ARGENTINE NATIONAL OFF-SHORE AREAS: THE CONTRACT SYSTEM RETURNS TO THE HYDROCARBONS' ARENA

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development and Investment
(Apr 2009)
CHAPTER 15B
ARGENTINE NATIONAL OFF-SHORE AREAS: THE CONTRACT SYSTEM RETURNS TO THE HYDROCARBONS' ARENA
Santiago López ¹
Abeledo Gottheil Abogados
Buenos Aires

Santiago Lopez was born in the City of Trelew, Province of Chubut, on January 11, 1976. He is an attorney and a member of the Bar Association of the City of Buenos Aires. He graduated in 2000 from the School of Law and Social Sciences of the University of Buenos Aires with career guidance in Administrative and Business Economic Law. He specialized in Public Utilities Regulation Law at the School of Law, Universidad Austral from 2004-2005, and in Oil and Natural Gas Law at the School of Law and Social Sciences, University of Buenos Aires, from 2005-2006. At present, he is specializing in Oil & Gas Economics at the Buenos Aires Institute of Technology (ITBA). He worked in the Energy and Fuels Commission of the National Chamber of Deputies as Legal Advisor in Energy Law (Electricity, Oil & Gas) from 2001 to 2005. Since 2006, he has worked in Abeledo Gottheil Abogados in Oil & Gas Law, Energy Regulation & Energy Arbitration.

INDEX

1. Introduction

2. A Summary on International Oil Agreements

3. Brief history of the oil agreements in Argentina

3.1. Concession under the Mining Code. The classical concessions

3.1.1. Lack of a Specific Regulation on Hydrocarbons in the Argentine legislation

3.1.2. Mining Code Concessions

3.1.3. A special case: The Contract with Compañía California Argentina de Petróleo

3.2. Service Contracts

3.2.1. Risk Contracts Law

3.2.2. Houston Plan

3.3. YPF's Participation Agreements in central areas

3.4. The Modern Concessions. The Hydrocarbons Law

3.4.1. The Argentina Plan

3.4.2. Conversion of Service Contracts into Concessions

4. Legal Framework of the National Off-Shore Areas

5. ENARSA's Legal Framework

6. ENARSA's OFF-SHORE CONTRACT to develop the National Off-Shore Areas

6.1. Characterization of ENARSA's OFF-SHORE CONTRACT

6.2. The management clause in ENARSA's OFF-SHORE CONTRACT

6.3. Investment and work commitments clauses in ENARSA'S OFF-SHORE CONTRACT

6.4. The government and company take clause (the taxation regime)

6.5. No Domestic Market Obligations

6.6.1. Exploration Period

6.6.1.1. Extension of the Exploration Period

6.6.1.2. Payment of the Exploration Yearly fee

6.6.2. Exploitation Stage

6.6.2.1. Joint Operating Agreement

a) Operating Committee Decisions. Pass-Mark Vote

b) Sole Risk Operations

c) Transfer of Participation

(i) General Considerations

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(ii) Assignment for Security

(iii) Preemptive Rights or Right of First Refusal

(iv) Aplicable Law And Dispute Resolutions

6.6.3. Fiscal System of ENARSA's OFF-SHORE CONTRACT

6.6.3.1. Cost Recovery

6.6.3.2. Profit Oil Split

6.6.3.3. Exploitation's Yearly Fee

6.6.3.4. Royalties

7. Comparison between ENARSA's OFF-SHORE CONTRACT and ANCAP's CONTRACT

8. Conclusion

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1. Introduction.

In Argentina, oil agreements between the Host Government and the international oil companies (or national private companies) to explore hydrocarbons reserves tend to follow the country's prevailing political and ideological trends at every historical moment.

In this work, the history of the oil agreements in Argentina shall be briefly developed, so as to specifically analyze the terms and conditions of the agreement implemented by the state-owned company ENARSA (Energía Argentina S.A.) to explore, develop and exploit the hydrocarbons potential of those areas owned by the national government.

