In July 2004, Bolivia
underwent a binding referendum by which a majority of the Bolivian population
approved the nationalization of hydrocarbons. Consequently and as a direct result of the referendum, the
new Law of Hydrocarbons No. 3058 of May 17, 2005, was passed. Although this law sets the foundation
for the process of nationalization of hydrocarbons, on May 1st 2006, the
government passed the "Nationalization" Supreme Decree No. 28701,
through which the State effectively took control of the whole commercial and
production chain. In November
2006, the government of Bolivia through its State oil and gas company,
YPFB, managed to successfully sign
new Operational Agreements with all private oil and gas producers.
A. Bolivian
Constitution
The Bolivian
Constitution states that all hydrocarbons including natural gas located in
Bolivian territory are of the original domain of the Bolivian State. The rights to explore and exploit such
resources must be granted by the Bolivian State. YPFB, acts on
behalf of the Bolivian State, the Ministry of Hydrocarbons represents the
government and the Superintendency of Hydrocarbons serves as the regulatory
authority for the distribution of oil and gas.
B. Hydrocarbons
Law
Although the Hydrocarbons Law No. 3058
of May 17, 2005 has been duly enacted and is in effect, some of the
corresponding regulations are still being drafted. The main aspects of this law are as follows:
Article 5 (paragraph
one) provides the basic new mandate that all hydrocarbons recovered at wellhead
are for the benefit of the Bolivian State. Article 5 (paragraph two) of the Hydrocarbons Law provides
that parties to joint venture agreements entered into with YPFB under the
former Law of Hydrocarbons No. 1689, must convert their agreements into new
forms of agreements within 180 days of enactment of the new law. Although the term was not complied
with, as of now all private producers have entered into new Operational
Agreements with YPFB.
Article 16 of the
Hydrocarbons Law strengthens the claim of the Bolivian State to original
ownership of the hydrocarbons by providing that “hydrocarbon deposits in
whatever state or form they may lie, are of the direct, perpetual, and
inalienable domain of the State.”
No contract may confer ownership of the hydrocarbon deposits, over
hydrocarbons at wellhead, or over hydrocarbons at the point of
measurement. Furthermore, under
Article 16, any party to a Shared Production Agreement, Operational Agreement,
or Association Agreement must deliver to the State all of the hydrocarbons
produced within the established contractual term.
Articles 53 through 57
of the Hydrocarbons Law creates and regulates the Direct Tax on Hydrocarbons
(“DTH”) applicable on the production of hydrocarbons at wellhead, measured at
the point of measurement. The DTH rate is 32% of the total production of
hydrocarbons measured to the point of measurement, it applies in a
non-progressive and direct manner allowing no deductions or credit offsets.
C. “Nationalization” Supreme Decree No. 28701 of May 1st,
2006
The “Nationalization”
Supreme Decree No. 28701 of May 1st, 2006, establishes that YPFB must
commercialize all of the oil and natural gas by defining prices, volumes and
conditions for commercialization and also places this entity in control of the
whole production chain.
The decree creates a
new tax/royalty or “participation” for YPFB by which private producers
operating in the mega-fields of San Antonio and San Alberto must relinquish a
further 32% of production at wellhead.
Only three private producers have been directly affected by this measure
that increases participation for the State (YPFB) from 50% to 82%.
Although the rest of
the private producers that operate in fields producing less that 100 million
cubic feet per day will continue to contribute 50% (18% royalty and 32% DTH) of production and not 82% as
described above, the decree leaves the possibility of this percentage
increasing if through audits the increase can be duly justified.
This norm also imposes
a mandatory sale of shares necessary for YPFB to control 51% in the companies
Andina S.A. (Repsol YPF), Chaco S.A. (BP), Transredes S.A. (Shell), Petrobras
Bolivia Refinación S.A. and C.L.H.B. S.A.
D. New
Tax and Royalty Structure
As a result of the
above-mentioned Hydrocarbons Law and “nationalization” Supreme Decree, the
Bolivian tax structure for hydrocarbons has changed dramatically. The taxes are now as follows: royalties
(18%), DTH (32%), income tax (25%) and withholding tax (12.5%). Also, a further 32% royalty is applied
to producers operating in the two major gas fields.
