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From an Argentine point of view, Brazilian financing of this project would be a relief due to financial difficulties, and could even bring more dollars to Argentina
On his first international trip since taking office, President Luiz Inácio Lula da Silva suggested, in Buenos Aires, that the National Bank for Economic and Social Development (BNDES) finance the second section of the Néstor Kirchner gas pipeline, in Argentina. A Work would transport shale gas from the Vaca Muerta reserves for the metropolitan area of Buenos Aires and for the south of Brazil.
According to experts' estimates, Vaca Muerta has the second largest deposit of shale gas in the world and the fourth largest of unconventional oil. Despite this potential, there is a notable infrastructure deficit in Argentina to distribute these resources, which limits the country's ability to become an export power at the regional level. It is in this sense that the exploration of Vaca Muerta is one of the most ambitious infrastructure projects in Argentina.
Financial problems and limited investment in Argentina
From the Argentine point of view, the financing of this section of the work by the Brazilian public bank would be a relief due to the serious financial difficulties that have limited public investment in infrastructure. Among the economic challenges faced by the neighbor are annual inflation and high interest rates, low foreign currency reserves and the restructuring of public debt with the International Monetary Fund (IMF).
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Since Alberto Fernández took office in 2020, the government has been betting on unorthodox regulatory measures to control macroeconomic imbalances. Key examples that have a high impact for investors are capital controls to limit access to the dollar and restrictions on imports and export taxes (retentions) to curb capital flight. Currency distortions, due to multiple exchange rates, add an additional challenge to Argentina's economic scenario.
Such circumstances do not allow the Fernández government to be able to explore, market and export natural gas from Vaca Muerta. These exports would bring in the dollars that the Argentine economy so craves. Help from Brazil, which was historically Argentina's main trading partner (lost its position in 2019 to China), would be of great value, including to alleviate the declining popularity of the left-wing governing coalition Front of All.
Brazilian companies may participate in the bidding process for the Vaca Muerta gas pipeline in Argentina
On our side of the border, Lula's speech brought up the debate on the role of state-owned banks during his third term. This is because in his first two governments the PT was accused of use public resources from the BNDES for the benefit of political allies abroad, in addition to opening space for corruption involving Brazilian contractors. In an attempt to differentiate financing for the Vaca Muerta gas pipeline from past projects abroad, the Minister of Finance, Fernando Haddad, proposed a system of guarantees so that Argentine natural gas itself would be the guarantee of the investment to mitigate insolvency risks. In addition, Haddad also indicated that Brazilian companies would participate in the bidding processes for the construction of the gas pipeline. This is to say that Brazil would benefit directly from this project, according to the minister, as it would facilitate the importation of a commodity considered strategic.
The proposal can be understood as an effort by the Lula government to reposition Brazil as a regional leader, mimicking the foreign policy strategy adopted by the president in his previous terms. The president's idea is that regional integration benefits Brazil at a global level since, as a block, Brazil can increase its projection of political and economic power, which it cannot do alone. This is the same line of reasoning behind the creation of the Mercosur economic bloc, in the 1990s, and the arrangement between emerging BRICS powers, in the early 2000s.
Another possible interpretation is that initiatives such as the gas pipeline, the guarantee system and even the common vehicle currency between Brazil and Argentina would be ways for Brazil to improve the commercial relationship with Argentina, in order to recover the market share lost to China. There is, therefore, a notable geopolitical calculation behind the possible financing of the gas pipeline: Lula's Brazil intends to position itself as an autonomous pole of power in the context of disputes between the United States and China.
It may be unlikely that financing of the Argentine gas pipeline by BNDES will continue for years to come
Despite incentives for both countries, funding is unlikely to move forward in the coming years. Firstly, the continuity of the project would be conditioned to a deep political and economic cooperation between the countries, which could be hampered by future changes of government in each country. Second, it is possible that the financing discussion will encounter significant resistance in Brazil.
In addition to financial viability, the socio-environmental impacts associated with the exploration and use of shale gas would represent possible points of friction between different government departments. The Minister of the Environment, Marina Silva, has already stated that the extraction of this type of gas is harmful to the environment and that the risks associated with this process must be duly considered.
Author Article By: Marina Pera is a political risk analyst for the Southern Cone at the consultancy Control Risks.
