LEGAL REGIMES FOR EXPLORATION AND EXPLOITATION OF OIL AND GAS IN LATIN AMERICA COMPARATIVE ANALYSIS OF THE LEGISLATION APPLICABLE TO THE CONTRACTUAL SYSTEMS OF ARGENTINA, ECUADOR AND PERU

• Jurisdiction: Derecho Internacional

Mining And Oil & Gas Development In Latin America
(2001)
CHAPTER 17B
LEGAL REGIMES FOR EXPLORATION AND EXPLOITATION OF OIL AND GAS IN LATIN AMERICA COMPARATIVE ANALYSIS OF THE LEGISLATION APPLICABLE TO THE CONTRACTUAL SYSTEMS OF ARGENTINA, ECUADOR AND PERU
Manual Alvarez-Trongé
Perez Companc SA
Buenos Aires, Argentina

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Introduction

This paper intends to present a comparative analysis of the regulations that apply to certain aspects of legislation of three important South American hydrocarbon-producing countries.

To the effects of this study, we will basically focus on the main rules of the different contractual systems of each country designed for the development of their oil and gas resources. In addition, we will analyze other related aspects that are specific of the respective legislation applicable to the different contracts.

We will essentially deal with the Argentine, Peruvian and Ecuadorian legislation. However, in certain cases we will also compare the regulations of other Latin American countries, which will be specifically indicated.

For this report to be clear and easy to understand, we found it adequate to include at the beginning of each specific paragraph the name of the country whose legislation is described.

Also, we will deal with certain issues that, although they are not typically "contractual," they have an important impact on the contractual framework of these countries, such as the ownership of the hydrocarbons and the role of the state companies.

I. Ownership¹

Ownership of the subsoil has always been a delicate subject. The Law has naturally dealt with this matter. In drafting specific legislation on hydrocarbons, political, economic and strategic issues have played a significant role.

A description of current regulations on the subject is found below.

As a result of the influence of the above mentioned factors, regulation on ownership of hydrocarbon resources is a dynamic process where many times certain social development ideas or state issues may quite rapidly change definitions and rules already established for many years in the sector.

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Argentina

Article 2518 of the Argentine Civil Code establishes the "Heaven to Hell" principle or "Ad Coleum" theory, but the section 1 of Law 17,319 of June 23, 1967, Argentine Law on Hydrocarbons (referred to as ALH), limits this principle.

Section 1 of the above mentioned ALH establishes: "Liquid and gaseous hydrocarbon fields located in the territory of the Argentine Republic as well as its continental shelf, belong to the non-transferable and imprescriptible wealth of the National Government."

Pursuant to this statement, Argentina declares the public ownership of hydrocarbon fields.

This rule has been significantly modified by the following two laws:

a) Law 24,145 which in September 1992 provided for the transfer of public ownership of fields from the National Government to the provinces, by vesting in them ownership of fields existing on the adjacent sea up to 12 nautical miles. This law also establishes that hydrocarbon deposits will effectively become part of the provincial domain when the new Hydrocarbon Law is passed as it will modify the above mentioned Law 17.319 to a large extent. Since 1992, different projects have been discussed, but none has obtained final approval in order to become the new legislation to regulate oil and gas exploration and exploitation activity.²

b) The approval of the amendment to the National Constitution dated 8/24/94, which establishes in section 124, that "the original ownership of natural resources existing in the provincial territory belongs to the provinces."

Such provisions determine the public ownership of the fields, whether such owner may be the Argentine Provinces or the National Government.

Public ownership of hydrocarbon fields is similar in other South American legislation.

Ecuador

Such criterion — the public ownership of the fields — is specified in the Codification of the Ecuadorian Law on Hydrocarbons (referred to as ELH) provided for by Decree 2967 of the Supreme Council of the Ecuadorian Government in 1978 (section one) but it is not exactly the same under the rules of Peru as we will see below.

Peru

Peruvian Law 26,221 (referred to as Peruvian Law on Hydrocarbons, PLH) passed on August 20, 1993 does not provide for the Peruvian Government's ownership of hydrocarbon fields.

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Section 7 thereof sets forth that "hydrocarbons" "in situ" are "the property of the Government," and also defines "Hydrocarbons" as "any organic, gaseous, liquid or solid compound, consisting mainly of carbon and hydrogen" (section 7, PLH³ ).

Unlike the legislation of Argentina and Ecuador, Peruvian Law refers to the Government's ownership of "Hydrocarbons in situ," which, though similar, differs from the "field" concept.

This difference between field ownership and hydrocarbon ownership has minor consequences in the practice as we will explain below.

A field is the place where hydrocarbons are found.

In some contracts we use in Argentina, it is usually defined as "reservoirs, stratum layers, which contain or are expected to contain a certain accumulation of Hydrocarbons"⁴

Argentina

As previously seen the ALH states that hydrocarbons are "the national Government's non-transferable and imprescriptible wealth."

Now, when dealing with ownership of hydrocarbons the ALH establishes that the holders of exploration permits or exploitation concessions "will have ownership of the hydrocarbons they extract ... in compliance with the regulations of the Executive Power." (Section 6, ALH).

In other words, a new concept is introduced to the terms already used in the sector, which is that of "extracted hydrocarbons." These may be privately owned.

This kind of regulation existing in Argentina, which sets forth Government ownership of fields on the one hand, and third party ownership of extracted hydrocarbons on the other hand, is not similarly dealt with in the Peruvian, and Ecuadorian legislation even though their consequences are actually very similar.

Peru

Peruvian regulations are very close to Argentina's regulations since although the "ownership of extracted hydrocarbons" (section 8, PLH), is expressly granted to the state-owned company Perupetro, such ownership may be "transferred to the licensees upon the execution of License Agreements."

Once this transfer is effective, the practical consequence is that licensee (the permit or concession holder in the ALH) becomes owner of the hydrocarbons transferred.

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Ecuador

In the case of Ecuador, hydrocarbon exploration and exploitation is performed by the Government (section 2, ELH) directly through, as in other cases, the state-owned company, Petroecuador.

The ELH empowers Petroecuador to perform the exploration and exploitation operations by itself or "by entering into partnership or participation agreements." Section 37 (or 34 according to the old code of laws) determines that "the natural gas obtained through oilfield exploitation belongs to the Government." This statement expressly provides for the Government ownership. Nevertheless, the code of laws provides for sales situations and ownership transfer.

In summary, we can say that, in spite of some differences,⁵ the essential concept shared by the legislation analyzed in this report is as follows:

• To maintain ownership on hydrocarbon resources in the hands of the Government; and

• To offer benefits to third parties without transferring this ownership and opposed to the granting of certain rights.

II. CONTRACTUAL PATTERNS

As we have seen until now, different contractual patterns are clearly derived from the hydrocarbon...