Development & Aid, Economy & Trade, Headlines, Labour, Latin America & the Caribbean

ARGENTINA: Gas Supply Cutoffs Threaten Economic Recovery, Jobs

Marcela Valente

BUENOS AIRES, May 13 2004 (IPS) - When gas company representatives showed up at the Maffisa synthetic thread factory in Argentina to cut off the fuel supply, the workers were ready.

They surrounded the plant’s gas valve and did not let the gas company employees approach.

”We prevented the supply cutoff and now we are just waiting, but nothing has been signed and we depend on the gas distribution company’s goodwill,” Maffisa’s human resources manager Ricardo González told IPS.

Maffisa, in the province of Buenos Aires, is the biggest factory of its kind in this South American country of 37 million, and illustrates the potential impact of the current energy crisis on industry and employment.

Gas supply cutoffs to factories in Argentina, where industry is getting back on its feet after the 2001 economic meltdown and subsequent crisis, are scaring off investment and endangering thousands of jobs, and could hurt economic growth, which climbed to 8.7 percent last year.

Like Maffisa, most local factories are fuelled by natural gas and signed interruptible service contracts with the companies that produce and distribute natural gas since Argentina’s energy industry was privatised in the 1990s.

”In Santa Fe there were 1.5 billion dollars in investment planned for industry, including 500 million already invested. But the doubt shared by many now is whether it’s a good idea to disburse the rest without any guarantee of steady gas supplies,” Carlos Garrera, the president of the Federation of Industries in the eastern province, said in an interview with IPS.

Garrera, whose business association represents around 80,000 firms, said many business owners are planning to temporarily lay off employees or to replace natural gas with alternative fuels, which are six or seven times more expensive.

But other companies do not have that possibility, because their plants run solely on gas, and the only option left is to freeze production, he said.

Over the past week, companies in six of the most industrially developed provinces have turned to the courts to secure injunctions that would block the gas supply cutoffs. Many of the companies are facing conflicts with their workers, who are afraid of losing their jobs.

The Maffisa factory, for example, employs 600 workers, and produces 167 tons a day, 365 days a year, and simply cannot afford to interrupt production. González explained that ”Without heating in the pipes, the products we use crystallize, and it takes six months to resume production.”

The factory consumes 56,000 cubic metres a day of gas, and one of its three furnaces only runs on that fuel.

The workers, determined to keep Maffisa running, blocked the Camuzzi Gas Pampeana distribution company – an Italian concessionaire that has the highest number of instances of incompliance with its contracts, according to the government gas regulatory body, ENERGAS – when it tried to cut off the factory’s gas supplies a week ago.

A number of textile, food, petrochemical, cement, ceramic, brick and fruit juice factories, sugar mills, meat-packing plants and mines have faced similar supply cutoffs, which threaten to bring production to a halt and could lead to temporary lay-offs or outright dismissals.

Some companies have already temporarily sent employees home, others have postponed production plans as they wait for more abundant gas supplies, while others expect labour conflicts in the near future.

Sugar mills are using sugar cane residue or bagasse as fuel, which will lead to shortages for the paper industry, which depends on bagasse as a production input.

If domestic supply cuts average 10 million cubic metres a day of natural gas over four months, the resultant drop in industrial output could cause losses of around 3.3 billion dollars, according to a report by the consultancy Freyre y Asociados, commissioned by the Argentine Industrial Union.

The study commissioned by Argentina’s leading business association, which estimates total industrial production in Argentina at 30 billion dollars a year, suggested an increase in utility rates to encourage a reduction in gas consumption, a cancellation of gas exports, and the promotion of alternative sources of fuel.

The report’s main conclusions were published by the local newspaper El Cronista on May 11.

ENERGAS representative Aldo Bianchi told IPS that the cuts in supplies to industry ”are perfectly legal.”

He noted that interruptible gas service contracts are up to 30 percent cheaper than contracts for non-interruptible gas supplies, and that the clients who agree to them are subject to curtailment or cessation of service at the discretion of the distributor under certain circumstances, as specified in the contract.

Even ”firm gas” contracts, sold on continuous non-interruptible terms, can be subject to cutoffs if the system has already cut off all of the companies with interruptible service contracts.

Most companies in Argentina opted for interruptible contracts, because when cutoffs occurred at all, they generally took place for only one week in July, the coldest month of the southern hemisphere winter, when demand for natural gas for heating purposes peaks.

The problem is that this year, the cutoffs began in March, and are increasing.

Energy experts say the crisis is not actually due to gas shortages, because even though Argentina’s estimated reserves have been corrected downwards, the country still has at least a decade of reserves.

Analysts say the current crisis is the result of a rise in demand caused by the economic recovery, as well as pressure on the government of Néstor Kirchner from the energy companies, which want to raise utility rates in order to bring them into line with the prices at which they export gas, which are 100 percent higher than domestic prices.

The Kirchner administration blames the gas crisis on the privatised companies’ failure to make the necessary investments in production and infrastructure for distributing gas, to which the firms committed themselves in the privatisation contracts, and on the high priority they put on exports, when Argentine law requires that domestic demand be covered before any ”surplus” gas is sold abroad.

Spokespersons for energy distribution companies, meanwhile, say it is not fair that industry, which benefited from the January 2002 devaluation of the Argentine peso, continues to pay low prices for gas because the rates have been frozen since then. ”It is as if they were being given a subsidy,” a representative of one of the companies told IPS.

The value of the peso has plunged, to 2.9 to the dollar, since the ”convertibility” or currency board scheme, which pegged the peso to the dollar, was scrapped in early 2002.

One of the main problems is that nearly all of the factories run on natural gas. If they are forced to switch over to liquefied gas or fuel oil, the costs of the new installations, along with the higher cost of those fuels, will drive up the final prices of their products, said Garrera.

But in the view of Américo García, with the Unión de Usuarios y Consumidores, a consumer defence organisation, the responsibility is shared by all of the parties involved.

García told IPS that some companies, foreseeing a rise in fuel prices, stepped up production in January and February, during the southern hemisphere summer, which accentuated the crisis.

He also said gas production and distribution companies are responsible as well. ”Since the data we have on extraction and reserves comes from the firms themselves, it is not clear how much gas there is and how much is actually reaching the domestic distribution network,” he said.

So far, the government has taken several different steps. First, it cut exports of gas, especially to Chile, the biggest buyer. It then announced a plan to encourage energy savings in residential areas by charging significantly higher rates for households that use more gas than they did last year.

The idea was to free up fuel for industry, which grew 16.4 percent in 2003 – double the country’s overall economic growth.

According to the Central Bank, the energy crisis could knock one percentage point off of Gross Domestic Product (GDP) this year.

But in the end, the government accepted an increase in fuel prices for large consumers (and, eventually, for smaller consumers).

The Ministry of Federal Planning authorised price hikes of between 15 and 40 percent for industry, power-plants and service stations, which have already gone into effect. Domestic prices will continue to rise gradually until reaching the level of export prices, as demanded by energy production and distribution companies.

Meanwhile, the government has not ruled out the possibility of appealing to the Supreme Court in an attempt to get it to issue a decision that would overrule the court injunctions secured by local factories to avoid gas supply cutoffs.

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