March 26, 2018 / 7:23 PM / in 3 months

Troubled labor pact raises obstacle to Argentina shale development

BUENOS AIRES (Reuters) - A year-old labor agreement between companies, workers and the government of Argentina meant to reduce production costs and lure investors to the sprawling Vaca Muerta shale formation is facing resistance, industry sources told Reuters.

Vaca Muerta has attracted investment from Chevron Corp and Exxon Mobil Corp. But the formation, which is about the size of Belgium, remains mostly unexplored, largely due to high production costs and a lack of labor flexibility, oil major executives have said.

The landmark January 2017 labor agreement and a subsidy deal sought to change the dynamic and jumpstart investment, promising government subsidized prices for natural gas, stable taxes and more attractive labor contracts to employers.

But it has yet to be fully implemented, and companies may have to offer pay incentives to make it work, undermining its appeal to firms eyeing Vaca Muerta, sources told Reuters.

Rising oil prices could help smooth deal-making, sources said, but for now, the labor agreement is failing to live up to expectations.

“If you don’t do anything to ensure its terms are applied then obviously the unions are going to refuse to cooperate,” an industry source said on condition of anonymity.

The source said that modifications to labor contracts had been successfully applied to unions in hydraulic fracturing, but had yet to reach other areas, like operations and maintenance.

Facing pressure from workers, some companies operating in Vaca Muerta have paid bonuses to unions in exchange for signing new, more flexible agreements, meaning “that the cost-savings of the scale initially imagined were never realized,” said Daniel Gerold, director of G&G Energy Consultants, which focuses on oil and gas sectors in Argentina and Latin America.

“Some (parts of the agreement) have been implemented, and it is a step forward, but there’s more to be done,” Gerold said.

A union representative said workers were holding up their end of the agreement, though some companies had made voluntary payments beyond those agreed upon in last year’s deal.

“If there’s a company that pays more than the agreement suggests there’s no reason to question them, that’s their prerogative,” said Guillermo Pereyra, a Senator from the Patagonian province of Neuquen and secretary general of the Oil and Gas Workers Union in producing provinces of Neuquen, Río Negro and Chubut.

“NEGOTIATE EVERY DETAIL”

Sources close to companies operating in Vaca Muerta said many firms still found themselves in continuous negotiations with unions, despite the pact.

The important thing is to “apply the agreement as it’s written, and not have to negotiate every detail. Today you still have to negotiate how the (2017 agreement) will be applied,” said an industry source on condition of anonymity.

Another industry source said the deal had faced a rocky start but its implementation had improved markedly recently.

“With rising global oil prices on the horizon and the gas subsidies (in place) we’re going to see a year of more work and more “fluid” application of the agreement, the source said of expectations that with more jobs in the sector, unions will be more willing to apply the accord.

As part of the pact, Argentina offered a subsidized price of $7.50 per million British thermal units of natural gas produced at new wells in 2018, more than double that of front-month natural gas futures NGc1 on the New York Mercantile Exchange.

The subsidy, offered by the pro-business Macri administration, was seen as a critical element in bringing firms and labor unions together to sign the 2017 agreement.

Reporting by Juliana Castilla, writing by Dave Sherwood; editing by Caroline Stauffer and Andrew Hay

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