Among the six major Latin American markets covered in our analysis, Argentina will face the most daunting economic prospects through the end of 2021. Prior to the pandemic, the country was reeling with an economic recession and a messy U$65 billion debt restructuring negotiation. In October 2020, the government’s net currency reserves were near zero and inflation had risen almost 40%  Argentina’s economy also fell 10% in the third quarter of 2020, compared to a 33% growth in the United States. As is stands, investors have lost complete confidence in the Argentine peso.  To compensate for the lack of capital, the Alberto Fernández government has increased taxes on a variety of businesses and transactions, provoking foreign investors to flee the country. All signs point to the continued deprecation of the peso, a declining economy, and higher sovereign risk.
In 2015, users’ electricity fees only covered 30% of the total energy bill in Argentina, forcing the government to become the largest subsidizer of energy in the region. The number of power cuts also increased fivefold between 2003 and 2015.  Noticing the vulnerability of the system, Argentina’s congress passed Law 27,191 (later amended with law 26,190) in October 2015 to promote the use of renewable energy sources. In addition to several tax incentives, such as VAT tax rebates and accelerated depreciation, the law established that large energy users must consume 8% of their energy via renewables by 2018. This increased to 12% by 2019, 16% by 2021, and 20% by 2025. This led to a significant increase in corporate PPAs as large consumers sought to comply with the new clean energy targets.  It also created FODER, a trust fund that provides subsidies for renewable energy feed-in tariffs and guarantees the payment of PPAs.
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Using the momentum of the law, former President Mauricio Macri introduced RenovAR—a program aimed at increasing the country’s renewable energy supply. Through long-term bankable PPAs, tax incentives, and loan guarantees, the government sought to ensure investor confidence to attract billions in foreign capital. RenovAR’s structural framework, coupled with US$730 million in partial project guarantees from the World Bank, was deemed a success by investors. By 2019, the program reached its 8% renewable energy target and set the stage to reach the 20% threshold by 2025. However, this trajectory changed with the inauguration of President Alberto Fernández in late 2019.
Peronist takeover — Fernandez Administration Shifts to Natural Gas and Vaca Muerta
With Fernandez and former president Cristina Kirchner leading the country, Argentina shifted its focus towards natural gas and the rebuilding of its state-owned company YPF. In his inaugural speech to Congress, Fernández emphasized that hydrocarbons would serve as a “lever” for the development of the country.  To that end, he appointed Dario Martinez as the Minister of Energy and Mines (MINEM), a former politician who is a close friend to Vice President Kirchner and the Peronist elite. Due to his political activism against Mauricio Macri and his involvement in the Frente de Todos (FdT) coalition—which elected Alberto Fernandez—Martinez has been described as an “energy militant.”  Currently, Martinez is seeking to pass a hydrocarbon law to increase oil and gas production, foster the growth of YPF, and attract investments to Argentina’s massive shale formation: Vaca Muerta.
The 30,000 square kilometers Vaca Muerta in the Nequén Basin is the second largest non-conventional gas-shale formation in the world. It has an estimated 9 million cubic meters of unconventional gas and 16 billion barrels of recoverable oil. Despite energy companies drilling 1000 wells and dumping U$20 billion dollars in investment, less than 6% of its total land area is in the large-scale development phase.  The low levels of exploration are a result of Argentina’s inability to stabilize its currency and provide a safe regulatory framework for investors. Vaca Muerta’s high breakeven cost of U$45-U$50 per barrel of oil, also limits investor appetite when other jurisdictions beckon. Although Argentina began to export some gas to neighboring countries in 2018, Vaca Muerta will need to model the successes in the U.S. Permian Basin if it plans to become a large gas exporter. This would consist of lowering operational costs and accelerating project development, both of which can be done through a pro-business regulatory environment and the use of the more innovative extraction technologies.
To that end, the Fernández administration announced, “Plan Gas 4’ (Gas.AR) in November 2020. The plan aims to incentivize natural gas drillers, reverse the fall in production, and increase foreign and local investment in Vaca Muerta. The three-year plan includes U$5.1 billion in gas subsidies from the government, a U$1.8 billion investment from YPF and a tender-scheme in which natural gas producers can sell gas at a price of up to U$3.70/MMBtu. The difference between the market price and the price awarded at the auction is subsidized by the government, which leads to guaranteed returns for the companies.
