The government of Argentina sets the price for natural gas artificially low to mollify the voters. The price paid by the consumer is less than what it costs to find and produce natural gas. The oil and gas companies are losing money and don’t have any funds to invest in exploration. Domestic production drops through the floor.
So, what does the government do? It nationalizes Repsol’s YPF subsidiary. Argentine Pres. Cristina Fernandez sent a bill to the country’s congress on April 16 that would give the government 51% of the company.
Why would the government do that? Obviously, the government was forced to take over operations of the company because it was not investing enough money into exploration and production, which forced the government to spend more than $9 billion in 2011 to import fuel like liquefied natural gas (LNG).
Fernandez made the announcement in a live television broadcast, saying, “I am a head of state and not a hoodlum.” Her actions showed how myopic government’s view can be. Myopia, by the way, is a condition in which visual images come to a focus in front of the retina, resulting especially in defective vision of distant objects (Merriam-Webster dictionary).
In 2001, price controls were imposed to combat inflation and help consumers buy natural gas during the economic crisis. The original cap was set at $0.90 per thousand cubic feet (Mcf) However, rather than remove the price caps, the government kept them in place and watched natural gas production fall by about 10% per year since its peak year of 2006.
Once a net exporter of natural gas, Argentina rapidly became a net importer -- in 2008 -- paying much higher prices for imported gas than domestic producers could earn.
Then Argentina built an LNG import terminal and balked at paying the going world rates for natural gas of $12 to $18/Mcf. The government had a conniption fit, railing against the high prices.
But, since power shortages during the winter forced as much as 40% of industrial and commercial customers to shut down, the government was being hammered about the lack of natural gas.
In an effort to reverse the declining production, the government devised the Gas Plus Program that allows companies to sell natural gas from new or unconventional resources at prices negotiated with the customers. All of a sudden, companies were interested in developing shale gas resources in Argentina. Imagine that.
However, those resources aren’t going to help Argentina during the upcoming winter. The infrastructure for drilling and hydraulically fracturing those formations is still lacking in the country. It will take some time for those resources to be developed.
The government’s solution is to step in and show those for-profit companies how to run an oil and gas company -- into the ground. Yes, the double entendre is intentional.
The Argentine president couldn’t wait for the congress to vote on her measure and instead issued an executive decree making the takeover immediate.
The government was really in a hurry. Roberto Baratta, the government representative on YPF’s board, went straight to the company headquarters and kicked out the Repsol executives. The planning minister and deputy economy minister are now in charge. Given how well they’ve managed the Argentine economy so far, you can imagine what they will do to YPF.
The Spanish government is incensed and is threatening retaliation. Repsol announced it would be taking legal action against the Argentine government. All the Argentine government had to do was take the price cap off and it wouldn’t have this problem.
And, its problems are going to grow exponentially. The biggest fallout from this takeover will be when international investment dries up very quickly. The oil and gas companies won’t be willing to spend money in a country that could appropriate the company when the economy goes bad.
That brings us to the U.S. Remember when Pres. Richard Nixon said, “I am not a crook?” Sounds familiar doesn’t it?
Our very own government is headed down the path of industry control as well. There are always cries of windfall profits taxes when oil prices are high or repeal of incentives when gasoline prices go up. You never hear the government even consider a floor price for oil when the bottom drops out of the market.
As you may have noted with domestic natural gas prices, the government is happiest when prices paid for energy are lowest. That will have consequences. The government cannot let the free market work. It will provide short-term, poorly thought-out responses rather than an energy policy.
Already some politicians are pushing to release oil from the Strategic Petroleum Reserves to mitigate high gasoline prices. That is not why the reserve was created. If you use it to lower gasoline prices, it won’t be there if a war breaks out in the Middle East. And, do the politicians even have an inkling how much it will cost to replace oil taken from those reserves?
Congress and the administration need to provide incentives, not disincentives. They need to support industry, not hobble it. And, the industry is ready to work with the government to keep the lights on.Contact the author, Scott Weeden, at firstname.lastname@example.org
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