Winners and Losers in Argentina in the Age of Unconventional Hydrocarbons

EXECUTIVE SUMMARY Winners and losers in Argentina in the age of unconventional hydrocarbons

Gustavo García Zanotti Marco Kofman Facundo López Crespo Jorge Chemes Pablo Bertinat Enlace por la Justicia Energética y Socioambiental (EJES) [Socio-environmental and Energy Justice Alliance] is the collaboration of Argentine organizations Observatorio Petrolero Sur (Buenos Aires, Neuquén, and Río Negro provinces) and Taller Ecologista (Santa Fe province).

Through an interdisciplinary and federal approach, our work currently focuses on the megaproject Vaca Muerta. We take into account the policies involved, and the territories and population affected in the long term. The strategic focus is on the economic, financial, energy and socio-environmental aspects. Our objective is to expose the overlooked impacts and find a fair path to energy and economic transition.

More information at ejes.org.ar

Authors: Gustavo García Zanotti, Marco Kofman, Facundo López Crespo, Jorge Chemes, Pablo Bertinat Editing: Fernando Cabrera, Diego di Risio, Flavia Medici Proofreading: Lynne Bolton Photos: Colectivo Vaca Bonsai, Martín Alvarez Mullaly, Marion Esnault Design and layout: dosRíos [diseño & comunicación]

1. Economic transfers, 2. Oil and Gas, 3. Energy, 4. Argentina December 2017, Argentina.

Copyleft Taller Ecologista Rosario and Observatorio Petrolero Sur in EJES (Enlace por la Justicia Energética y Socioambiental), Argentina.

CC-BY-SA – Attribution-ShareAlike Details of the license can be found on the following website: http://creativecommons.org/licenses/by-sa/4.0/legalcode Executive Summary In the context of insufficient energy supply, which has severely affected the Argentine economy in recent decades, there has been a progressive shift in the state’s strategy towards the energy sector in general, and the hydrocarbons sector in particular. The loss of gas self-sufficiency, the volatility of international oil prices, the resurgence of the external constraints historically faced by our economy and the power of market’ players were all variables that determined the way this problem was addressed by the different administrations in charge of the energy sector. This set of contradictions was resolved from 2011 on by the large-scale development of Vaca Muerta. The unconventional play is one of the biggest in the world and could supply the domestic market for several decades, not only with gas but also with foreign currency from exports. But there are various paths that can be taken. With the change of government in late 2015, where Cambiemos coalition overthrew 12 years of Cristina and Néstor Kirchner governments, economic policy in general, and sector- related policy in particular, have radically changed. The map of winners and losers has thus been redrawn, hitting the poorest the hardest. A variety of social actors are involved in the sector and they constitute a complex web of interests: several state jurisdictions, different types of users, workers, communities affected by the exploitation and industrialization of natural resources, producers from those region and companies belonging to the sector. However – and this is true for the entire period under analysis – sectoral policy was mainly defined as part of a negotiation between the national state and the biggest companies in the sector. In recent times, the inclusion of union movements succeeded in reducing workers’ participation in income distribution. Such mechanisms limit and restrict debate and the decision- making process since they view energy as just another commodity. The purpose of this work is to counter that trend. In essence, it seeks broaden the debate on energy policy, with an emphasis on the need to democratize the decision-making process. Thus, while describing the current dynamic, we aim to broaden the window of possibilities. The final section thus suggests a number of energy alternatives using renewable sources and potential ways to develop the sector. Winners and losers in Argentina in the age of unconventional hydrocarbons

1. The energy system received by Cambiemos We have defined four main variables for analyzing an energy system: a) What the primary energy sources are at present and which are being encouraged. b) What type of ownership or management structure is employed by the main actors in the sector. c) How energy generation is recompensed (in other words, who pays to use that commodity and how) d) What that energy is used for (who it is consumed by, how and what for?)

1.1. Fossil fuel dependency as a structure and projection The level of fossil fuel dependency in the primary energy supply has remained at almost 87% for at least two decades, a high level in comparison to other South American countries, only surpassed by those that are major producers of oil (Venezuela, Colombia Ecuador) or gas (Bolivia).

