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By Luc Cohen
BUENOS AIRES, July 1 (Reuters) - Argentina will allow fuelretailers to freely set pump prices starting in August,according to an Energy Ministry official familiar with the plan,a move that could encourage badly needed investment in thenation's oil patch but risks worsening sky-high inflation andangering consumers.
Separately, the ministry is looking to set up an auctionprocess for the natural-gas market that it hopes will lowerprices, according to the official, who was not authorized tospeak publicly.
The actions signal that President Mauricio Macri is movingahead with free-market reforms to attract private investment todevelop the nation's abundant shale oil reserves, even as risingglobal oil prices and a precipitous weakening of the nation'scurrency have led to pressure for more interventionistgovernment policies.
The moves will also bring relief to the oil sector. Pricecontrols have squeezed refiners' margins, prompting one refineryto suspend operations.
Macri's pro-business government freed fuel prices last year,part of its efforts to unwind state controls on Argentina'seconomy. But his administration reversed course in May due to arapid decline in the peso. The sudden depreciationrattled markets and prompted Argentina to turn to theInternational Monetary Fund (IMF) for emergency financing.
In May, the government reached a deal for a two-month freezeon pump prices with the three largest oil companies operating inArgentina: state-owned YPF, Shell, and BP'sPan American Energy. It later set the price of domesticcrude at $68, about $10 below the global Brent crude price, tomitigate the impact of freezing fuel prices on refiners'margins.
By freeing pump prices, the government is betting that gasstations will limit price hikes to avoid losing customers, theofficial said, and that by freeing crude prices it wouldencourage more investment in domestic drilling, part of along-term strategy to wean Argentina from petroleum imports.
"Price controls do not help with anything," the officialsaid.
The government and the oil companies agreed to loosen thefreeze June 1, allowing for hikes of 5 percent in June and 3percent in July. Macri’s administration had kept the industryguessing as to what it might do in August.
Th earlier increases were unsatisfactory to oil industryplayers, three of whom complained privately to Reuters that themodest bumps did not come close to covering their increasedcosts.
Last month, global trader Trafigura announced it wassuspending activities at its 30,500 barrel-per-day refinery inthe port city of Bahia Blanca due to the "mismatch between fuelprices and production and import costs."
An oil industry executive who spoke with Reuters recentlyexpressed frustration with the bind.
"The adjustment that needs to be done is not 3 percent, itis 45 percent," said the person, who requested anonymity tospeak freely.
VACA MUERTA RAMP-UP
An end to retail price caps would likely infuriate Argentineconsumers, who are already incensed at the government for thedrop in the peso and inflation that is running at a 26.3 percentannual clip.
But Macri's government has prioritized reviving the energysector to shake Argentina's dependence on imported oil and gas,and to put an end to market-distorting subsidies.
Argentina possesses the world's second-largest reserves ofshale natural gas and ranks No. 4 in reserves of shale oil,mostly in the Vaca Muerta fields in Patagonia. But it facesstiff competition to attract the billions in private investmentneeded to develop these resources. Oil production is languishingat multi-decade lows.
The picture is brighter with natural gas. Rising output inVaca Muerta helped boost the country's production by 3.4 percentin the first quarter of 2018 compared with the same period lastyear, according to government data.
"We are beginning to have an abundance of gas in Argentina,"the Energy Ministry official said.
As a result, the ministry will create an auction process forwholesale customers to bid on the open market for their naturalgas supplies during the low-demand summer months, the officialsaid. The plan is to phase out the current fixed-contract systemin a move the government hopes will lower prices.
The auctions could start in September or October, and couldaccount for as much as 70 percent of wholesale supply by Marchor April of 2019, the official said.
Argentina is also expected to begin gas exports to Chile inthe fourth quarter of this year, another result of rising VacaMuerta output.
Argentina will still need to import liquefied natural gas(LNG) to meet demand in winter months.
(Reporting by Luc Cohen; Additional reporting by JulianaCastilla; Editing by Marla Dickerson)
