President Alberto Fernandez has stated that his administration’s goal is to submit a new energy bill before the end of Congress’ extraordinary session this month. Major energy investors, particularly in Vaca Muerta, have been quietly lobbying the government to enact a framework that eliminates the uncertainty that has gripped the sector since the 2019 election cycle.
In our view, the legislation will likely cushion the oil and gas sector from many of the more extreme financial and economic measures put in place by the Fernandez government since taking office in December. Specifically, it would address the issue of capital controls and facilitate an avenue for companies to repatriate profits – a critical element to unleash the foreign investment necessary to tap the country’s unconventional resource potential. The legislation would also ensure that energy companies have access to foreign exchange markets.
A key element of the legislative process is the role of YPF and particularly its chairman, Guillermo Nielsen. Indeed, since taking the reins at YPF, he has sought to assert his influence over the policymaking process with regard to hydrocarbons. Nielsen is the purported author of the bill, which aims to “create the conditions for investment in the development of the natural gas resource on a global scale.” It seeks to establish a legal, regulatory and investment framework that would not be subject to changes derived from political cycles, thereby providing long-term certainty.
In our view, the path forward for monetizing the world’s second-largest shale gas potential is almost exclusively an LNG conversation. Nielsen, through his legislative proposal, joins a chorus of officials and private sector representatives who have signaled that sustained development of Vaca Muerta requires a corresponding expansion of LNG export capacity. This includes the necessary pipeline infrastructure, which the proposed bill would facilitate to support LNG exports.
Of note, Nielsen has been viewed as one of the more seasoned and critical economic figures in the broader cabinet. This has led to rumored discord in some quarters among the Fernandez team. Vice President Cristina Kirchner has not expressed her views regarding Nielsen’s push to provide certainty for foreign investors. Interestingly, though, the YPF chairman appears to have built rapport with Productive Development Minister Matias Kulfas, who is known for a more interventionist inclination toward the economy. Nielsen’s legislative proposal was reportedly sent to Kulfas for review and input.
To date, Nielsen has successfully managed the pressure and demands from the president and his economic team. Most notably, in early January, the president overturned a proposal to increase retail fuel prices, a step that Nielsen had argued for as head of YPF. The latter’s conciliatory response was seen as an important step in maintaining his political capital, and somewhat allayed concerns that he was not fully integrated into the Fernandez team and its economic agenda. How long this might continue amid Nielsen’s efforts to create legislation for major investment in gas and LNG is not entirely clear, however, especially given his high profile and long career.
Recent congressional debates provide important signals as to the path for energy legislation. We expect a majority of parties in Congress to perceive the bill as a matter of national interest, as was the case surrounding the debt sustainability legislation, which netted broad political support. Until the government submits its complete legislative proposal for energy, though, it is difficult to discern if it will move through Congress as quickly and with as wide-ranging support as the debt sustainability law had.
Once presented, the energy bill will likely attract some opposition from smaller parties such as the Frente de la Izquierda (the Leftist Front) over its market-oriented policy aspects. In the legislative debate over the debt bill, the opposition focused its criticism on the fact that the Fernandez administration had not set forth a budget proposal or overall roadmap for achieving economic growth. A key signpost will be whether the government responds to that earlier criticism enough to gain support for the bill from the opposition, most notably the Juntos por el Cambio (Together for Change) bloc, which retains a significant number of seats in both houses of Congress.