Latin Lawyer Online Reference Section – Oil and Gas 2009

LATINLAWYER Online reference section – Oil and Gas 2009

Questionnaire

Alberto Varillas

Published in Latin Lawyer July 2009 (www.latinlawyer.com/article.php?id=14673)

  1. What is the legislation applicable to oil and gas activities in your country? Is it federal or state legislation, or both?

Peru is a country with a unitary and civil code. Laws have a national coverage, leaving only certain specific topics to be regulated by the regional or municipal governments.

The oil and gas activities are mainly ruled by the Hydrocarbons Organic Law (Law No.26221) and other laws and regulations dealing with the promotion of the domestic and industrial use of gas, exploration and production, environmental matters, tax stability, marketing, citizens’ participation, etc. Specific laws like the Law for the Development of the Natural Gas Industry (Law No.27133) and the Law to Promote the Investment in Natural Gas Processing Plants (Law No.28176), grants some of the benefits covered by the exploration and production regulations. (See question 13 relating to separate regulation for exploration and production.)

  1. Are oil and gas activities carried out by the state or a state-owned agency?

Oil and Gas activities are open to private companies. The government participates in the market thru two state-owned companies: Perupetro SA and Petroperu SA. Perupetro S.A. is the state agency in charge of promoting and executing exploration and production contracts; it also audits the compliance of such contracts. Petroperu SA acts as a regular oil company; it operates several refineries (mainly the one located in Talara, on the northwest coast, the second largest in the country), service stations and the North Peruvian Pipeline. In recent years, Petroperu SA has returned to the exploration activities by signing one license contract and some technical evaluation agreements with Perupetro SA, although the oil and gas activities is still mainly controlled by private companies.

  1. Is oil and gas a regulated business that can only be carried out by companies that are licensed or that receive government concessions to operate?

Exploration and Production activities are carried out through license or services contracts executed with Perupetro SA. Distribution and transportation of hydrocarbons through pipelines are considered a public service and require a concession contract executed with the Ministry of Energy and Mines. Processing (refineries), storage, distribution and marketing are subject to licenses and permits (but not concession contracts) granted by the Ministry of Energy and Mines.

  1. What are the regulatory agencies charged with regulating oil and gas activities?

As mentioned before, Perupetro SA is the Peruvian state-owned company in charge of promoting, executing and auditing license and services contract for the exploration and production of hydrocarbons. OSINERGMIN (the Supervision Organism of the Investment in Energy and Mines) controls de compliance of technical, safety and environmental regulations and sanctions their lack of compliance. It also approves the rates applicable to the transportation and distribution of hydrocarbons through pipelines. The recently created Ministry of the Environment will assume the authority to audit the compliance of environmental regulations in the near future.

  1. Are all hydrocarbons in your country deemed to be originally owned by the state?

Yes. Article 66 of the Peruvian Constitution states that the natural resources are a patrimony of the Nation and that special laws (such as the Hydrocarbons Organic Law) rule the conditions in which individuals may use and take advantage of them. This same principle is also included in the Hydrocarbons Organic Law which states that the in situ hydrocarbons are owned by the state.

  1. How are oil and gas exploration rights or concessions granted?

Exploration rights are granted through license or services contracts executed by the oil companies with Perupetro SA. These contracts include two phases: exploration and production. The exploration phase can last for a period of seven year and may be extended, under special conditions, for three more years. The exploration phase is divided in periods in which the complying of certain minimum activities (ie reinterpretation of existing data, acquisition of seismic information, drilling of exploratory wells) is agreed and guaranteed with bank performance bonds to be supplied by the oil company to Perupetro SA. The production phase has an extension of 30 years for crude oil and 40 years for non-associated natural gas and for non-associated natural gas and condensates form the date when the exploration phase starts.

To enter into effect, license and service contracts must be approved by Perupetro’s board of directors, the Ministry of Energy and Mines, the Ministry of Economy and Finance and the Central Reserve Bank’s board of directors. With all these approvals in place, the Government issues a Supreme Decree with the final contract approval and authorises Perupetro SA to execute it. Usually this approval process takes between four to six months.

  1. Is there a public bidding or similar process? If so, is it open to foreign investors?

Since 1994, when it started its activities, Perupetro S.A. has had privileged direct negotiations with companies interested in investing in the exploration and production business. In 2007 and 2008 Perupetro SA successfully conducted international public bid rounds awarding almost 40 new contracts in total. Another round is expected for the end of 2009 or early 2010. All rounds had been open to local and foreign investors that meet the qualification minimum standards required by Perupetro SA in the correspondent bid basis.

  1. Are there any restrictions on foreign participation in such rights or concessions or in companies holding any such rights?

There are no restrictions on foreign participation in exploration and production rights. Nevertheless, to be a part of a license or service contract, companies (foreigner or local) need to be legally, technically and financially qualified as an oil company according with the standards set forth by Perupetro SA. In addition, foreign companies are required by law to incorporate a local branch or subsidiary, operate through it, and appoint a national representative.

