1. Daniel Kerner Director and Practice Head, Latin America kerner@eurasiagroup.net October 2014 Argentina’s energy outlook

2. A lost decade Underinvestment in the energy sector led to a persistent decline in hydrocarbons production in spite of favorable demand conditions This has been mostly the result of prices and interventionist economic policies A government that emerged from the 2001/2 crisis sought to maximize growth and avoid making painful adjustments Contrast with market-friendly framework in the 1990s is stark 3

3. Energy problems led to growing state intervention Energy shortages became problematic in 2007 Government responded by: Subsidizing expensive alternative imports And controlled incentive programs A reflection of the government's deep mistrust of markets and private sector But led to a substantial deterioration of the fiscal and external accounts Worsening macroeconomic dynamics (and Vaca Muerta) led to nationalization of YPF and highly interventionist decree 1277 Results have been disappointing 5

4. Begrudgingly moving towards some pragmatism Failure to attract investment has led to a move towards somewhat more pragmatic policy since 2013 YPF has been driving policy and thus benefitted the most Higher gasoline prices and subsidies increased YPF’s cash flow But government has also sought better long term incentives for private firms Movement has been slow given low trust and worsening macroeconomic dynamics Problems continue (production still declining, imports still rising) Not much will likely happen before the October 2015 elections in a context of worsening political and economic dynamics 6

5. Policy will likely improve after 2015 Energy policy is likely to improve after 2015 Any new government will likely be more market friendly More importantly, improving energy policy will be essential to stabilizing macroeconomic accounts Most politicians are betting major investments will help mitigate need for broader macroeconomic adjustment Development will likely be led by YPF through partnerships with private companies Overall risks for unconventional developments are low Regional competition could be a negative factor 7

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