The Government announced that it had reached an agreement between oil companies, related workers’ unions and the Neuquén provincial government today that outlines updated conditions for development projects on energy fields located in the province’s Vaca Muerta region. In a speech in the Casa Rosada, President Mauricio Macri said that as a result of these new, more favorable conditions, there is already a commitment to invest US $5 billion and assured the public that the agreement will usher in a “real revolution in job creation.”
“A new future for the country’s energy sector is here. Without energy we can’t grow as a country, there can’t be any development and we won’t be able to reduce poverty,” Macri said.
The Vaca Muerta region holds the third largest mixed oil, shale oil and natural gas fields in the world, and could satisfy the Argentine population’s energy needs for 400 years. However, the country currently has to import a third of the gas it uses in winter, according to Clarín.
One of the main reasons why these energy reserves have never been exploited is that companies considered the upfront costs to be too high: the current cost to develop an oil well in Argentina is US $14 million, when it is approximately half in the United States, for example.
In an attempt to attract potential investors, union leaders gave the Government permission to guarantee a reduction in labor costs. Macri’s administration also announced that taxes on oil exports will be removed. “We have provided all the conditions and now companies need to move forward with their investments,” Macri told oil business leaders present at the speech.
At the other side of the negotiation table, state-run oil company YPF authorities assured unions — whose support was crucial in reaching the agreement that there are two oil giants ready to pour billions into the region. And billions more dollars means more jobs for the sector. “Thousands and thousands of families will move to the area,” Macri assured in a passage of his speech.
“With cheap energy there will be more factories and more jobs, and more Argentines will get out of poverty. This type of agreement is an enormous bet. It’s what we need in all [economic] sectors in the country,” he added.
So far, the only concrete investment in the region comes from the agreement the former Kirchner administration reached with US-based energy company Chevron. However, the agreement signed in 2013, was mired in controversy from the the very beginning.
YPF portrayed the move as a victory for the company that the State had partially nationalized the previous year, but there was soon talk of secret clauses, particularly fomented by Socialist Party (PS) Senator Rubén Giustiniani.
After exhausting every legal trick in the book, the Government was finally forced by a Federal Court to hand over the documents regarding the agreement. Among the most brow-raising clauses, the contract permitted Chevron to not send the investment needed to develop infrastructure on a shale oil field in Loma Campana, Neuquén, directly from its headquarters to Argentina.
Instead, it was allowed to design a web of offshore companies and accounts to avoid the possibility that any kind of developments on the legal or political front would adversely affect their investment.
In addition, YPF made a guarantee to Chevron that there would be no new taxes on their activity and said that if they happened to be imposed, the Argentine firm would pay them. Plus, the contract clearly stated any legal disputes could be settled outside the country and Chevron had the right to rescind the contract at any time.
Taking this precedent into account, it’s likely all future agreements will be thoroughly scrutinized by the media and the parties involved who are concerned about potential concessions that could prove harmful to the country’s interests down the road.