  1. Are companies or consortia that are awarded exploration rights given priority to operate and exploit the fields?

As mentioned above, operation and exploitation rights are also included in the license or service contracts were exploration rights are granted. Companies may decide whether or not to move into the production phase once fulfilling all the exploratory commitments agreed in the contract.

  1. Who has title to assets imported to develop and produce petroleum?

All assets are owned by the companies engaged in E&P contracts.

  1. How are federal, state and local governments recompensed for granting companies rights or concessions to conduct oil and gas exploration and production?

Out of the royalties paid by companies with license contracts or from the production profits made by Perupetro SA in service contracts, Perupetro SA pays a special tax, called a canon, to the regional and municipal governments from where the hydrocarbons are extracted.

  1. May companies or consortia that hold oil and gas exploration rights compulsorily acquire property or rights of way to carry out exploration or production activities? Are these compulsory acquisitions governed by special judicial or administrative proceedings?

Companies engaging in E&P, processing and transportation and distribution activities may acquire property for these purposes. They may also request easements or rights of way on public or private property for the construction of its facilities, pipelines, etc. The property owner shall be compensated. If no agreement could be reached between the owner and the oil company, the latter may request that the Ministry of Energy and Mines expropriate the private lands. The Ministry of Energy and Mines shall study the request and, should it be declared pertinent and duly supported, and consider such expropriations to be matters of national and public need, expropriation procedures over the area concerned shall begin per the law.

  1. Are natural gas exploration and production activities regulated separately or subject to the same regulation applicable to oil exploration and production? Are there different royalties or other government charges payable by companies that conduct natural gas production activities?

Exploration and production of oil and gas are subject to the same legal framework with some special regulations aiming to promote the use and consumption of natural gas for industrial, power generation, petrochemical and domestic purposes as mentioned initially. The production of gas and oil are subject to the same royalties. Royalties may be calculated, at the company’s choice, based on two methodologies: scales of production or economic result. In both cases, royalties may fluctuate between 5% and 20%. The decision on the methodology to be used must be exercised when the oil company makes the block’s commercial declaration, at which point the exploration phase of the license or services contracts will end and so will all the benefits granted for such phase.

  1. Do foreign ownership restrictions apply to the oil and gas sector in your country?

No. There are no restrictions.

  1. Are there any minimum domestic participation rules or any labour law rules relating to domestic and foreign workers (eg, permits for foreign workers)?

The workers of companies engaged in oil and gas activities included in the scope of the Hydrocarbons Organic Law, are subject to private activity labour legislation, weather employees are foreign or local.The hiring of foreign employees is limited to 20 per cent of the employer’s workforce. Salaries paid to foreign employees may not exceed 30 per cent of the employer’s payroll. There are certain exceptions to such limits (managerial positions, new activities, specialized technicians, etc.). In order to start working, foreign employees need an employment contract duly approved by the Ministry of Labour and a work visa granted by the Immigrations Authority. Foreigners cannot work under a tourist visa.

  1. Does local law mandate a particular entity with authority over the sector?

The Ministry of Energy and Mines thru the Hydrocarbons General Direction (DGH), the Energy Environmental Affairs General Direction (DGAAE), and the Regional Energy and Mines Directions (DREM) has authority over the sector. As part of the regionalization process that the government has been implemented during the last years, some of the DREMs had already been transferred to the regional governments becoming part of the local administrative structure. In addition, Perupetro SA, OSINERGMIN and the Ministry of the Environment also play a key role as explained above.

  1. Are there any limitations on vertical integration in the oil and gas industry?

No. One single company may be fully integrated as long as it complies with the requirements applicable to each industry area.

  1. Are oil and gas activities carried out through incorporated entities with limited liability or by consortia or other types of unincorporated joint ventures? Are joint venture partners jointly and severally liable for the obligations undertaking?

All forms of corporate vehicles are used by investors. The most common way to carry out oil and gas activities in Peru is to have a Peruvian branch of a LLC incorporated abroad. When operating through a Joint Venture, each company will be responsible for its portion in the contract before the Peruvian authorities, regardless of what may have settled in the joint venture agreement.

  1. May oil and gas be pledged or encumbered to secure the repayment of debt? How?

Yes. Once produced and fiscalized, the oil company becomes the owner of the hydrocarbon for which a royalty will be paid to Perupetro SA according to the proper license contract. From then on, the oil company may freely pledge or encumber the oil and gas. It worth mentioning that Perupetro SA has as a policy not to accept any financing clauses or provisions in the license or service contracts since this is an issue considered as one of the oil company’s exclusive responsibilities. Therefore, any pledge or encumbrance with a financial institution will need to be agreed in a separate and specific contract.

