Oil and gas in the capitals

	Vol. 228 No. 9
DAVID MICHAEL COHEN, PRODUCTION ENGINEERING EDITOR

Excess baggage. A smuggled suitcase stuffed with cash is pouring cold water on the romance between the leftist governments of Argentina and Venezuela.

Argentina has issued a warrant for the arrest of the Venezuelan businessman who entered the country on Aug. 4 with almost $800,000 in undeclared $50 bills in his suitcase on a plane chartered by the state-owned oil company, Energia Argentina SA, or Enarsa. The businessman, Guido Antonini Wilson, was flying with four executives of Venezuela’s Petróleos de Venezuela (PDVSA) and three Argentine public officials. After questioning, Wilson reportedly left the suitcase with customs officials and departed the country unmolested.

Statements by the government of Venezuelan President Hugo Chavez have ranged from simple denial of any connection between Wilson and PDVSA to blaming the incident on a CIA plot to damage Chavez’s credibility. Chavez has ignored Argentina’s demands for an apology, though the resignation of PDVSA official Diego Uzcategui, whose son had invited Wilson on the flight, is seen by many as a tacit mea culpa. An Argentine official connected to the case was also forced to resign.

Opposition leaders in Argentina have seized on “Valijagate,” as some commentators are starting to call the scandal surrounding the suitcase (the Spanish word for which is valija), as evidence of corruption in the government of President Nestor Kirchner, whose wife, Senator Cristina Fernández de Kirchner, is campaigning to succeed him as president in October’s election. To avoid such charges, the Kirchners may have to distance themselves from the flamboyant Venezuelan leader.

That, however, may be difficult. The Kirchner government looked awfully chummy with Chavez on Aug. 8-the same day the Argentine Senate demanded a report on the now-infamous luggage-when Chavez pledged to buy $1 billion in Argentine bonds to boost the country’s struggling economy. He also agreed to fund a $400 million natural gas plant to help meet energy needs in the country, where an unusually cold winter has contributed to a growing energy crisis.

Less than a week later, President Kirchner joined Chavez in Bolivia to announce a series of petroleum deals to strengthen ties among the three nations. Kirchner pledged $450 million in soft loans to Bolivian President Evo Morales for a new plant to process natural gas for export to Argentina, while Chavez announced that he will finance a new, $600 million Venezuelan-Bolivian exploration firm.

Kirchner has moved toward the Venezuelan economic model since he became president in May 2003. At the time, Argentina was reeling from the economic collapse of 2001, which had left the country deep in debt with over half of its citizens living in poverty.

In the 1990s, Argentina had dropped trade restrictions, deregulated labor and privatized state-owned companies, including state oil company Yacimientos Petrolíferos Fiscales (YPF) in 1991; the 5% retained by the state was sold to Spanish corporation Repsol in 1999. The national currency was also fixed to the US dollar in 1991. The turn of the century saw large-scale deindustrialization and unemployment in Argentina. Massive government spending and rampant corruption contributed to a huge flight of investment in 2001, which prompted the state to freeze bank accounts.

Kirchner came to power on a platform of economic recovery and ending corruption. He rescheduled the country’s debt and encouraged import substitution, while improving tax collection and directing large amounts of money to social welfare. A devalued peso helped make Argentine exports competitive, and the country developed a large trade surplus. In 2004, Kirchner returned the Argentine government to the oil and gas business with the founding of Enarsa.

By all accounts, the Kirchner government has shepherded a remarkable economic recovery. Since 2003, the economy has grown at least 8.5% a year, and unemployment has fallen below 9% from a high of 25% during the crisis.

Recently, however, a lack of investment in domestic drilling, high residential gas demand and an unseasonably cold winter have conspired to create an energy crunch that threatens Argentina’s rebound. Electricity costs for residential consumers have remained fixed at the lowest rate in the world since the government froze tariffs during the economic crisis, even as the economy has expanded, and the lack of a timeline for future tariff hikes has discouraged investment. To keep residential demand satisfied, the government recently cut 1,200 MW per day from industry, which could severely curtail economic growth. Critics charge that President Kirchner refuses to raise residential rates because energy-hungry Buenos Aires accounts for more than half the votes his wife will need to take the presidency.

In addition, Argentina has diverted gas intended for export to Chile for domestic use, forcing Chilean electric plants to burn much more expensive diesel and straining relations between the two countries. Argentina has also bought expensive natural gas from Bolivia and electricity from Brazil. And, of course, Kirchner has leaned ever more heavily on his friend Hugo Chavez.

Now that relationship may turn into a liability for the Kirchners, who have faced a series of recent corruption allegations. Revelations came earlier this year of bribery and corruption surrounding a project to expand a pipeline bringing gas from Bolivia. Swedish construction firm Skanska, one of the companies hired to build the expansion, fired seven of its managers in Argentina for “improper payments” in connection with the project; all seven were arrested in May. And in June, fire inspectors found $64,000 in local currency and dollars in the offices of Economy Minister Felisa Miceli, which opposition leaders have suggested was part of a government slush fund. Meanwhile, a judicial investigation has been launched into suspicions that the Kirchner administration manipulated inflation data to hide rising consumer prices.

Now Senator Kirchner has to contend with allegations of Venezuelan money influencing national politics, at a time when her husband’s 2003 promises to end corruption are ringing hollow with voters. And the dependence on Venezuela that President Kirchner fostered means that Chavez can deny involvement while the senator will have to take the political hit. If the Kirchners can weather all the dirty laundry and fire hazards, they might just be able to stay in the Casa Rosada. If voters send them packing, then hopefully their bags will be packed only with clothes.