As a result of the drop in international oil prices which has taken place in the last two years, the oil sector is now in a very difficult situation. Investment in exploration, oil production, and proven oil reserves have declined significantly due to this crisis and, as a result, the amount collected in royalties by Perupetro S.A. and the canon funds distributed to regions have dropped substantially. Many oil contractors, including their vendors and subcontractors, have been severely affected and a large number of workers have lost their jobs.
For this reason, reducing the royalty paid by oil contractors which are now facing a serious crisis should be the first measure to be considered. As a matter of fact, the royalty should be reduced to the largest extent possible in order for these companies to be able to increase production levels, reactivate wells, carry out work, and make other investments required for such purpose.
Modernizing the oil legislation, strengthening Perupetro S.A., improving the terms and conditions of contracts for the exploration and exploitation of hydrocarbons, offering a more competitive royalty, extending the term of contracts, and expediting the approval of environmental impact assessments are some other measures which are also required to attract investment and thus guarantee our future energy security.
However, new investments will only bear fruit in the medium and long term. In the best-case scenario, we will need more than five years to complete the whole cycle, from procurement to exploration, discovery and development of new fields, and commencement of commercial operations.
For this reason, it is indispensable, and this decision cannot be postponed any longer, for oil contractors affected by the current crisis to continue operating and stop reducing their production, shutting down wells or postponing work in their wells just because their costs are higher than the income they may obtain under the current context of low oil prices. Reducing the royalty can be the only option currently available to contractors.
Concerning Blocks 8, 67, and 192, located in the Northern Jungle, the royalty should also be revised because these blocks are no longer producing as the Nor-Peruano Pipeline is out of service and they are facing some other events of force majeure. Said contractors were already affected by the drop in international oil prices and, as a result, will continue being affected after force majeure is lifted.
The same thing should be done with contracts which are facing an event of force majeure and pay high royalty percentages. Any effort to overcome the current situation will be insufficient if, as a result of low oil prices, contractors are obliged to relinquish their blocks because it is economically impractical to meet their commitments.
The royalty is the consideration paid by contractors to Perupetro S.A. for being the owners of the hydrocarbons they produce from the blocks awarded to them under
a contract. The royalty is a percentage of the value of regulated production, which is agreed upon with Perupetro S.A., whether by holding direct talks or through a competitive bidding process, at the time of signing said contracts, and it can only be reduced through an amendment to the relevant contract.
It is worth bearing in mind the fact that, as explained by experts, the contractor is not obliged to pay a royalty the amount of which should be enough to cover the
canon payment to be distributed among regions. Article 77 of the Constitution provides that the “canon” is the percentage that regions are entitled to receive from the total income and revenues obtained by the State from the exploitation of natural resources in each region.
It means that the more activities are carried out, the more income and revenues the State will receive. For instance, from taxes paid by vendors and subcontractors, and also by workers, which must be distributed in the form of canon. From the moment exploration begins in any given block, until a barrel of oil is extracted, refined and sold as gasoline in a service station, income and revenues are generated in favor of the State, and these funds must be earmarked for the payment of canon.
Therefore, the State should focus on stepping up contractor activities, even if it implies reducing royalty percentages. To achieve it, Perupetro S.A. should be authorized to negotiate a royalty reduction and an expeditious mechanism should
be established in order for contracts to be modified within the shortest possible term.