Argentina's President Is Going to War With Its Oil Provinces

What happens when Argentina’s oil provinces cut off supplies amid a head-to-head battle with the country’s new libertarian president, Javier Milei, who has approached his mandate with a guns-blazing attitude and little political support to back it up?

Milei is playing fast and loose with Argentine provinces that have grown accustomed to being treated with more deference and respect and now feel like they are being extorted, and the blowback could be phenomenal, with no sign that Milei is entertaining any notions of backing down. He is on the warpath. Just this week he fired 24,000 government workers in a brazen move to trim an overextended administration. 

He wants to empower the Federal government at the expense of provinces that covet their own natural resources on a provincial, not federal, level. Milei is attempting to squeeze the provinces in order to deal with inflation, the fiscal deficit, and dwindling reserves. The original fight here is with the Patagonia region over tax disbursements. 

They have vowed to fight to the last for full control over their natural resources; but so has Milei. 

The two-way extortion dictates how Milei’s administration will survive the coming months and the first half of his first term as president. 

In February, the Argentine Ministry withheld some $16 million from one province–Chubut, one of the Patagonian provinces that is the second-largest for oil and the third-largest for natural gas in the country. The funds were withheld for debt owed to the government. Chubut’s response, supported by the governors of some other southern natural resource provinces who see the writing on the wall here, is to threaten to withhold oil and gas supply by way of extortive retribution. 

Argentina’s most promising hydrocarbon play right now is Vaca Muerta, which is also in the Patagonia region, in the Neuquen province. One of the biggest fossil gas deposits in the world (think: fracking), Milei also sees it as the country’s treasure trove that could not only turn things around but could turn Argentina into a regional gas hub, replacing Bolivia. 

Milei is betting a lot on this, including a new pipeline to transport Vaca Muerta gas 

Talks are already underway between Argentina and Brazil with regard to Argentina’s Northern Gas Pipeline, which currently pipes dwindling Bolivian gas to the north of Argentina (heading southward from Bolivia). The plan is to turn that into a reverse-flow pipeline that would bring Vaca Muerta gas north. With Bolivia’s gas failing amid mismanagement and underinvestment, Brazil is keen for this new regional supply that would help it avoid expensive LNG imports.

This is Milei’s leverage over the provinces, and his diplomatic capital with Brazil, too. 

But what about the Argentine governors? Milei is taking on some powerhouses that together account for 98% of the country’s gas production and 87% of the country’s oil production, not to mention a huge share in clean energy output. 

Cutting off oil and gas supplies would create a massive amount of chaos that would blow back on the provinces themselves, and Milei is clearly hedging his bets that they won’t take this drastic step. The president wants the governors to sign off on his reforms, and for the time being, he is fully committed to this and calling their bluff. But these governors hold much sway in political corridors (beyond cutting off oil and gas), and Milei has few strong relations in the government, particularly in the Senate, where he is in the minority. Normally, in Argentina, the governor’s support in the Senate would have to be bought, but Milei is not only refusing to play this game, he is actually doing the opposite - withholding money and attempting to push reforms that benefit the state, not the provinces. 

This battle is only beginning, and everything will depend on whether MIlei still thinks he is winning without playing the game, but cutting off oil and gas supplies would be a losing situation for both the provinces and the Milei.