Fossil fuel dependency in the energy balances of South American countries (including imports)

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Source: own elaboration, based on data from the International Energy Agency

In a context of rising energy imports, an intense strategy of “energy self-sufficiency” was adopted. The aim was to put an end to the need to purchase energy from abroad given the resurgence of external constraints. To achieve this goal, Executive Summary once the state had regained majority control of YPF in 2012 – which was to fulfill the role of “sectoral leader”– big economic transfers were made to the sector to reverse the steady fall in production. In 2013, 2014 and 2015, direct transfers from the state to the sector exceeded 3 billion dollars a year, a similar amount to that the state spent on health and almost three times the figure spent on science. The big flagship project of that period was Vaca Muerta. Through the part- nership formed first by YPF and Chevron– and later with other multination- als – the intention was to obtain income from foreign direct investment. The development of unconventional hydrocarbon extraction made it possible to halt the decline in oil and gas production in Argentina, albeit at a significant environmental and social cost, not only to the communities where the unconventional wells are located, but in numerous areas linked to the megaproject.

1.2. Economic concentration in the hydrocarbon sector The microeconomic features of Argentina’s hydrocarbon sector show a strong concentration. In 2015, four companies (YPF, Pan American Energy –a BP, Cnooc and Bridas holding, Pluspetrol, Sinopec) were responsible for 74% of oil production. With regard to gas, the four main operators (YPF, Total Austral, Pan American Energy and Petrobras) extracted 75% of the total output.

Concentration in oil and gas production, 2015

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Source: own elaboration based on data from the Ministry of Energy and Mining. Winners and losers in Argentina in the age of unconventional hydrocarbons

1.3. Energy subsidies and maintenance of rates

The energy subsidies implemented during the Kirchnerism period fulfilled the function of generating indirect income for citizens, thereby boosting their consumption capacity. As the years went by, more and more resources were earmarked for this purpose. As a proportion of public spending during the three Kirchner governments, total energy subsidies increased from 2% in the early years to 10% by the end of that period.

Photo: Martín Álvarez Mullaly

Energy subsidies as a share of public spending

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Source: own elaboration based on data from INDEC and MECON

A significant proportion of these transfers were direct subsidies granted by the national state to hydrocarbon companies through different programs designed to encourage investment. Between 2008 and 2016, the state contributed 16 billion dollars to companies in the sector. From 2013 on, these incentives became more costly, involving annual disbursements of almost 3 billion dollars. Executive Summary 2. Recent changes in energy policy 2.1. The priority in Vaca Muerta, greater concentration of unconventional exploitation

In early 2017, Omar Gutiérrez, Governor of Neuquén, Guillermo Pereyra and Manuel Arévalo, Secretary General of the Private Oil and Gas Union of Rio Negro, Neuquén and La Pampa and Secretary General of the Union of Private Oil and Gas Workers respectively; Miguel Angel Gutierrez, YPF President, Marcos Bulgheroni, Executive Director of Pan American Energy and Jean-Marqc Hosanski, Executive Director of Total Austral, signed the so-called “Vaca Muerta Agreement”. The addendum to the collective agreement for workers in the sector, which included a set of elements designed to ensure contract flexibility and a reduction in wage costs for companies, was one of the modifications included. At the same time, unlike in other basins, in Neuquén, unconventional gas production continues to be favorably regulated in terms of the “Gas Plan” program. This has meant that the fall in productive investment has shown significant differences according to the type of exploitation. In the case of conventional production, investment fell by 48% between 2015 and 2016, taking into account companies as a whole. Meanwhile, investment in unconventional production only dropped by 16% during the same period. Investment in unconventionals has thus gone from accounting for 32% of the total invested to 43%, thereby aggravating the environmental, social and productive problems associated with this activity.

-7- Photo Vaca Bonsai Winners and losers in Argentina in the age of unconventional hydrocarbons

Gross productive investment for the whole sector in millions of dollars

Source: own elaboration based on data from the Ministry of Energy

-8- Photo: Vaca Bonsai Executive Summary 2.2. An end to mandatory productive investment as a condition for receiving incentives

The incentives granted until 2015 rewarded exploration and increases in investment for both conventional and unconventional exploitation. Productive investment by companies grew year on year, employment increased and production levels ended a long cycle of steady decline. In 2016, the companies earned more than in 2015, but they invested much less and fired over 3,000 workers. They were rewarded without making any effort.

Gross investment by selected Companies (YPF, Pampa Energía, Petrobras, Pan American Energy, Roch, Medanito) in millions of dollars

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Source: own elaboration, based on balance sheet data Winners and losers in Argentina in the age of unconventional hydrocarbons

2.3. Change of origin A. Reduction in energy subsidies

The government of Cambiemos decided to dismantle the structure of energy subsidies as part of an economic model underpinned by borrowing and financial speculation, without concern for aggregate demand. In this context, a high level of public spending may act as a break on the cycle of debt. The fall in the burden on expenditure represented by energy subsidies has been offset in the last year by the rise in interest payments in the budget. The macroeconomic priorities have changed, and the changes in the energy sector are a consequence of that. One exception to this trend is the continuity of the Gas Plan for Vaca Muerta and other unconventional formations in the Neuquén basin until 2021.

