In early July 2021, the Argentine Ministry of the Environment convened a public hearing that showed a majority rejection of offshore hydrocarbon extraction. Minister Juan Cabandie, who convened and supported the initiative, later authorized the energy company Equinor to carry out the environmental assessment tasks. And, at the end of December, the government granted the Environmental Impact Statement for the seismic acquisition project in the CAN 100, CAN 108 and CAN 114 offshore exploration areas, located in the northern Basin of Argentina, presented by Equinor in partnership with YPF and shell.
The official discourse tries to highlight the beneficial effects that this type of activity will generate, particularly in terms of new direct and indirect jobs. Some business sectors have also been excited about new business opportunities, while the provincial government is thinking about tax revenues.
Several actors, however, highlight the environmental risks involved in this type of exploration. A group of researchers from the Center for Technologies and Environmental Energy of the Faculty of Engineering of the Universidad Nacional del Centro, has demonstrated that there is a 99% risk of spills on the coasts of Buenos Aires if seismic exploration advances in search of oil and gas reserves.
On the other hand, the noise emissions produced by the seismic analysis at the time of prospecting seriously harm the marine ecosystem, as denounced by Greenpeace Argentina.
In addition to all the problems generated by exploitation, the central problem is global warming. Fossil fuels release carbon dioxide into the atmosphere, compounding the problem and the scientific community has shown how close we are to crossing certain “tipping points”, which would have terrible effects on life on Earth.
Unlike the risk that surrounds an archetypal environmental problem, climate change combines uncertainty and fragility. The first involves assuming a certain risk, which can be quantified. But the second leads us to the unknown, which prevents its quantification.
The (i)logic of offshore
Regardless of the environment and climate, the government should consider transition risk or financial risk. This is associated with an unanticipated or premature loss in the value of assets used by the sector (including infrastructure), this is the problem of stranded assets. This revaluation loss is due to different factors, whether climatic or environmental, but also due to a change of opinion among investors. Pressured by activists, but also by shareholders, the markets are already beginning to discount the inevitability of change: the decline of oil has a near horizon. The sooner the powers act to mitigate the environmental problem, the greater the probability that in Latin America we will be left with “assets stranded”. If the targets set in Paris are met, some $304 billion in stranded assets are projected by 2035, with the oil industry reporting around $180 billion.
And then there are the assets currently in operation, which would be able to amortize part of the originally sunk capital costs.
According to a report by the Inter-American Development Bank (IDB), by 2035 production in the region should be below 4 million barrels a day, a production value 60% lower than before the pandemic. Obviously, this will have strong fiscal repercussions and will affect the trade balance of exporting countries.
If the resolution of such a dilemma were local, there would be drawbacks, although they could be resolved. The problem is that the problem is global, as the decisions of some to mitigate fiscal risk could increase the financial risk of others. This is what those who cling to oil exploration in Latin America and specifically to offshore development in the Argentine sea should see. Investments made in the country may be rendered obsolete by a decision adopted in other latitudes, such as the imposition of a carbon tax on imports.
These aspects remain unconsidered by many development economists who see offshore exploration as a way to reduce the need for foreign exchange that the country requires. Others speak of “energy sovereignty”, highlighting the greater autonomy that the aforementioned project allows. However, both arguments are wrong.
On the revenue side, this interpretation does not take into account the probability of an abrupt drop in demand, as a result of public policies, technological changes or new environmental regulations, all of which lead us to the problem of stranded assets. Such an approach to the problem is comparable to that of those who defend the theory of comparative advantages from a static perspective. If you want to foresee this possible transition, you have to take into account the dynamic nature of the problem and that oil exploration may end up demanding more foreign exchange than it promises to generate.
And on the “geopolitics” side, those who govern must see the transition as an alternative for transformation, a moment that allows diversifying the economy and thinking about which activities bring dynamic advantages and allow the consolidation of a sustainable model.
The world is changing from a model of energy based on molecules to one based on electrons, where tomorrow’s winners will be those who invest in new technologies today. The “race for the energy of the future” has already begun. In the US, in Europe or Asia, the State has been playing a decisive role: nobody wants to be left out.
Therefore, no one would rationally sink another dollar in this industry. This forces us to rethink investor interest from a political economy perspective where interests are behind the decisions of agents, markets are far from perfect and politicians are permeable to the oil lobby.
But in Latin America, with few exceptions, we look to the past. Continuing to bet on the development of value chains in industries that are destined to disappear is part of that bet. Geopolitically it’s a myopic look
