July 23, 2014
‘Oil firms are waiting for a change in 2015’
Freshman Senator Guillermo Pereyra is starting out his tenure at centre stage. The veteran Neuquén oil workers’ union representative is presiding over the Mining, Energy and Fuels Committee as it gets ready to take on the debate over Argentina’s US$5 billion compensation agreement with Spanish oil company Repsol for the 2012 expropriation of a majority stake in YPF.
The election of Pereyra, who is the Secretary-General of the oil workers’ union of Río Negro, Neuquén and La Pampa and is allied with dissident union boss Hugo Moyano and is part of the Nequen Popular Movement, is a nod to the strategic importance of Neuquén, where most of the Vaca Muerta shale formation is located. It is one of the most promising shale formations in the world but Argentina needs to attract tens of billions of dollars in foreign investment to fully develop its potential.
President Cristina Fernández de Kirchner’s government is optimistic that the Repsol compensation deal will be a positive step in that direction.
Pereyra, who welcomed the Herald in his Senate office this week to talk about the deal and the general state of the industry, is more cautious — but agrees with the general sentiment.
“This settlement evidently opens the door to new investments,” Pereyra said. “We don’t have the financial resources to exploit these reserves on our own and so we need foreign partners. This is the only way to generate that confidence.”
Still, he emphasized that the country is nowhere near being able to fulfill the president’s stated goal of selling energy abroad.
“We are still very far from being able to export energy,” Pereyra said, although he emphasized that the fact that Argentina turned into an energy importer “isn’t exclusively this government’s fault. This is a result of processes that began in 1989 and continued with the privatization of YPF in 1993 and the deregulation of the sector.”
Since then, there has been an “over-exploitation” of the resources, and reserves were not replaced. In essence, Argentina’s soil became an overmilked cow as hydrocarbons were pumped out of the soil without a parallel investment that could increase exploration and drilling, leading to a decline in production.”
Even though YPF has increased production, the sector as a whole is still showing broad declines in both oil and natural gas output.
“This means that that the other companies in the sector are not investing as much as they should be and the provinces need to apply pressure on them, making sure that they honour their investment commitments because otherwise YPF’s efforts will be useless,” Pereyra said.
Provinces, who have the obligation of overseeing the energy companies that operate on their soil, have have been “very permissive, they should be controlling the sector more, especially with regards to investments in exploration, because the companies prefer to extract and not invest” while “they wait for a change in energy policies from the next government in 2015.”
According to the agreement that Economy Minister Axel Kicillof and Repsol executives sealed on February 27 , Congress has until May 1 to ratify the agreement.
“I can’t be against this settlement because I always spoke about a confiscation of YPF and not an expropriation. Expropriations require a tribunal to set a valuation of the assets and a corresponding payment.”
Even as Pereyra anticipated a “rich debate” in the Senate, he also recognized that lawmakers would not be able to amend a single comma of the agreement.
Pereyra also said that the value placed on the company and the payment through dollar-denominated bonds that mature between 2017 and 2033 with interests rates of up to 8.75 percent, is “correct” as it is significantly less than Repsol’s own valuation of the shares at the end of 2013, estimated at approximately US$7 billion.
Although some have criticized the deal because it seems to leave aside any claims of environmental damage, Pereyra insists Repsol was not the worst offender.
“Repsol only came here to make money,” and the worst polluter was the publicly-owned YPF of earlier incarnations.
“I’m not here to defend Repsol but the biggest polluter was YPF,” he said, while also lauding the environmental policies of the new YPF leadership.
As a life-long oilman, Pereyra is not too sympathetic to environmental views in general, dismissing concern about the environmental effects of hydraulic fracturing, normally known as fracking, which is a process to reach unconventional resources that involves shooting a high-pressure mix of water, sand and chemicals to free up hydrocarbons.
“There is no reason for any contamination whatsoever of water resources” using this method, Pereyra insists.
The Road Ahead
Even as he pushes for new investment, Pereyra was one of the strongest opponents to the US$1.24 billion deal that YPF sealed with Chevron to set up a pilot shale project in Neuquén.
Pereyra continues to insist the deal with Chevron contains “secret clauses between a public and private company.” The companies have long denied the agreement includes secret clauses.
Even if the agreement that will begin to be debated in Congress today can mark the beginning of a new phase for Argentina’s largest company, the change will not be imminent.
“We still have a long way to go, we are just now beginning a path that will lead us towards energy self-sufficiency,” Pereyra said. “It’s a long road and we need to have policy stability, so that policies don’t change according to each government.”