Energy subsidies and debt interest rate share of public spending

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Source: own elaboration based on data from INDEC, ASAP and MECON Executive Summary B. Massive rate hikes To prevent the reduction in subsidies from negatively impacting the accounts of companies in the sector, the government introduced significant increases in public utility rates. The transfers made by the national state were thus, in part, replaced by the economic transfers from the various users to the companies. The producers of hydrocarbons were not the only ones to benefit from higher prices; so did the intermediaries in the sector (carriers and distribu- tors). Thanks to the increase in the rates paid by different users (households, stores, industries), the hydrocarbon companies recorded an additional turnover of 1.559 billion dollars in 2016.

Companies’ turnover for 2016 in millions of dollars

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Source: own elaboration based on Enargas Winners and losers in Argentina in the age of unconventional hydrocarbons

3. The consequences of the new energy policy

3.1. Winners A. Hydrocarbon companies The hydrocarbon companies have achieved remarkable improvements in their balance sheets. The increase in turnover in pesos, as a result of the higher rates paid by users, enabled companies to maintain the same level of income in dollars in 2016, despite the strong devaluation that took place in late 2015. However, there was a change in cost structure, which did not follow the move- ment of the dollar. So, although turnover in US dollars remained unchanged, the companies’ earnings in that currency virtually doubled in that last year.

Final earnings of the selected companies (Pampa Energía, Petrobras, Pan American Energy, Roch, Medanito). In millions of dollars.

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Source: own elaboration based on balance sheet data Executive Summary B. Other companies in the value chain

The main winners from the new energy policy have without doubt been those companies located between the producers and users in the sector’s value chain. These firms saw a substantial increase in the price of their services and their earnings grew exponentially, making them the top performers in the current economic scenario. This is evidenced by the fact that between 2015 and 2017, the share price of these companies rose more than any other on the Buenos Aires stock exchange. A large part of the control structures that make up the Argentine companies are located in offshore tax havens. The company that saw the highest increase in share price is Transportadora Gas del Norte, controlled by Spanish structures through Tecpetrol (which in turn is controlled by a foundation in the Netherlands), Compañía General de Combustibles (Argentina) and Southern Cone Energy Holding Company Inc, a company based in Panama.

Share price of energy companies and related companies

Company Controlling Domicile of the Oct. 2015 Nov. 2017 Variation group controlling group Transportadora Tecpetrol- Spain- 3 63.3 2010% Gas del Norte Comgeneral de Argentina- Combustibles- Panama Southern Cone Camuzzi Gas Sempra Energy The Netherlands, 3.5 60 1614% Pampeana (EEUU)-Camuzzi Luxemburg, -13- Internacional S.A. Denmark Capex Götz Family Argentina 7.4 82.9 1020% Metrogas YPF Argentina 3.1 32 932% Transener Enarsa-Mindlin Argentina 5.1 42.9 741% Transportadora Petrobras The Netherlands 11 74.25 575% Gas del Sur Central Endesa Chile 2.62 16.7 537% Costanera Pampa Energía Mindlin Uruguay 8.5 47.45 458% Edenor Mindlin Argentina 8.7 39.65 356% Petrobras Petrobras The Netherlands 32.75 94.35 188% YPF S.A. National State Argentina 219.5 433.45 97% Tenaris Rocca Family Luxemburg 183 269.7 47%

Source: own elaboration with data from the Stock Market Winners and losers in Argentina in the age of unconventional hydrocarbons

3.2. The losers from the current energy policy Small and medium-sized industries and businesses, households, workers from the sector, populations and producers in Northern Patagonia, among other social actors, make up the map of those adversely affected by the recent transfor- mations in the energy sector. In this section, we will analyze the consequences for some of these actors of the changes introduced in the sector.

A. Households While in 2012 gas bills accounted for 0.83% of household income on average, in 2015 that proportion increased to 1.1%, reaching 2.1% by October 2016 and 2.49% by April 2017 (the figure for both October 2016 and April 2017 includes the “Social Tariff” in recipient households) If we take the population decile with the second lowest income, the proportion of income earmarked for the consumption of natural gas rose from 1.44% to 3.76%. Moreover, the impact of the massive rate hikes is entirely unequal. In 2012, 10% of the poorest households (that had access to the gas network) spent 3.26% of their income on gas bills. By April 2017, that proportion had reached 8.64%. In contrast, the wealthiest 10% of households earmarked 0.34% of their income for this purpose in 2012, and this has now increased to 1.22%.

