Expanding oil will deepen its disconnect from other parts of the economy

Starting in April 2023, while overall activity began to contract, the energy sector, by contrast, began a strong expansionary process (Reuters)

Although Argentina ended 2023 at the same level of activity as at the beginning of 2022, the group of companies in the energy and mining sector grew by 19%. This fact is especially true starting from April 2023, when the overall activity starts to shrink and the energy sector, on the contrary, starts the process of strong expansion.

There are some specific and other general factors that indicate that this disconnect will consolidate in the coming months. To a large extent they have to do a certain trend of normalizing the local macroeconomic conditions that puts the oil and gas companies at a competitive edge.

Early liberalization of local fuel prices, approaching their international equilibrium values, frees the domestic energy sector from state discretion and allows for alignment of incentives in the direction of increasing production.

Source: VDC consultation with data from Indec

Amid the price freeze in the run-up to the 2023 elections, the price paid domestically for a barrel of Neuquen oil was less than 69% of the international value and will be 80% by the end of the first half of the year. and 90%. One hundred.

Fewer export restrictions are also a factor that will strongly boost the performance of oil and gas in the coming years. When the industry stops thinking about catering only to a local market of limited size and volatility, and starts considering expanded demand (Chile, Brazil and others), the investment potential is enormous.

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shrinking path Transmission interval Almost until it disappears, it is on the way to consolidation, creating a positive impact through prices on exporters, among which hydrocarbons stand out. A trade gap is more or less a mechanism to subsidize importers and penalize exporters. Its moderation significantly improves the account of programs focused on external sales.

Exchange rate prevents free exit abroad. If an operator or investor knows that the funds abroad cannot be recovered, he will never bring them back. Equity, for practical purposes, acts as a barrier to entry of foreign investment and capital and fundamentally affects globalized areas such as the oil industry.

Fewer export restrictions are also a factor that will strongly boost the performance of oil and gas in the coming years.

In competition for the projects of global companies, restrictions on the movement of funds negatively affect Argentine projects. To the extent that the capital account is normalized, which is already happening in the beginning, there will be an opportunity to distribute dividends abroad, and Argentina's status as a vessel for investments will change significantly.

A fall in reference interest rates BCRA And a moderate expectation of inflation rate are the most favorable factors to improve the sector performance, a line that escapes the virtual impasse suffered by the SME oil sector.

A fall in BCRA's reference interest rate and a moderate expectation on the inflation rate are the most positive factors in improving the sector's performance (Reuters)

Particularly, in the case of small or medium-sized service firms that are structured or do not have liquid access to international financing, they are more vulnerable to the erosion of their income due to inflation. These companies work hand in hand with the decisions of the operators and provide a good portion of the human resources and capital assets required to stimulate the sector.

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Although they are passing through a good present in terms of operations, in many cases small and medium enterprises suffer from serious financial constraints, which restricts the pace of expansion.

In many cases, small and medium-sized businesses suffer from severe financial stress, which puts a limit on the pace of expansion.

Transport infrastructure is showing a dynamism not long ago and is encouraging new production projects.

However, this is almost irrelevant compared to the potential of existing hydrocarbon resources. A shift in production requires a powerful acceleration of investments in both transport and export infrastructure.

Source: VDC consultation with data from Indec

There is another reason, perhaps the foundation and the “secret weapon”, which explains why the sector's disconnection will not continue, but will be strengthened. The oil industry plays an important role in generating foreign exchange and is key to full and lasting stabilization and normalization of the economy.

It is an important part of any rational development plan for Argentina (severe and immediate needs for foreign currency) and in the long term (industry and society, in addition to financial accounts, a hard currency that only needs energy, in addition to agriculture, can contribute).

Up to 2010 and for nearly 12 years, energy was a net generator of foreign exchange of over US$ 49 billion. In contrast, it ran a trade deficit of nearly US$36 billion over the next 13 years.

Up to 2010 and for nearly 12 years, energy was a net generator of foreign exchange of over US$ 49 billion. In contrast, over the next 13 years it became part of the problem: running up a trade deficit of nearly US$36 billion.

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Production and productivity indicators, planned investments, the number of fracture positions (predicting hydrocarbon production in the short and medium term), and the value of companies confirm the disconnection with respect to the rest of the economy. At least it will go deeper during the next semester.

The author is the director of VDC Consultora

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