Oil production has fallen to the same level as 20 years ago

In the last decade, Argentina has suffered an unprecedented setback in its oil production capacity. This has happened due to the systematic application of irrational regulations such as prohibitions, privileges, inadequate taxes and nontransparent subsidies.  In this context, the YPF-Chevron agreement is neither the “salvation” nor a “surrendering” to foreign interests, but the continuation of the bad results since the same logic of wrong regulations is still present. In order to reverse the failure and achieve positive results better rules are needed.

The problems in the oil sector have been multiplying since the 2002 crisis. First, price controls and a rise in export duties were established in order to lessen the effect of the mega devaluation on the domestic prices. By using short-term and improvised palliatives a strong disincentive to invest was placed. This caused exports to diminish and the country to become a fuel importer. This failure was used as the excuse to take over YPF and by means of a controversial expropriation process whose resolution is still pending. Now that there are insufficient funds to finance investment, YPF proceeds with an agreement with Chevron in hopes of reversing the decline in oil investment. 

In order to understand the outcome caused by the energy policy swings in the last decade it is very useful to analyze the time series of the Argentinean oil production in the last 60 years. According to information published by the Argentine Institute of Oil and Gas:

·  The first wave of investment in the oil sector happened between 1958 and 1972, when production went from 6 to 25 million cubic meters per year.

·  Between 1991 and 1998, after 2 decades of stagnation, the second wave of investment increased production from 29 to 49 million cubic meters per year

·  An involution process begins in 1999 and leads oil production to drop to 33 million cubic meters per year in 2013

The data shows that the deterioration suffered in the last years is much worse than that suffered in the 70s and 80s, to the point that production fell to almost the same level as 20 years ago. The result is that all the production capacity developed during the nineties was completely consumed.

In this context, the “Regime for the Promotion of Investment for the Exploitation of Hydrocarbons” is announced as a part the hydrocarbons’ sovereignty policy. This is a new regulation designed specifically to “fit” the Chevron agreement. Among the most important things, it can be highlighted that if a company invests more than $ 1 billion in five years, it can export 20% of their production without paying export duties and dispose freely of those dollars. This incentive is preserved even in the case that there is lack of domestic supply and the quota has to be sold internally, since the equivalent international price without export duties will be received and revenue can be converted into dollars at the official exchange rate.

More paradoxical than approving a special benefit for Chevron while claiming sovereignty, is that what it is established as a “promotion policy” is exactly what common sense dictates should be the general rule. Instead of allowing the right to export and freely dispose of dollars generated by all operators, a web of irrational regulations is impose causing the decline in investment, which is later used to legitimize complex exceptions that generate obscure business niches. There would be less corruption and more incentives to productive investment if this “privilege” of being able to export and dispose of foreign currency was generalized in all sectors of the economy.

The energy sector illustrates the logic behind all public policies applied in the last decade. There is an underestimation, not only by the government but also by almost the whole ruling-class, about the importance of good institutional arrangements. While the government and opposition parties spend time discussing the financial, technical and ethical qualities of Chevron, they overlook the fact that what matters is not the company but the rules.  Well-intentioned companies under poor regulations will generate bad results; while malicious companies do not even take place when the rules are good.