Oil and Gas investment in Uruguay: Great perspectives for Ronda 3 – 2018
After two successful offshore oil & gas rounds executed in the last years, in late 2017 Uruguay launched Ronda 3 (Round 3 or Third Round) offshore, which includes 17 areas or blocks in three different basins. This ongoing process is being promoted by the Uruguayan government around the world, in order to attract more offers and get the best possible result for the country.
From an external perspective, Uruguay is in position to have another success with the Ronda 3 process and cement its status as oil & gas country in a region where that term has been ownership of other nations. There are several elements that need to be aligned to generate comfort to investors and, at the same time, be able to extract the most positive economic outcome for the treasury and citizens, and Uruguay gathers most of them:
1. Rule of law, institutions and ease to do business
Beyond technical matters, about which I will not write since that is not my area of expertise, oil & gas investors look for two main indicators: an attractive economic reward for the risk taken and a sound legal framework. Let’s start from the second, legal system.
According to the Rule of Law Index 2017-2018, prepared by the World Justice Project, Uruguay is located in position 22 out of 113 countries analyzed. This outstanding position is highlighted by the fact that Uruguay is the country with best ranking in the region (first out of 30 countries). The country has good rates in separation of power, protection of fundamental rights, enforcement, absence of corruption or civil conflict, among others.
This ranking is especially important in Latin America, a region that has been prone to have a flexible approach towards the law and its application. Uruguay ranking is similar to the one received by the United States and better than several OECD countries. Its economic freedom is also remarkably good compared to the region.
In the oil & gas sector, even though legislation is not completely updated, the rules are clear and stable enough for the investors to trust, and that has been proven in the past two rounds. Also, the taxation regime is quite clear, with a corporate income tax rate of 25%, standard in the region. In the last years, Uruguay has signed double taxation agreements with more than 20 countries, which eases the transactions with companies incorporated in such jurisdictions.
2. Organization and transparency of the process
Following excellent examples in the region (Colombia, México) Uruguay has designed and already applied a clear process for contractors’ selection, with the following schedule:
This is a two-step process, where companies have to be qualified from three perspectives (legal, economic and technical). The legal requirements are the same for all bidders, but sensibly, the economic requirements are divided depending on the challenges that the contractor wants to bid for (exploration/production) and the technical requirements are divided considering the skills and experience required for different conditions (shallow and deep water). The requirements established are similar with others used in the region and are focusing on attracting experienced and reputable corporations, without excluding non-mayors in the process.
With the qualification of the oil companies, bids will be received until April 26th, 2018. The documents clearly establish the formulas that will be the base for the proposals evaluation and very little room for discretion is allowed. The participation of Uruguay in the profits of the project is a definitive factor in the decision.
3. Contract conditions
The bidding documents include the model of contract that will be used with the different contractors. I will briefly analyze the most important clauses:
a. Compensation (Clause 4 and 17): This is a traditional production sharing agreement (PSA), in which the government and the contractor share the profit oil after paying expenses and investment with the cost oil. Payments will be made in oil or gas, and the contractor can freely export that share.
b. Obligations (Clause 6): Among the most important are:
Carry out the operations accordingly to the applicable international technical and environmental standards.
Keep accounting records and allow its inspection by the government.
Avoid in the possible extent, disruption of maritime activities.
Deliver all technical data collected as result of the execution of the contract.
c. Stabilization (Clause 27.5): The contract partially includes this concept, related to creation of new taxes or levies, or modification of the Corporate Income Tax. If such decision occurs, the contractor has the right to request that such additional costs are by the cost oil.
d. Dispute resolution (Clause 30): Disputes are classified in two categories: technical/economic and legal. For the first kind, there might be direct negotiation, decision by advisors (binding or not) or arbitration (to happen in Montevideo, under the ICC Rules). All other (legal and contractual) conflicts will be solved by Uruguayan Courts.
All in all, economic terms seem reasonable, and the legal framework meets the international standards of the industry. Thus, if the technical characteristics are attractive, considering Uruguay for investment in oil and gas projects makes sense in a comprehensive Latin American strategy.
Leonardo Sempértegui (InE Partners, Inc. and Sempértegui Ontaneda Abogados) is an international energy and extractive industries consultant, resident in Washington DC., advising corporations and investors interested in projects in Latin America in his areas of expertise. Please contact him at Lsempertegui@inepartners.com, check his LinkedIn profile or read his last blog posts here.