MercoPress. South Atlantic News Agency

Argentina raises wholesale natural gas prices 40%

Following an agreement reached over the weekend with the Argentine government, natural gas producers will be allowed to increase wholesale prices by 40% as long as they guarantee full supply to domestic consumers until 2007.

The agreement that mitigates potential risks of supply shortages means Argentine natural gas producers will be supplying 80 million cubic metres per day to the domestic market, said a source from the Argentine Energy Secretariat.

"And if demand expands they will also cover that", added the source who indicated that in exchange for that assurance wholesale prices will increase 40%, a cost that will have to be absorbed by big companies and industry, but not by residential consumers.

"This is a major agreement since it guarantees the provision of natural gas for the coming three years and includes a specific commitment to invest in exploring for additional supplies", said Cabinet Chief Alberto Fernández.

Argentina faces this coming winter its most severe energy crisis in fifteen years because public utility rates have been frozen for the last two years, seriously limiting investments, and because demand has outstripped supply following the strong rebound of the Argentine economy after four years of recession.

A drought that drained water from most hydroelectric plants that generates half the country's energy, also contributed to the extreme scenario.

Argentina has the lowest natural gas prices in the world (in US dollars) because of the freezing of prices and the January 2002 strong devaluation of the currency.

President Kirchner administration officials are concerned that possible cuts in energy supply could hinder the economy's recovery that last year managed to grow 8,7% and this yeas is forecasted to expand 7%.

The shortage of natural gas forced the Argentine government to limit surplus natural gas exports until September and in accordance with consumption averages of last year.

The new scale of prices will begin to be publicly discussed late this month and early May, and they will represent an additional 15 to 25% for industrial consumers.

The three companies that signed the agreement are YPF-Repsol; Total and Petrobras, all foreign undertakings that dominate the Argentine natural gas market.

The Argentine government has been particularly critical of gas companies for not having invested in exploration and infrastructure. However, they argue that the freezing of rates and the 2002 devaluation turned the business non profitable, and thus the lack of investments.

Meantime Argentine was forced to import electricity from Brazil, cut 20% the supply to thirty major industries that have turned to more costly fuel generators.

Surplus export cuts hit Chile since Argentina supplies 90% of its total natural gas demand. Three main thermoelectric plants in the north of Chile are facing a 10,5% reduction in Argentine natural gas provision.