Has Argentina's Recovery Run Out Of Gas?

Profession:Negri & Teijeiro Abogados

By Carlos A. de Kemmeter and Juan Carlos Sanguinetti

This edition of Argentine Business Law Watch1 reports on recent government rules responding to the Argentine energy crisis. As winter approaches and natural gas consumption increases, the Government has announced plans to curtail exports of natural gas and gas-generated electricity, as well as other measures to reduce domestic consumption. How can a country rich in gas reserves suffer a shortage? Why are Argentina's neighbors, particularly Chile, extremely worried? Read on for answers to these questions and more.

A Pipeline to the Truth

Since Argentina devalued its currency in 2002, public utility tariffs have remained largely frozen. Providers of gas, electricity and water have been obliged to continue charging consumers in pesos without substantial tariff adjustments to reflect currency depreciation or the effects of inflation. Most, if not all, of these public utilities carry significant financial debt and are bound, under the terms of their license, to make capital expenditures to improve and maintain infrastructure. These obligations are generally dollar-based, making it difficult to pay them with a revenue stream of devalued pesos.

The result has been predictable. The utilities have defaulted on their financial debt and worked over the last two years to restructure these obligations. As for capital expenditures, many utilities have been unable or unwilling to comply with scheduled investments, pending the Government's approval of a tariff increase. In the natural gas sector, this lack of investment has meant, among other things, a failure to meet increased capacity requirementsexacerbated by an incipient recovery of Argentine industry and an abrupt increase in natural gas-powered vehicles.

These and other factors have led to a daily shortfall of more than five million cubic meters and the specter that Argentines will return to an era, which, like devaluation, they once believed a thing of the past: natural gas shortages and even electrical blackouts, as much of Argentina's electricity is gas-generated.

The Coming Winter of Our Discontent

To address the insufficient transport capacity of existing systems, in February 2004 the Government released Decrees 180/04 and 181/04.2 These decrees announced a "mechanism of curtailments" applicable to natural gas distribution companies "in the event of system restrictions." By this time "interruptible" gas supply (i.e., gas sold on a...

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