To encourage participation in the latest tender, participants were also promised free access to the official foreign exchange market to convert investments, income, and debt maturities to U.S. dollars.  In December 2020, the ministry awarded 23 contracts to supply 67.42Mm3/d of natural gas at an average price of US$3.36/MMBTU. The supply—provided by companies such as YPF, TecPetrol, Pan American Energy (owned by BP and CNOOC) and Total Austral (owned by TotalEnergies)—will be distributed between 2021 and 2024 to wholesale market administrator Cammesa, distributors and sub distributors.  With the new awarded supply, the government will substitute 30Bm3 of natural gas imports and save U$5 billion in costs.  It plans to hold a new natural gas supply auction in 2022.
Despite Argentina’s slightly lower production levels of conventional oil, which use vertical wells and take place mostly in the Jujuy province, the country’s shale oil, 99% of which is produced in Vaca Muerta, is growing increasingly fast. This is because of the government’s tax incentives and improved technological innovations that have reduced drilling times and costs. In fact, Vista Oil & Gas, owned by former CEO of YPF Miguel Galuccio, said it reduced drilling time from 35 days in 2018 to 17 days in the first trimester of 2021. They also experienced a 24% and 45% reduction in both the development and drilling costs in Vaca Muerta, respectively, since they drilled their first wells in 2019. This has reignited hopes that Vaca Muerta can produce enough oil and gas to support the local market during the winter months, when the country struggles to meet the increased energy demand, while simultaneously allowing for companies to export any surplus. 
State-Owned Favoritism and a Preference for Hydrocarbons
Argentina has some of the best renewable energy resources in Latin America. The Patagonia region has one of the highest wind energy potentials in the world, with capacity factors ranging from 38 to 50 percent. In fact, in the tripling of renewable energy capacity expected by 2030, 65% will come from onshore wind.  In provinces such as Jujuy and Salta in the northwest, there is an abundance of solar resources.  Unfortunately, the rapid development of renewable generation projects has not been accompanied by the necessary expansion of the country’s distribution and transmission networks. With Covid-19 lockdowns and the network at overcapacity, 99 renewable energy projects have been halted. 
The current administration’s lack of enthusiasm over Macri’s RenovAr program is symbolized by the recent inauguration of Goldwind’s 98 MW wind farm, where no government officials were present. Peronist lawmakers allege that the previous sale of the park to a Macri-owned group Sideco Americana, involved “influence peddling, incompatible negotiations and the use of privileged information.” The PPAs awarded to the plant took place in the RenovAr 1.5 tender, under resolution 202, which allowed Macri to reduce PPA prices from $85/MWh, as established by Cristina Kirchner, to $71/MWh. Although the renegotiation of PPAs happens on a case-by-case basis, it is possible that the current government may try to further renegotiate prices to avoid defaults. 
In the province of Chubut, a tax was even imposed on the energy generated by wind farms in Puerto Madryn, a city off the Atlantic coast with favorable wind conditions. The tax costs a 100 MW wind farm an estimated U$20 million and will likely discourage the development of new renewable projects in the region. Clean energy developments are already stagnating with the government’s increased focus on fossil fuels and investors’ general lack of confidence.  An additional tax would hinder much-needed growth of clean energy generation.
As foreign investors look for greater yields in emerging markets, Argentina’s renewable energy sector is not an appealing option. With the government favoring the development of fossil fuels and the growth of state-owned YPF, renewable energy projects may encounter difficulties in an already unstable political environment. That said, not all is lost. There are certain pockets in Argentina, such as Patagonia, with world-class wind conditions and local communities looking eagerly for job opportunities. If investors can obtain local community buy-in, guarantee dollar-denominated PPA’s with well-financed off takers, and rally government support, the project should be a success. Vaca Muerta is also a growing opportunity for investors looking at traditional energy sources. This sector is highly subsidized, and the government is determined to make it attractive for energy players.
With careful due-diligence, on-the-ground risk monitoring, and a strategy to mitigate local challenges, investors may see higher returns in Argentina vis-a-vis any other country in the region. This is where AMI can help. Contact us to find out how our energy market research in Argentina can help you with opportunity benchmarking, understanding the market landscape, finding partners, conducting due diligence and much more.
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