What does Milei mean for oil and gas in Argentina?

Energy subsidies to both producers and consumers across the hydrocarbon and power sectors have accounted for over 10% of the Argentinian government budget over the last decade. Low domestic production, Covid-19 and the conflict in Ukraine have all been factors that have resulted in increased subsidies in recent years. To boost investment, a liberalised market-based pricing system is badly needed.

Issue 3: Growing gas production and building exporting capacity

Argentina has the potential to become a regional gas exporter, sending gas to Chile, Brazil and possibly Bolivia. However, this will require significant funding. Milei favours using private sources of investment, assuming they can be found. But gas subsidies put in place by the former administration, which succeeded in boosting production, are unlikely to be renewed, reducing the potential ROI for investors.

Issue 4: Increasing oil exports and related infrastructure

Current oil export capacity is around 600,000 barrels per day (b/d). New planned pipeline and port capacity could take that above one million b/d as soon as 2026 if projects are developed in a timely manner. However, massive investment will be needed to increase and sustain production at that level throughout the next decade. For that to happen, industry participants and investors will need to be convinced a sufficiently stable political and regulatory regime is in place.

Issue 5: Maximising the strategic and market value of YPF

President Milei has promised to privatise majority state-owned oil company YPF. However, given the political obstacles we think an outright sale is unlikely. Instead, expect disposals of non-core assets in the fertiliser, gas & power and downstream segments. Overall, given Milei's expressed desire to boost hydrocarbon exports, YPF will continue to play a major role in generating ongoing government revenue.

Issue 6: Loosening import restrictions on drilling equipment

To successfully fill new pipeline capacity, ideally both drilling days and the number of rigs in operation need to increase. Currently, Argentina's difficult economic situation limits access to dollars for import purposes. The resulting shortage of equipment and key parts for rig repair and maintenance causes regular bottlenecks in drilling activity. In this respect, Milei's plans to lift capital controls should help.

Issue 7: Addressing market distortion caused by government control of oil prices

Argentina has long controlled the domestic oil price for refiners in order to keep prices low and reduce inflationary pressure. This severely distorts the price formation mechanism for crude and refinery fuels, discouraging increased domestic production. Milei plans to remove price caps, however, this will only be possible if the Argentinian economy can be stabilised, and inflation brought under control.

As is usually the case, the devil will be in the details. Time is of the essence, with voters unlikely to demonstrate a great deal of patience. However, past evidence indicates that stabilising the Argentinian economy and encouraging inward investment is unlikely to be achieved overnight.

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