  1. Can oil and gas rights that are subject to a lien be sold or transferred freely by the secured creditor?

The rights granted through license and service contracts cannot be used as a guarantee and, therefore, transferred by the creditor. Bear in mind that the new party to a license or service contract will need to be an oil company duly and previously qualified by Perupetro SA to assume the debtor’s position in the contract.

  1. Is oil and gas output freely exportable in your country? Are there any limits or quotas applicable to oil and gas production?  Is there access to export pipelines?  What licences are required for oil and gas exports? Are duties applicable?

The exportation of oil has no limits or quotas and can be freely exported. The only crude oil pipeline is the North Peruvian Pipeline which is currently underused. It connects the jungle areas with the Bayovar Port which has exportation facilities. Gas production needs to satisfy the domestic market requirements before being exported. There are no duties applicable to exportations. The other pipeline is the one that transports gas and condensates from the Camisea field to the Pisco Port.

  1. Are prices for oil and gas set or fixed by the government?

The activities and prices related to crude oil and by-products are ruled by supply and demand. Nevertheless, it is worth mentioning that the rates for distribution and transportation of hydrocarbons by pipelines are subject to approval by OSINERGMIN.

  1. Are oil and gas exports taxed under the general income tax regime or is there specific petroleum tax legislation?

There are no taxes for the exportation of oil and gas.

  1. Do special environmental rules apply to oil and gas exploration and production?

Yes, specific regulations rule the exploration and production of oil and gas.

  1. Are environmental regulations in your country consistent with any international standards?

Yes, several international standards are used as reference by the environmental regulations.

  1. Must companies in the oil and gas industry obtain special environmental or other government permits (other than licences or concessions to carry out oil and gas exploration and production) in to operate in your country?

Yes, in general, an environmental and social impact study (EIA) is requested for each activity (seismic, drilling, transportation, distribution, etc.). EIAs need to be consulted with the communities living in the project area and approved by the DGAAE. In general, an EIA contains a base line study, the environmental rules to be complied by the company and an abandonment plan. Compliance of all the environmental obligations and commitments included in the EIA shall be audited by OSINERGMIN.

  1. Does the government (including any development banks or agency) provide financing, subsidy or other support to companies undertaking oil and gas exploration or production?

There is no financing or subsidy available for oil and gas companies. Nevertheless, some special benefits are provided by law for the exploration phase, ie the importation of equipment and materials (included in a list approved by the government) is exempted of customs duties; and, (ii) the 19 per cent sales tTax (VAT) paid by the companies can be early reimbursed by the Tax Authority.

  1. Are there any tax stability or similar regimes available to foreign investors undertaking investment in the oil and gas industry in your country?

Yes. The Hydrocarbons Organic Law grants tax and exchange stability rights to oil companies. In such way, the tax and foreign currency exchange regimes are effective from the date in which the E&P contract is executed, and will remain in effect during the contract’s life. This guarantee basically refers to the Income Tax. Regarding the Value Added Tax, Selective Consumption Tax, Municipal Promotion Tax and any other Tax on consumption, this benefit guarantees the oil company their transferable nature, as well as the regime applicable to exports and exemption regarding imports. Likewise, the tax stability guarantee includes the Value Added Tax Early Recovery Regime, pursuant to the provisions in force on the date the contract is signed. As a consequence of this benefit, the Income Tax Rate (currently 30 per cent of the net income for all corporations) is increased in two points. It is worth mentioning that companies that enter into a license or service contract with Perupetro SA can keep their accounting in foreign currency.

  1. Are oil and gas activities generally protected under bilateral investment treaties entered into by your country?

There are no specific treaties; therefore, general international agreements signed by Peru shall apply.

  1. Are there any dispute resolution systems specific to the oil and gas industry?  Does state immunity apply in disputes?

All the E&P contracts include arbitration as the only dispute resolution alternative. Since Perupetro SA is formally a regular corporation (although owned by the state) it acts without any immunity status when executing a contract or arbitrating a dispute. Since 2005 Perupetro SA has agreed to subject arbitration to the International Centre for Investments Disputes (CIADI). E&P Contracts contemplate that a three-arbitrator panel shall be appointed. Each Party shall appoint one arbitrator and the third one shall be appointed by the arbitrators designated by the Parties. To solve the dispute, controversy, difference or claim referred to arbitration, the arbitrators shall apply the domestic laws of Peru. The arbitration shall take place at the Permanent Arbitration Court or at any other proper institution, public or private, with which the Centre may have entered into an agreement for such purposes or in any other place the committee or panel may approve, after consulting with the secretary general. The award shall be mandatory for the parties and may not be subject to any remedy of appeal or any other appeal, except for those covered by the Agreement for Investment Disputes between States and Nationals of other States. The arbitration award issued according with the Agreement shall be enforced in Peruvian territory following the rules applicable to the enforcement of judicial decisions.

  1. Do anti-corruption rules apply to the oil and gas industry?

The Criminal Code has anti-corruption rules. There are no specific rules applicable to the oil and gas industry.


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