Interview with Juan José Aranguren, Minister of Energy and Mining

You had a successful career with Shell Argentina; but does that really prepare you for the political battle of being the Minister for Energy and Mining?

Minister Aranguren: It’s an interesting question. I guess only time will tell the outcome of this ‘adventure’ but in principal I think there are striking similarities. Essentially it comes down to administering resources, although perhaps they are different resources. I would imagine that 34 years at Shell has given me substantial acumen and experience that I can transfer into the public world.

Of course there are political differences. In our constitution the owners of the resources – apart from those on the continental shelf – are the provinces, not the federal government. So they are the ones with the authority to offer and grant concessions to private companies, while we provide the federal support and administration to create an environment that makes this business viable for all of the stakeholders.

Argentina has been politically and economically volatile; why should LatAm INVESTOR readers make long-term, Argentine natural resource investments now?

The most important thing for people to realise about this government is that we are working to recover the rule of law in the country. That goes across all sectors, not just energy and mining. We want to be more transparent than the previous government and we want to avoid discretionary measures coming from the government that arbitrarily change the rules of the game. Our focus is on establishing the regulatory bodies and a fair, solid framework for companies. That is our fundamental focus. The other moves, such as the reduction of export taxes and modifying the consumer tariff regime come on top of that.

"We want to be more transparent than the previous government…"

Of course, after the 12 years that preceded our government I can understand why your readers would be sceptical. But the key thing is that we don’t need to rewrite legislation or codes, rather we need to ensure that the existing laws are respected. If we can make it clear that the rule of law is followed in Argentina then international investors will come to the country. But it’s not just about attracting investors – we also need to make sure that companies fulfil their obligations.

You have decided to maintain the ‘barril criollo’ policy of a supported price for locally produced crude that is well above global prices; is that sustainable?

Barril criollo is the consequence of the confused energy policies of the last decade. Since 2005 local producers here received a price that was well below the world average. A combination of different tax and export schemes meant that they suffered a decade of this. The result of this was a lack of investment and a reduction in Argentine hydrocarbon reserves, which eventually led us to import energy. At the very end the previous administration realised its mistake and began to offer an artificial local price that was higher than the global average.

We inherited this policy, known as barril criollo, which offered around US $84 for local crude. We have since lowered it somewhat. The price depends on the quality of the crude but the average is US $67.50 for lighter crude. We kept the policy because we wanted to maintain employment levels in those provinces that are very oil-dependent. Also we want to attract investment to the sector because it has been starved of capital during the last decade. Eventually we want to align local prices with international levels but because of the distortions that we inherited that may take some time. Gradually we are reducing the local price and if the global price goes up that would help alignment take place more quickly. Once we have got local prices aligned we will keep them the same, regardless of future movements in global prices. We don’t want to be isolated from the global system; we want to be part of it. In my past life at Shell I wanted prices aligned with the international system, not because I thought low prices would benefit the firm’s downstream business but because of the consequences a country suffers if it is not aligned with the world. You end up with a reduction of reserves and falling production, which transformed us from an energy exporter to an energy importer – all because we defied market logic.

And how does the price support system work for natural gas?

MA: Again we have inherited a complex system that eventually we will look to change. At the moment there is a bonus for new gas production, which means that new gas fields receive US $7.5 per million BTU, compared to the US $3.8 we pay for Bolivian imports, and the US $5.4 we pay for LNG imports, although with that you have to add an extra US $1.5 for regasification. We also import diesel for electricity generation at around US $9 per million BTU.

The import prices change every month, fortunately they are a lot cheaper this year than in 2015. However, the price for new local production is stable. So currently the marginal price that we pay local producers is higher than the Bolivan imports, it is aligned with imported LNG, but it is still below diesel alternative.

Your ministry attracted a lot of attention for increasing electricity tariffs; what is your vision for the sector?

MA: With electricity there are two different types of cost: you have the generating cost, and then the transport and distribution costs. So when we deal with the latter we need to honour the regulatory framework that is in place and make sure that we have the tariff reviews that are stipulated by the regulations. The reason why this increase seems high – and subsequently attracted some controversy in Argentina – is that in the last ten years there were no increases. In fact the current price levels still only cover around 40% of the generating costs. So while for some Argentines it may come as a shock, for us at the ministry we know that we are being gradual. We don’t want to make electricity unaffordable so we are going to take a few years to increase tariffs until they cover all of the costs.

The other part of our plan is to diversify the sources of electricity production. So this year, though the new renewable law 27.191, we will launch a renewable auction that will give various renewable technologies the chance to generate electricity. This will diversify the electricity matrix and make generation cheaper in the long run.

Given that you recently declared a state of emergency in the electricity sector, is renewable energy a luxury that Argentina can afford?

MA: I disagree with the premise of that question. Renewable energy isn’t a luxury for Argentina, it is a necessity. We have plenty of resources, such as solar, wind, mini hydro and biomass, that we aren’t using at the moment. And that is the real luxury that we can’t afford – letting all that potential go to waste. The good thing about these technologies is that the upfront capital expenditure is far less than you get with nuclear or large hydro. Moreover the completion time is shorter, meaning that they can start helping us fix the situation more quickly. Finally we have to obey the law of this country which mandates that 8% of all consumption must be renewable by 2017, with that rising to 20% by 2025.

We will have auctions for each different type of technology so that it is an opportunity for the whole country. There is great wind potential in Patagonia in the south, while the forestry sector of the north east would be excellent for biomass projects.

Your plans for the electricity sector are very ambitious; do you think that international investors will buy into them?

MA: Judging by the amount of journalists like you asking for interviews then I would say yes! But in all seriousness, we have already seen lots of energy investors visiting the country. Argentina offers a great opportunity at the right time. If you are an international player with operations in other Latin American countries and then suddenly Argentina opens up, it is a great chance to expand your portfolio.

What we need at the moment is investment in all parts of the sector, because at the moment we are suffering two consequences of the artificially low tariff. One is that the low prices acted as a disincentive to investment while at the same time they encouraged a massive increase in consumption. They sent a buy signal to the user because they were far cheaper than anything else in the Argentine economy.

So now we are sending another signal to the market. We are making it clear that we are prepared to recover tariff levels, which will provide investors with a reasonable rate of return, and this will encourage firms to build the facilities that our system needs to get out of this state of emergency. So this will create real opportunities for your readers.

Your ministry is also hoping to kick-start mining; how will you manage the communities issue that has stymied mining projects in neighbouring countries?

MA: We need to be more transparent and make sure that we open a dialogue between companies, NGOs, society and the government. The key is that mining is carried out with a culture of responsibility. I don’t think we should pretend it can be sustainable, because it is impossible for a mining site to return to exactly how it was before the resources were extracted. But if you can do it in a responsible way then the benefits can outweigh the risks and costs that society must invariably take and the industry is welcomed by a country. That means we need to inform the people about the benefits that mining can bring and work with companies to ensure that they understand and manage the environmental risks, that they stick to the rules and that they strive to involve the local community in their projects.