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Argentina, unplugged: the staring contest between the government and energy companies could stunt a promising recovery.

There's more energy here than we know what to do with," says Marcelo Cardinali as he surveys the 80-meter thick concrete retention wall that bisects the Parana River. Cardinali knows what he's talking about. As a hydrological engineer at the Yacyreta dam, a huge hydroelectric project straddling the border of Argentina and Paraguay, he's on the front line of Argentina's desperate search for new energy sources. "In 30 days we could have Argentina running at full speed again," Cardinali says.

His offer is tempting. As every shivering homeowner this winter in Argentina knows, the country is in desperate need of fuel. After three years of price controls the country's privately held gas and oil rigs--whose fossil fuels used to feed the country's dimming electrical grid--are running dry from a lack of investment. As a result, the country has cut off valuable export contracts with neighboring Brazil, Chile and Uruguay and has implemented, for the first time in over a decade, open ended rationing plans aimed at lowering consumption.

The energy crisis is now the top priority for the government of President Nestor Kirchner, who fears a prolonged energy shortage could spoil the 8% economic growth rate expected this year. To keep the economy going strong, much hope for a quick solution is focused on Yacyreta, some 1,287 kilometers north of Buenos Aires in Corrientes province. For U85500 million, the government says it can raise Yacyreta's reservoir by seven meters, enough to double the dam's current output and cover an amazing 25% of Argentina's energy needs. Even without additional financing engineers say it's possible to use the existing infrastructure to boom output by 250 megawatts.

Environmentalists, though, say the cure could be worse than the disease. For most Argentines Yacyreta and its joint Argentina-Paraguay operator, the Entidad Binacional Yacyreta (EBY), were well described by former Argentine President Carlos Menem when he called the dam a "monument to corruption." Overshooting its construction budget by $7 billion and 10 years, the debt-laden dam has yet to turn a profit since coming on line in 1994, largely because its 20 turbines operate at only 60% of their installed 2,700-megawatt capacity. Environmentalists doubt engineers' claims that rising reservoir levels won't flood the Esteros del Ibera wetlands just downstream. They also claim that topping off the reservoir would displace 80,000 people, not to mention thousands of animals in the wetlands.

Yacyreta is just one of several costly projects that environmentalists criticize. The government plans to spend billions in the next five years on infrastructure projects designed to tackle the energy shortage. In addition to Yacyreta, the most controversial include a plan to resume construction of Atucha II, a $3 billion nuclear energy facility abandoned half-built last decade. "Kirchner has chosen the worst combo for a way out of the energy crisis: fossil fuels, hydroelectric projects and nuclear energy," says Elba Stancich, head of Taller Ecologista, an environmental group in Rosario.

Scaling back. As potentially hazardous as the government's energy policy may be, Kirchner is more worried about saving jobs than he is about Argentina's environment. Since the government implemented energy rationing in March, hundreds of companies have been forced to scale back production. Industrial production slipped hard the next month, worrisome as the country is just getting its recovery into gear.

A myriad of companies like German car maker Volkswagen and Siderca, the world's largest steel producer, are bracing for the worst. Every morning hundreds of plant managers across Argentina begin their work day checking the fax machine to see how much energy the government will let them put to work. The draconian measure is necessary to prevent a total collapse of the electrical grid.

in Cordoba, home to Argentina's beleaguered automobile industry, companies have had to decrease power consumption by as much as 20% each day. Already the cutbacks have forced at least one parts supplier to lose an important export contract for fears it can't guarantee on-time delivery.

What's worse, the forced slowdown may only be the tip of the iceberg. The Union Industrial de Cordoba predicts that power cuts could affect as many as 90 workdays in the coming months, depending on how cold the winter is and on the reaction of residential consumers. If that happens, factories might have no choice but to take more drastic measures, For the 17,000 workers at Cordoba's biggest 20 industrial energy consumers "layoffs are a real possibility," says Jorge Man-silla, executive director of the business group.

Calculating exactly how much the energy crisis will actually coat Argentina depends on how efficiently mitigating measures, like incentives for homeowners to use less electricity, take hold. The speed with which new investments like those at Yacyreta develop will be decisive, too. But if Brazil's 2001 energy crisis is any measure, Argentina's economic growth could suffer a setback of at least 1.5%. "It's still too early to know if we face a best-case or worst-case scenario," says Oscar Dores, director of the Fundacion para el Desarollo Electrico. an independent group that monitors the sector.

A lot depends on how effectively the government intervenes to regulate the sector. Given its response so far, however, nobody expects much to happen. Analysts say the crisis could have been prevented and accuse both past and present governments of being asleep at the wheel. Although rate hikes of up to 25% were passed in March for large, industrial clients, until then rates were stuck at the same level as they were at the time of Argentina's 2001 devaluation, $0.40 per million British Thermal Units, one-third the international energy price.

Smarting. With such distorted prices, companies like Spain's Repsol YPF and Royal Dutch Shell have refused to spend, even though demand has increased 25% since 1998. They're still smarting from the $4 billion they invested in drilling, exploration and transport of natural gas last decade. As a result, not enough of the fossil fuel is reaching the gas fueled power plants that generate 50% of Argentina's energy supply. "This isn't a structural bottleneck. It's clearly a consequence of the government not taking the necessary political decision to stimulate investment," says Daniel Montamat, a former Argentine energy secretary and now private consultant. "Sooner or later you need to bite the bullet and raise rates."

The government, for its part, blames an unexpected 16.2% surge in industrial activity last year for catching private investors off guard. In any case, Argentina's substantial gas supplies have languished from a peak of 18 years of reserves in 2000 to 12 years of reserves now. Argentina's most recent, response to the crisis has been to put a 20% export tax on natural gas.

Meanwhile, the shortage has pitted companies against consumers, which the government continues to protect from price hikes. While politically sensible, analysts say the government's approach is shortsighted and could eventually depress growth.

That's precisely what Argentina can least afford. Although the economy grew a phenomenal 8.7% in 2003, it languishes below what it was in 1998 and unemployment hovers at 16%. To keep growing, Argentina needs more juice. Where it will come from, no one knows.

[GRAPHIC OMITTED]

JOSHUA GOODMAN * ITUZAINGO, ARGENTINA
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Title Annotation:Energy
Author:Goodman, Joshua
Publication:Latin Trade
Geographic Code:3ARGE
Date:Aug 1, 2004
Words:1191
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