BUENOS AIRES, July 1 (Reuters) - Argentina will allow fuel retailers to freely set pump prices starting in August, according to an Energy Ministry official familiar with the plan, a move that could encourage badly needed investment in the nation’s oil patch but risks worsening sky-high inflation and angering consumers.
Separately, the ministry is looking to set up an auction process for the natural-gas market that it hopes will lower prices, according to the official, who was not authorized to speak publicly.
The actions signal that President Mauricio Macri is moving ahead with free-market reforms to attract private investment to develop the nation’s abundant shale oil reserves, even as rising global oil prices and a precipitous weakening of the nation’s currency have led to pressure for more interventionist government policies.
The moves will also bring relief to the oil sector. Price controls have squeezed refiners’ margins, prompting one refinery to suspend operations.
Macri’s pro-business government freed fuel prices last year, part of its efforts to unwind state controls on Argentina’s economy. But his administration reversed course in May due to a rapid decline in the peso. The sudden depreciation rattled markets and prompted Argentina to turn to the International Monetary Fund (IMF) for emergency financing.
In May, the government reached a deal for a two-month freeze on pump prices with the three largest oil companies operating in Argentina: state-owned YPF, Shell, and BP’s Pan American Energy. It later set the price of domestic crude at $68, about $10 below the global Brent crude price, to mitigate the impact of freezing fuel prices on refiners’ margins.
By freeing pump prices, the government is betting that gas stations will limit price hikes to avoid losing customers, the official said, and that by freeing crude prices it would encourage more investment in domestic drilling, part of a long-term strategy to wean Argentina from petroleum imports.
“Price controls do not help with anything,” the official said.
The government and the oil companies agreed to loosen the freeze June 1, allowing for hikes of 5 percent in June and 3 percent in July. Macri’s administration had kept the industry guessing as to what it might do in August.
Th earlier increases were unsatisfactory to oil industry players, three of whom complained privately to Reuters that the modest bumps did not come close to covering their increased costs.
Last month, global trader Trafigura announced it was suspending activities at its 30,500 barrel-per-day refinery in the port city of Bahia Blanca due to the “mismatch between fuel prices and production and import costs.”
An oil industry executive who spoke with Reuters recently expressed frustration with the bind.
“The adjustment that needs to be done is not 3 percent, it is 45 percent,” said the person, who requested anonymity to speak freely.
VACA MUERTA RAMP-UP
An end to retail price caps would likely infuriate Argentine consumers, who are already incensed at the government for the drop in the peso and inflation that is running at a 26.3 percent annual clip.
But Macri’s government has prioritized reviving the energy sector to shake Argentina’s dependence on imported oil and gas, and to put an end to market-distorting subsidies.
Argentina possesses the world’s second-largest reserves of shale natural gas and ranks No. 4 in reserves of shale oil, mostly in the Vaca Muerta fields in Patagonia. But it faces stiff competition to attract the billions in private investment needed to develop these resources. Oil production is languishing at multi-decade lows.
The picture is brighter with natural gas. Rising output in Vaca Muerta helped boost the country’s production by 3.4 percent in the first quarter of 2018 compared with the same period last year, according to government data.
“We are beginning to have an abundance of gas in Argentina,” the Energy Ministry official said.
As a result, the ministry will create an auction process for wholesale customers to bid on the open market for their natural gas supplies during the low-demand summer months, the official said. The plan is to phase out the current fixed-contract system in a move the government hopes will lower prices.
The auctions could start in September or October, and could account for as much as 70 percent of wholesale supply by March or April of 2019, the official said.
Argentina is also expected to begin gas exports to Chile in the fourth quarter of this year, another result of rising Vaca Muerta output.
Argentina will still need to import liquefied natural gas (LNG) to meet demand in winter months.
Reporting by Luc Cohen; Additional reporting by Juliana Castilla; Editing by Marla Dickerson