2. A Summary on International Oil Agreements.

International oil agreements may fall into two large categories, namely: ((i) Concessions; (ii) Contracts.² From a legal standpoint, this classification is based on the possibility to transfer or not the legal title (interest) of hydrocarbons to the oil companies.³

The Concession System has two legal traditions. Under the Anglo-Saxon tradition, the concessionary system allows private ownership of the minerals and individuals may own mineral rights. In some countries the government has the ownership over the mineral, but under the concessionary systems it will transfer the legal title of the minerals to a private company if they are produced. In return, the company is subject to payment of royalties and taxes.⁴

Pursuant to the Contractual System, the government of the host country retains the ownership over the minerals and the oil companies have to receive the share of production or revenues from the sale of hydrocarbons. Thus, the contracts may be classified according to the level of control granted to said companies and may be subdivided into:

(a) Production Sharing Contracts (PSC). The difference between the PSC and Service Contracts depends on whether or not the private company receives in cash or in kind the hydrocarbon produced. PSC has been defined as "a

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contract for the development of mineral resources under which the contractor's cost are recoverable each year out of the production but there is a maximum amount of production which can be applied to this recovery in any year. His share of production is referred to as "cost oil". The balance of the oil (...) is regarded as "profit oil" and is divided in the net profit royalty ratio (...). After the contractor has recovered its investment, the amount of "costs oil" will drop to cover operating expenses only and the profit oil increases by a corresponding amount".⁵

(b) Participation Agreements. The Participation Agreements involves the creation of a joint venture between the host country (or its stated-owned company) and the private company.⁶

(c) Service Contracts: Pure Service Contracts⁷ and Risk Service Contracts.⁸ The difference between Pure Service Contracts and Risk Service Contracts depends on whether the fee is based on profits or not.⁹ In a pure service contract, the host country (or its NOI) would contract the oil company to perform a specified service for a flat fee. Under a Risk Service Contract, the host government pays for the services of the oil companies in cash and not in kind. On the other hand, under the Pure Service Contract, the oil company is paid a flat rate for its services usually by applying a percentage of the oil produced.

To sum up, all oil petroleum agreements have common features like description of (i) the parties, (iii) the rights granted, (iii) the area, (iv) terms (v) management control, (vi) Contractual requirements and (Vii) regulations. Actually, the main variations between them are (i) ownership of assets (ii) ownership of production and (iii) government take.

The classification of petroleum agreements is outlined in the chart 1.

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CLASSIFICATION OF PETROLEUM AGREEMENTS

Although, these classifications -like any- intend to clarify, conceptually or theoretically the differences existing between the systems, in practice it is difficult to clearly classify an agreement in only one category.¹⁰ As JOHNSTON¹¹ said "The categorization is not the important thing, the economics (...) [and legal framework are¹² ]".

3. Brief history of the oil agreements in Argentina.

All the terms and conditions of oil contracts, except for the PSC, have been in use in Argentina since the discovery of hydrocarbons in Comodoro Rivadavia in 1907.

Yet, the different techniques for the exploration and exploitation of hydrocarbons have changed during history, pursuant to the changes in the political conceptions on the state sovereignty over the natural resources. Therefore, in periods in which the state sovereignty criteria on the natural resources prevailed, contracts such as the

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Service Contracts or the Participation Agreements were chosen to explore hydrocarbons reserves.¹³

3.1. Concession under the Mining Code. The classical concessions.

3.1.1. Lack of a Specific Regulation on Hydrocarbons in the Argentine legislation.

In 1907, when hydrocarbons were discovered in Comodoro Rivadavia -Province of Chubut- the only legislative body that implicitly and expressly mentioned these minerals was the Mining Code that had been approved by the National Congress pursuant to section 75, subsection 12 of the National Constitution.

The Mining Code of 1887 did not regulate hydrocarbons specifically, probably because at such time hydrocarbons lacked the economic value that they have at present. Under the Mining Code hydrocarbons were included among the first-class minerals and therefore, the Government was compelled to grant the concession to the priority petitioner (discoverer) who had to comply with the requirements imposed by said Code, i.e. to be the holder of the mine "legal concession". Like minerals, the rights were granted for an uncertain term and the maintenance was subject to the mining "amparo" (the conditions that shall be complying by minor in order to conserve the right over the mines). Thus, the granting power rested in the local and national mining authorities depending on the territory where the hydrocarbons were found.

In 1907, a day after the discovery of some hydrocarbon fields in the area of Comodoro Rivadavia, the Executive Branch -under Figueroa Alcorta's Administration- somehow anticipating the importance of said discovery, issued a decree whose legal ground was Article 15 of the Lands Law 4167,¹⁴ whereby a state reserve was instituted over the respective area, suspending thus in it the application of the Mining Code, whose Articles 8 and 9 set forth that the Government cannot exploit and dispose of mines and must grant them to private parties.¹⁵

In 1910, the National Congress passed Law Nº 7059 whereby the Executive Branch was authorized to reserve an area of five thousand hectares (5,000 ha.) in the oil zone of Comodoro Rivadavia, within which no mining belongings or exploration permits could be granted for a term of five years while areas of six hundred and twenty...