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What Mauricio Macri means for Argentine's oil and gas

AP/Ricardo Mazalan

Opposition candidate Mauricio Macri celebrates after winning a runoff presidential election in Buenos Aires, Argentina, Sunday, Nov. 22, 2015. Macri won Argentina's historic runoff election against ruling party candidate Daniel Scioli, putting an end to the era of President Cristina Fernandez, who along with her late husband dominated Argentine politics for 12 years.

Petroleumworld.com 11 24 2015

Former Mayor of Buenos Aires Mauricio Macri has been confirmed as the winner of Argentina's presidential election run-off in a result that looked highly improbable up until a few months ago, but one that foreign and domestic investors were pining for.

With most of the votes in, Macri of the center-right Cambiemos (Let's Change) coalition led the center-left Peronist candidate Daniel Scioli by 51.5% to 48.5%. The result sees incumbent president Cristina Fernández de Kirchner's party booted out after over a decade in office.

Macri, who had decades in business and the Presidency of Boca Juniors football club on his resume before entering politics, led a strong campaign focusing on tackling the country's crime and corruption, and promoting a more “business friendly” Argentina.

In the end, he triumphed against Scioli, the governor of Buenos Aires province, handpicked by Kirchner herself. On a recent visit to the Argentine capital before the first round of voting back in October, I had local analysts opining to me that Argentina was suffering from “Kirchner fatigue” given the state of the economy and general discontent about how the country was being run.

The business community, farmers and middle classes were seen rallying behind Macri like never before helping him close the gap to Scioli. As it turned out, the center-right man narrowly lost the first round to Scioli by 36.7% to 34.5%. However, with the Argentine constitution requiring at least a 40% mandate threshold for an outright victory, a run-off was called as the third candidate – Sergio Massa – dropped out of contention.

Subsequently, many of Massa's supporters switched their vote to Macri endorsing his pro-business no nonsense credentials. The center-right candidate headed to the 22 November run-off with a comfortable lead in the opinion polls, and ultimately prevailed in stunning fashion.

The result is a blow to Kirchner, who was barred by the constitution from seeking a third term, but was said to be contemplating another run for office in four years time. Yet, it is a shot in the arm for a more business friendly Argentina in general, and its nascent oil and gas sector in particular, especially in an era of low oil prices .

The incoming president is said to be less confrontational to begin with. A Cambiemos spokesperson said Macri wants to reboot Argentina's trade relations with the global community, including the UK with whom Kirchner constantly sparred over the Falkland Islands dispute to deflect attention from serious domestic social and economic issues.

More importantly, closer to home, the Cambiemos camp is also seeking a “friendlier dialogue” with Chile and Uruguay over natural resources, and reengaging with regional oil and gas powerhouse Brazil .

“We will have a new philosophy about how we relate to the world, with countries, such as the USA, European and Latin American partners, with whom we share values, economic interests and cultural friendships but have seen the relationship deteriorate,” the spokesperson added.

While not giving up its claim to sovereignty over Falkland Islands or Las Malvinas as the Argentines call them, Buenos Aires' continued hostility to British offshore oil and gas exploration is likely to subside. Kirchner's administration had created a cabinet position – in 2013 – of “Falklands Minister” held by trusted lieutenant Daniel Filmus.

Macri is likely to bring the charge de affairs back to the country's ministry of foreign affairs. The conciliatory tone might even involve participating in the hitherto off-limits oil and gas exploration in Falkland Islands waters.

Away from the contentious side issue, it is the direction of Argentina's shale exploration that is of much bigger significance in a global context. Earlier this year, the US Energy Information Administration noted that excluding the US and Canada, only Argentina and China happen to be producing either natural gas from shale formations or crude oil from tight formations (tight oil) at an international level.

How Argentina's promising Neuquen Basin develops further would have a massive bearing on the economy. The Argentine Energy Institute says macroeconomic stability is essential for attracting foreign direct investment during the current oil and gas market downturn.

Macri has promised to bring about just that, even making a pledge to enact laws promoting investment and a more credible framework for the oil and gas sector. Restoring credibility, much of which has been lost under Kirchner, would be an entirely different matter.

Argentina is in a technical recession having grown a mere 0.5% last year by some counts. Official statistics are hard to come by with the country's statistics agency INDEC censured by the IMF in February 2014, for allegedly fiddling with economic data. Argentina has still not been able to raise finance on the international debt markets fearing that any funds raised would be impounded by hedge-fund holdout lawsuits .

As a consequence, risk borrowing cost premiums remain over 10%. Concurrently, inflation is currently running at around 38% per year, according to estimates by private research establishments, a figure hotly contest by the outgoing Kirchner administration.

Walking around Buenos Aires you cannot even establish a price point for common items, restaurants alter prices on their menus on a near daily basis, taxi cabs refuse to use fare meters and fake banknotes, including versions of the relatively new Eva Peron 100 peso note , are commonplace. Official exchange rate to the dollar to one on the street is a good few paces apart.

The troubling situation requires radical action from Macri. More specifically, if Neuquen Basin's oil and gas activity has to thrive, the new government needs to be bolder in making the giant Vaca Muerta shale play more viable.

Kirchner pushed through a new hydrocarbon law in the last days of her term designed to counter Argentina's difficult business environment and incentivize oil and gas capital expenditure, especially towards shale plays. Currently, companies investing over $250 million are granted equipment import licenses, and the right to export 20% of their production abroad without paying Argentina's punitively heavy taxes. Argentina also grants shale and offshore investors 35-year leases with optional ten-year extensions.

However, given the downturn in the oil and gas business, locals fear even this may not be enough given, for instance, the Repsol versus Kirchner Government nationalization histrionics of the past. Macri knew the size of in-tray beforehand and promised radical changes on the campaign trail. Here's hoping he can enact them from the Presidential palace, as the investor community watches.


Story by Gaurav Sharma (contributor) from Forbes.

| 11 23 2015

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