Ukraine crisis could hit Argentina LNG imports, double energy deficit

2/25/2022

Russia's invasion of Ukraine could have an effect thousands of miles away on debt-laden Argentina's fiscal balance, with a price spike for its natural gas imports set to more than double the South American country's energy deficit to as high as $4 B this year, analysts said on Friday.

Argentina, which produces its own gas from its core Vaca Muerta shale formation but relies on imports to supplement supply, could spend three times as much on LNG imports in 2022 versus last year.

The energy balance is key for Argentina, which is ironing out a $44.5 B debt deal with the International Monetary Fund that will include targets to reduce a deep fiscal deficit and refill depleted foreign currency reserves.

Russia's invasion of Ukraine on Thursday sent gas prices at the benchmark Dutch TTF hub soaring by 50-60%. It also boosted crude oil prices above $100/bbl for the first time since 2014, though Argentina's oil exports are very low compared with its gas imports. Russia is the second-largest oil exporter, and also the largest provider of natural gas to Europe.

"There is talk of more than $3 billion in LNG imports with a price of $24 (per metric MMBtu), now prices are already at almost $40," said Daniel Dreizzen, an analyst at consulting firm Ecolatina and a former secretary of energy planning.

"I don't think the (government) will approve a price over $30. If they don't ok it, there may be supply cuts," he added.

Argentina's energy secretariat did not respond to a request for comment.

Higher energy spending could eat into government coffers, as President Alberto Fernandez's administration looks to dig out of a protracted economic crisis and reverse a major energy deficit in order to protect scarce central bank international reserves.

Argentina imported some $1.1 B of LNG last year at an average price of $8/MMBtu to meet industrial and residential demand, official data show.

Imports are seen swelling to between $3-$3.5 B this year, energy analysts said, which Dreizzen estimated would leave an energy deficit of about $4 B this year after a negative balance of $1.7 B in 2021.

PIPELINE NEEDED

Argentina is trying to ramp up local gas production to reduce its reliance on imports, which are needed during the southern hemisphere's winter when demand peaks.

Jose Luis Sureda, Argentina's former hydrocarbon resources secretary, said the country would try to avoid buying now at the peak of the crisis and that the hope was prices could come back down if the crisis was brought under control.

Even then, however, prices would be elevated versus last year, and would remain so until Argentina increases its gas capacity, something it is trying to do with a new pipeline from Vaca Muerta but which will take years to come online.

Vaca Muerta is the second largest unconventional gas reserve in the world, located in the Patagonian province of Neuquen.

"As long as we do not have the new pipeline, Argentina's gas production from now on can only decline because there is no more transport capacity," Sureda said.

"Transport from Neuquén is saturated and in the rest of the country production is already declining."

(Reporting by Eliana Raszewski; Writing by Anthony Esposito; Editing by Adam Jourdan and Marguerita Choy)