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Can Javier Milei boost Argentina’s oil and gas industry?

by SuperiorInvest

In the end, when the results of Argentina’s presidential election became clear on Monday (November 20, 2023), the result was not so surprising. However, the margin of victory certainly was, and it is nothing short of a political earthquake.

Fed up with the seemingly perennial economic malaise, with annual inflation hovering around 143% and widespread poverty affecting 40% of the population, Argentines turned en masse to the 53-year-old economist and right-wing outsider Javier Milei.

The man often scathingly described as “El Loco” or the madman by his critics and opponents came to power with nearly a record 56% of the vote in the public runoff against incumbent government minister and left-wing rival Sergio Massa, with 44%.

He won in 20 of the country’s 23 provinces. Even the country’s capital, Buenos Aires, preferred him to her opponent, and in some provinces up to 70% of the votes went to Milei.

His economic policies, many of which may seem quite outlandish to some, will no doubt be scrutinized before his inauguration on December 10, 2023. But a central mission of Milei to “kick the butts of the Keynesians and collectivists” might offer some color to the situation. that.

In addition to promising to reduce bureaucracy (a firm favorite of his base of supporters), the president-elect has also promised to “blow up” the central bank to prevent it from printing more money, which he claims is fueling rampant inflation. from Argentina. to point out a couple of things said during the election campaign. He also wants to get rid of the local currency, the peso, in favor of the US dollar.

Will El Loco go turbo with Argentina’s energy policy?

Milei also promised to cut public spending and privatize state companies, something that inevitably sparked the interest of the energy world. According to the International Energy Agency (IEA), Argentina has the second largest shale gas reserves in the world and the fourth largest shale oil reserves in the world.

In 2022, Argentina produced 706,000 barrels (bpd) of oil and its Vaca Muerta shale formation contains 308 trillion cubic feet of natural gas. The standard bearers of Argentina’s hydrocarbon wealth are the state oil companies YPF and Enarsa.

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Milei reaffirmed his intention to privatize YPF in statements after his electoral victory. This caused New York-listed YPF shares (NYSE: YPF) to rise 39% from Friday’s closing price of $10.78 to $15 on Monday (3:00 p.m. EDT).

However, Milei also told Argentine broadcasters that before YPF could be privatized, his administration would have to “rebuild” it. The president-elect did not specify how long this would take or what type of operational and process simplification he had in mind. No doubt the market will analyze the details as they emerge.

Luck also seems to be on the incoming president’s side. In a desperate attempt to curb crippling energy imports, his predecessor built a pipeline infrastructure to monetize Vaca Muerta’s natural gas.

Energy exports have finally increased, including to neighboring Chile, after an economically painful lull that lasted almost 20 years. In 2022, Argentina had an energy deficit of $5 billion and the current year may be a balancing act. But government data points to an energy surplus of $4 billion in 2024.

Ultimately, the windfall could amount to $20 billion by 2030, depending on market direction. Many, probably including Milei himself, hope that Argentina’s energy exports will also help reduce the country’s overall trade deficit.

And the president-elect, who proudly declares himself a climate skeptic, has also promised to free Argentina’s energy industry from bureaucracy. This broad and encompassing promise apparently ranges from closing the country’s ministry of environment and sustainable development to encouraging private sector investment in renewable energy, if there are takers.

There are also high hopes that attempts at commercially viable oil and gas exploration in the Falkland Islands – a British overseas territory 300 miles off the southern coast of Argentina, claimed by Buenos Aires – may be more conducive and cordial.

Two countries went to war over the islands in 1982 during the United Kingdom presidency of “Iron Lady” Margaret Thatcher. A British expeditionary force retook the islands in June 1982 after an Argentine invasion of the islands in April led to a brief occupation by Buenos Aires.

Successive left-wing Argentine governments have used the dispute for political gain in recent decades, but Milei ruffled political feathers by describing Thatcher as “one of humanity’s great leaders” in a televised debate earlier this month.

While in line with many predecessors, Milei still considers Argentine sovereignty of the islands “non-negotiable”, his tone is likely to be more conciliatory and may encourage a friendlier level of economic dialogue.

Don’t forget lithium

In politics, it is often said that timing is everything, and the broader energy complex also appears to be turning in Milei’s favor. Argentina has the second-largest lithium reserves in the world, estimated in the region of 20 million tons, according to the United States Geological Survey.

Domestic production of the metal desperately needed for the global energy transition is increasing and could reach 120,000 t/year by 2024 (from a current level of around 60,000 t/year). Milei’s encouragement of private sector investment could further up the game with nearly 40 projects in development at three active mines.

The only big problem in energy policy is that Milei spent his entire presidential campaign attacking almost the entire political classes and Argentine politicians, especially those on the left.

But his party only has a small number of seats in Argentina’s Congress. Despite her powerful mandate, Milei will now have to negotiate with those she attacked during the campaign to implement her agenda. This won’t be easy. While it’s too early to say how everything will play out, there are tangible reasons for cautious optimism.

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