Last August 30th, Perupetro signed a Temporary Service Agreement for the Development of Hydrocarbons in Block 192 (the “Service Agreement”) with Pacific Stratus Energy del Perú S.A. (“Pacific”), a subsidiary of Pacific Exploration & Production Corporation. The term of the Service Agreement is 24 months counted as from its date of signing.
As we explain in this article, the Service Agreement has avoided the serious consequences of not signing a license contract for the development of Block 1-AB oil fields. Block 192 consists of the Block 1-AB oil fields which were developed by Pluspetrol during fifteen years under the terms of the License Contract that it signed with Perupetro, which came to an end last August 29th. Some other areas have been added to Block 192 in order for exploration work to be carried out there, but Pacific is not expected to drill exploratory wells or carry out any type of exploration work because the term of the Service Agreement is very short and therefore does not justify it.
The Service Agreement is aimed at guaranteeing the continuation of oil production from the Block 1-AB fields while Perupetro carries out the competitive bidding process required to award a 30-year license contract for the exploitation of Block 192. Halting operations until signing a new license contract was not an option because it could have meant losing more than three hundred thousand barrels of oil a month, which was the volume that Pluspetrol used to produce every month, plus royalty and “canon” payments, jobs, and other effects derived from the exploitation of said fields.
Pacific is obliged to extract hydrocarbons from Block 192 and to engage in the economic recovery of hydrocarbon reserves in the contract area. It must also carry out a guaranteed work program, which consists of reconditioning six wells and keeping a specific number of economically producing wells which should be higher than, or at least equivalent to, Pluspetrol’s producing wells in the last twelve months. Pacific is not obliged to drill new production wells and can also halt operations in any of the wells it has received if it proves to Perupetro that their production is no longer economical.
Under the terms of the License Contract for Block 1-AB, Pluspetrol was the owner of hydrocarbons extracted from Block 1-AB and, in exchange, it had to pay Perupetro a royalty in cash. On the contrary, the Service Agreement provides that Perupetro is the owner of hydrocarbons extracted from Block 192 and must pay Pacific a given percentage of the volume of the hydrocarbons it extracts, in consideration of its services.
To determine the aforesaid percentage, Factor “R” will be used. As a matter of fact, as long as the ratio between accumulated revenue and accumulated investments, expenses and operating costs is less than 1, the percentage will be 84%; if the ratio is 1 or more, without reaching 1.5, then it will be 83%; if it is 1.5 or more, but below 2, then it will be 49%; and if it is 2 or more, then it will be 44%. From the onset of operations until January 31, 2016, Factor “R” is equal to 1, for which reason in said period the percentage payable in consideration of its services will be equivalent to 83% of the volume of fiscalized hydrocarbons extracted from the fields.
Pacific is not going to assume any environmental liability for previous operations. The competent authority has agreed to determine who is responsible for remediating environmental liabilities generated by operations carried out in Block 1-AB in the past.
According to the Service Agreement, Pacific has undertaken to make a monthly voluntary contribution equivalent to 0.75% of the value of Fiscalized production which will be invested in the implementation of development and environmental surveillance projects within the area of influence of Block 192.
Finally, it is worth commenting on the insistence of the proposed law approved by Congress last September 22nd, which authorizes Perupetro to enter into a contract for exploitation of hydrocarbons in Block 192 with Petroperú. In our opinion, this proposed law could not affect the validity of the Service Agreement, for which reason Petroperu could only start operating Block 192 in September 2017, after the Service Agreement comes to an end. As a matter of fact, the Service Agreement is actually a Stability Agreement and is protected by Article 62, which provides that stability agreements cannot be modified by means of legal rules.