Argentine natural gas distributors brace for tough times

Argentine natural gas distributors face hard times as regulatory instability and an unwillingness to adjust end-user prices threaten to erode their revenue streams.

Consumer prices have not been updated since April 2019, contrary to Argentina’s regulatory framework, which specifies adjustments must be made twice per year. The second price adjustment of 2019, originally slated for October, was pushed back in August. And the first adjustment for 2020, planned for April, was also postponed.

The COVID-19 pandemic has left the price adjustment process (known locally as RTI), which was supposed to resume in some form in June, in limbo. Observers agree the government is unlikely to resume the process as it grapples with the economic consequences of the nationwide lockdown.

Companies such as Camuzzi Gas Pampeana, Distribuidora de Gas Cuyana and Naturgy Ban face uncertain prospects that prompted rating agency Moody’s to drop their credit rating to 'Caa3' and change the outlook to negative. Moody’s has said these companies’ strong credit profile was not enough to offset their dependence on the state and a muddled regulatory outlook.

“Argentina’s regulatory framework and the sufficiency of future regulated tariffs have become more uncertain in the recent months. Tariffs have not been adjusted since April 2019 and there are no clear policies for the sector,” Moody’s said.

After the RTI was enacted in 2017, cashflows in the sector recovered, allowing for adequate funding of distributors’ operations and opening the door for new investments. Before then, gas distributors stayed in survival mode for years as revenues were pressured by frozen end-user prices, rising costs and high inflation.

The government’s move on the price adjustment framework will be key to gauge regulatory risk in Argentina’s natural gas sector in the coming years. Before COVID-19 struck, authorities had said they would overhaul price-setting regulations in June to reduce their weight on consumers while maintaining a periodical adjustment. 

But the pandemic and the pressure it puts on household incomes suggests the government could extend the current situation, in which the distribution sector operates without enforceable policies. The policy to forbid cutting services in case of missed payments for users that meet certain criteria will further erode revenues, Moody’s said.

Meanwhile, the midstream business is facing similar pressures, as the RTI regulated gas transport and electric power prices. As BNamericas reported previously, Transportadora de Gas del Sur, one of Argentina’s biggest gas transport companies, has slashed its 2020 capex guidance by 30% because of the operating environment.

According to Moody’s, as the company is under pressure in the regulated transport business, it is also pressured in its unregulated gas production business because of the international oil price rout. Internal wellhead prices for natural gas have reached historic lows in Argentina, hovering around US$2.5/MMBTU (million British thermal units).

While the government has opened discussions on a framework to support producers through a subsidy program that incentivizes new projects, it is less clear how it could help the distribution and transport sectors. The past governments of Cristina Fernández and Néstor Kirchner subsidized gas consumption to support prices, fueling the country’s fiscal deficit.