E. Operational
Agreements
Supreme Decree 28701,
of May 01 2006, was considered as the first step of the so-called “nationalization
process” through which Bolivia expects to control all the commercial and
productive chain, in an attempt to industrialize its hydrocarbon resources in
the near future. According to this decree, private oil and gas producers had a
180-day term to enter into new forms of agreements with YPFB. This term expired on October 28, but on
November 1st, 2006, the government managed to execute 44 Operating
Contracts with all private oil and gas companies currently operating in
Bolivia. Not one of these
companies filed an arbitration claim nor has suspended operations.
The following summary
describes the most important clauses of the Operational Agreements, which are
now in the hands of Congress for analysis, discussion and approval.
·
Private producers must
cover all costs, personnel, technology, facilities, materials and capital
necessary for the execution of oil operations. YPFB shall not assume any
responsibility regarding operations or their results. Producers shall be
entitled to retribution from YPFB in exchange for their activities (the
“Retribution”).
·
Property over
hydrocarbons in whatever form they may exist, will in no way be conferred to
Producers and will remain throughout property of YPFB.
·
The term of the contract
is for a period of 30 years, as from the effective date, but shall come into
effect, after its approval by Congress.
·
The volume and amount of
net hydrocarbons must be measured and determined constantly at the monitoring
points. YPFB must also verify all volumes and quality of the net hydrocarbons
at the monitoring point for a further certification to the Ministry of
Hydrocarbons. Such measurements shall be the basis for the payment of (1)
departmental royalties (2) national compensatory royalties (3) participation
for the Treasury, and (4) the
Direct Tax on Hydrocarbons.
·
Retribution to the
Producer shall consist of (1) sums for the reimbursement of costs and expenses
(2) direct profit; both previously approved by YPFB. Retribution shall be paid
in US Dollars. If a conflict between the parties arises with regards to the
amount of Retribution, it shall be first resolved through conciliation and if
this fails, parties may apply the arbitration clause.
·
When hiring its own
personnel or subcontractors, the company must give preference to qualified
national citizens, with experience in the required position. Foreign personnel
must not surpass 15% of the company payroll. The holder must include national
personnel at all hierarchical levels, whether technical or managerial.
Subcontractors must be chosen via public tenders.
·
Upon approval by
Congress of the agreements and within 20 days, Producers must present the Compliance Guarantee to
YPFB. YPFB shall have the right to
terminate the agreement if the company does not submit the banking guarantees
established in the contract within five days of the commencement of each phase
of the initial exploration period.
YPFB may also terminate the contract if the holder refuses to produce
the necessary volumes for supplying of the internal market.
·
The agreement shall be
subject to Bolivian law. The agreements must be executed and interpreted in
Spanish. Any translation shall be made solely for convenience purposes and
shall not be considered for purposes of interpretation.
·
Conflicts arising between
the producer and YPFB must first be brought before the Control and Monitoring
Unit. If the disagreement is not
solved in that instance, the matter shall be filed to the executives of the
involved parties, who shall have a maximum term of ninety days to take a
decision. If the situation
persists, parties may resort to an arbitration process to be held in the city
of La Paz, Bolivia, in accordance with ICC Rules. An arbitration panel of three
arbitrators shall be chosen and the process shall be conducted in Spanish.
·
Parties renounce to
recurring to any type of diplomatic means for conflict resolution.
G. Economic Prospects for 2007 as a result
of the Nationalization
Before this process
was set about and prior to the new Hydrocarbons Law, the Bolivian State
received around $us. 250 million Dollars per year as a result of taxes and
royalties. The passing of the new
law doubled this intake and with the passing of the nationalization decree,
Bolivia will receive $us. 1.3 billion Dollars per year.
It is expected that
2007 will commence the era of Bolivia’s industrialization of its hydrocarbon
resources. Projects such as gas to liquids, LNG, petrochemicals and new
investments for exploration and production for new markets will approximately
bring upwards of $us. 4 billion Dollars per year. Also, rising prices and expectations as to their future
stability as well as new gas supply agreements with neighboring countries, such
as the contract recently signed with Argentina to export up to 27 million cubic
feet per day till 2025, will surely increase this annual figure.
Diego Rojas M.
C.R.&F. ROJAS – ABOGADOS
Santa Cruz, Bolivia
