mexicanos (Pemex) and its US$106-billion debt is one of the hottest campaign issues ahead of the June 2 presidential election. In Argentina, the chairman of Yacimientos Petrolíferos Fiscales (YPF) warned that unless Congress passes pro-investor legislation, there will be no major gas development in the country.

Argentina is not alone in the region in debating what to do with its resources or how the market and the government should engage with one another. But unlike at other key moments over the last few decades, Latin America is not clearly leaning to the right or to the left – it is fragmented and collectively at a political loss. 

Under Javier Milei, the new Argentina is to the farthest right of this bunch. The President  is trying to move the country from market pariah to darling overnight – a tough ask.

The Régimen de Incentivo para Grandes Inversiones (Large Investment Incentive Scheme, or RIGI, according to its acronym in Spanish) is one of the thorniest issues of the debate currently taking place in the Senate. Milei does not have much of a margin of error and needs Congress to pass something – anything – even if only for the sake of having something to show off. 

Critics argue RIGI gives investors too many benefits, even some they are not even asking for. Horacio Marín, the chairman and CEO of YPF, does not agree. He is telling anybody who will listen that “without RIGI there will be no LNG” development in Argentina. 

YPF signed in 2022 an agreement with Malaysia’s Petronas for a joint venture starting at US$10 billion to develop and export Liquified Natural Gas. So far, the two firms are taking baby steps with their project, including the relatively cheap tasks of engineering design and feasibility studies. 

Marín, a veteran in gas development from the Techint Group, is echoing the language of  Petronas’ top management, “We are now waiting for the new investment law,” said Abang Yusuf, the firm’s senior vice-president of LNG, a few weeks ago.

The YPF-Petronas project is one of the key items behind Marin’s strategy that would see the state-run firm spearhead energy development in Argentina, potentially changing the country’s economic equation through exports. 

Marin wants to quadruple YPF’s market value over the next four years by focusing almost exclusively on fracking oil and gas out of the profitable Vaca Muerta shale formation. In a second stage, LNG development would be the star that leads the way, first with two floating facilities and, by 2031, an onshore LNG plant.

The YPF boss’ line that there is no LNG without RIGI is slightly far-fetched, but he is right that once you announce there might be benefits, investors understandably wait for them to kick in before making a move. 

So what of RIGI? The scheme passed through the Chamber of Deputies almost unnoticed, but its fate in the Senate appears more critical. RIGI is unprecedented and exaggerated in its scope: Argentina has never had such a beneficial policy for investors. In its spirit, however, it follows a visible line that has crossed party lines.

Go back just over a decade and then-president Cristina Fernández de Kirchner, in her second term, faced a moment like this. In 2012, she controversially nationalised 51 percent of YPF. A year later, the firm signed a landmark agreement with Chevron – mostly a secret at the time – to kickstart a larger-scale development of Vaca Muerta. It was a focused, one-shot agreement between two companies but ultimately it set the stage for constant (but still moderate, according to its potential) growth in Vaca Muerta. 

YPF’s current boss, in turn, has in mind Energy Secretariat Resolution 46 from 2017, when then-president Mauricio Macri offered significant price incentives for gas producers to scale up at Vaca Muerta. Marín led the most emblematic project of that era, the Techint Group’s Fortín de Piedra, which is one of the reasons why Argentina will not have to pay such a hefty gas bill this winter.

Given there is a cross-party consensus about the development of resources and an acknowledgment that local cash is not enough for the scale and scope of the projects involved, the government should in the coming days – be it before or after the symbolically charged ‘Pacto de 25 de Mayo’ – get its first bill passed in Congress, RIGI included (with changes). 

From then on, the Milei administration will have less excuses to show Argentines that the President’s all-for-the-market development model works. It will not be easy. From the outside, Milei still has some way to go to prove that his political and economic programme is sustainable. At home, investment does not automatically equal wellbeing. Take Mexico, which has just posted a record Foreign Direct Investment (FDI) figure of US$20 billion in the first quarter of the year but which, at the same time, is enduring the most violent presidential campaign ever, with more than 30 candidates killed in recent months. The stakes are high.

Marcelo J. Garcia

Marcelo J. Garcia

Political analyst and Director for the Americas for the Horizon Engage political risk consultancy firm.


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