Gas bills as a proportion of household income (by deciles)

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Source: own elaboration based on ENARGAS and ENGHo 2012-2013 Executive Summary The policy implemented by Cambiemos (when comparing the situation in 2015 to that in 2017) meant a loss of purchasing power for households as a result of the extremely unequal increase in rates, even taking into account the impact of the “social tariff”. Between 2015 and 2017, households in the first decile lost 4.62% of their income due to higher gas bills (in 2015, they had to earmark 4.01% of their income to pay gas bills, and in 2017 that figure was 8.63%). Households in the second decile lost 1.94% of their income for the same reason, whereas the 10% of households with the highest incomes lost 0.73% of their consumption capacity.

Loss of purchasing power due to higher gas bills, October 2016-April 2017

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Own elaboration

In summary, the impact of the massive rate hikes on the purchasing power of the population was very strong and, moreover, profoundly unequal, as it was felt hardest by those households with the lowest incomes. Winners and losers in Argentina in the age of unconventional hydrocarbons

B. Oil sector workers After a long cycle of job creation in the sector, there was a sharp contraction in 2016. Along with the sudden fall in investment, 3,417 jobs were lost. Between 2011 and 2015, employment in the sector grew by 34%. In 2016, 6% of the labor force was lost. Added to this was the addendum included in the collective agreement for oil workers in the framework of the Vaca Muerta agreement, which reduces their labor rights and make their contracts more flexible.

Net sectoral job creation. Annual average.

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Source: own elaboration based on data from the Ministry of Labor

C. Population and producers from the regions where unconventional exploitation takes place

The concentration of investment in unconventional production aggravated the environmental, social and production-related problems faced by the regions concerned. Unconventional oil production increased from 5% of the total in 2015 to 7% in 2016, while unconventional gas production rose from 15% of total output in 2015 to 21% in 2016. Executive Summary Share of unconventionals in the total extracted

Source: own elaboration based on data from the Ministry of Energy

-17- Photo: Marion Esnault Winners and losers in Argentina in the age of unconventional hydrocarbons

4. The alternative paths of change In the case of natural gas, the main energy source in the energy matrix, we see that, at the national level, 40% is used for power generation and 27% is consumed by the residential sector. These are two important areas where we can seek out opportunities to improve energy efficiency and fuel source replacement in order to both reduce consumption, on the one hand, and replace and reject the use of unconventional gas, on the other. In the electricity sector, in order to comply with Law 27191, the state, through the National Ministry of Energy and Mining, is analyzing two possibilities based on the scenarios foreseen for 2025; one being business as usual and another involving energy efficiency measures (in terms of electrical power). In both cases, a 20% injection of renewable electrical energy is proposed to reduce ther- mal input in the electric power generation matrix. However, the proportion of gas usage increases from 73% in 2015 to a 94% and 98% depending on the scenario. At the national level, there are other future development projects offer- ing a variety of matrices, which are bolder than the original proposals. The “Argentina 2035 Energy Scenarios Platform” made up of various institutions and sectors, has projected a number of different scenarios, the most daring of which involve the injection of renewables and replacement of fossil fuels, and propose a renewable energy penetration of between 48% and 80%, depending on the scenario, and, in one case, the total replacement of unconventional gas. Energy efficiency end use – particularly the use of gas – in the residential sector proves to be a powerful tool on the path to replacing unconventional gas. According to various studies, it can be inferred that 21% of the gas used in homes is used for heating water, 54% for heating and 13% for passive consump- -18- tion (pilot lights on water heaters). Smart solutions to address such consumption can yield big savings for a modest investment at the state level. It is possible to replace water heaters with better performing devices and flame modulation systems, install hybrid water heating systems (solar heater + efficient support), which save water, and improve the efficiency of the materials used to build houses. Approximately 11 million households in the country use gas. If we can get 35% of users to implement water saving systems, 25% of users to implement hybrid solar systems for water heating, and the rest migrate to efficient class A water heating systems, we would manage to save 7.7 MMm3 per day, around 2,810.5 MMm3 per year, which accounts for nearly 30% of unconventional gas production in 2016. This saving would be equivalent to 6.5 MM tCO2 less in emissions into the atmosphere. There are many different options and strategies with varying positive impacts that can be adopted on the path of transitioning to a more renewable matrix. Presenting them in such a way as to promote the inclusion and participation of citizens in decisions on what energy we wish to consume and how will make the difference between a physic transition and a social transition of the energy matrix. Full report in: www.ejes.org.ar Photo: Marion Esnault www.ejes.org.ar