CHAPTER 17 EVOLUTION OF HYDROCARBON CONTRACTING SCHEMES IN LATIN AMERICA
| Jurisdiction | Derecho Internacional |
EVOLUTION OF HYDROCARBON CONTRACTING SCHEMES IN LATIN AMERICA
Partner, Thompson & Knight LLP
Dallas, TX
Martín Añez Rea
Latin America Legal Director REPSOL
Madrid
Jaime Zaldumbide-Serrano
Partner, Pérez Bustamante & Ponce
Quito
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ANDREW B. DERMAN is a Partner in Thompson & Knight's Dallas office and serves as the Firm's International Energy Practice Leader as well as Chairman of Thompson & Knight Global Energy Services, LLC, a wholly owned affiliate of the Firm that provides technical, economic, and commercial advisory services to the energy sector. With a concentration on oil and gas investment projects and cross-border transactions, he focuses on providing legal and commercial support in connection with acquisitions, divestments, trades, and mergers; strategic commercial and business advice; large infrastructure projects; nationalization/expropriation; anti-corruption and sanction advice; unitizations; boundary disputes; exploration, development, and production operations; production sharing contracts; negotiations; and dispute resolution. Mr. Derman has assisted clients in more than 50 countries on six continents and offers clients a comprehensive understanding of oil and gas activities through experience in a broad spectrum of countries and companies. Prior to joining Thompson & Knight, he served as in-house counsel and later an executive for a large international oil and gas company for nearly 20 years. His practice is equally divided between providing clients with traditional legal representation (contract negotiation and drafting) and business development/commercial counseling (the identification and capture of oil and gas opportunities). Mr. Derman is admitted to practice in Texas and New York, and he is Board Certified in Oil, Gas and Mineral Law by the Texas Board of Legal Specialization. He received a J.D. from Temple University Law School in 1978, a B. A. from New York University in 1974, and he attended the Insead Advanced Management Program in Fontainebleau, France in 1991. Mr. Derman's accolades include being named among the "Leaders in Their Field" by Chambers Global and Chambers USA by Chambers & Partners as well as to The Best Lawyers in America® by Woodward/White Inc. and Texas Super Lawyers® by Thomson Reuters.
MARTÍN AÑEZ REA is Director of Exploration and Production Legal Services at REPSOL S. A., and is currently responsible for Latin America. He has almost 20 years of experience in the oil and gas business and particularly in Upstream legal issues. He has been a lawyer in other energy companies such as OXY and Maxus. He obtained his law degree from the Private University of Santa Cruz de la Sierra, Bolivia, and holds a Master in Economic Law from the University of Chile and a Master in Business Negotiations from the Vancouver Business Institute, Canada. He is a Lecturer of Contracting and International Law of Hydrocarbons issues in Spanish and Latin American universities.
MARTÍN AÑEZ REA es Director de Servicios Jurídicos en el ámbito de Exploración y Producción de Repsol S. A., actualmente responsable de Latinoamérica. Casi 20 años de experiencia trabajando como abogado en materia de hidrocarburos, y especialmente en Upstream. Abogado en otras compañías petroleras tales como OXY y Maxus. Licenciado en Derecho por la Universidad Privada de Santa Cruz de la Sierra, Bolivia. Master en Derecho Económico por la Universidad de Chile y Master en Business Negotiations por el Vancouver Business Institute, Canadá. Disertante de temas de Contratación Internacional y Derecho de los Hidrocarburos en universidades españolas y latinoamericanas.
JAIME ZALDUMBIDE-SERRANO is a Partner with Pérez Bustamante & Ponce, in Quito. Jaime is an experienced attorney with a practice in energy matters and the exploration and exploitation of natural resources, with a particular emphasis on environmental law. He has spent decades advising oil and mining companies on their operations and negotiations in Ecuador, and leading electricity and alternative energy projects from an environmental perspective. From 2012 to 2016, Jaime was a practicing attorney in Chile acting as Senior Counsel in the energy department of the prestigious law firm Carey Abogados. Admitted to the bar in Chile and Ecuador, Jaime is one of the few Ecuadorian attorneys to be to have been distinguished by Chambers Global as a foreign expert. Recent transactions during his stay in Chile include: Advising on the sale and purchase of LNG (Liquefied Natural Gas), advising on contracts for the operation of regasification terminals, advising on procurement for oil exploration and contracts for the sale and purchase of electricity, and advising on the development of non-conventional renewable energy projects for both solar and wind power. His professional experience includes serving as Private Secretary to the Minister of Energy and Mines (1984-1987); Manager of the Legal Department at Kerr Mc Gee Ecuador (1991-1995); Arbitrator at the Quito Construction Chamber (1998-to date); Member for two terms of the Board of Directors of the Pichincha Chamber of Industry. He received his JD from the Catholic University of Ecuador (1983), and his Master's Degree in Environmental Law from the University of the Basque Country, San Sebastián, Spain (2005). He is fluent in English and Spanish.
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Oil and gas investment follows prospective geology, attractive commercial terms, infrastructure or the prospect of infrastructure and contract stability. This paper will consider strategies host governments can employ to encourage investment through economic incentives and contract stability.
Ecuador has tested a variety of oil and gas contractual forms over the past 30 or so years and provides an instructive paradigm upon which to examine what systems worked well and successfully attracted material investment. After considering Ecuador's recent oil and gas history from a legal and commercial perspective, we will examine a number of issues that impact the decision to commit to an oil and gas project and several issues that influence the continued spending on such project over the life of the Contract.
ECUADOR: OIL AND GAS CONTRACT EVOLUTION
:THE SERVICE CONTRACTS FOR THE EXPLORATION AND EXPLOITATION OF HYDROCARBONS
After the nationalization process in the early 1970s, by the military government, in 1982 the Ecuadorian Congress enacted significant amendments to the Hydrocarbons Law. Through this ammendments, the form of a "Service Contract" for the "Exploration and Exploitation of Hydrocarbons" (Risk Contract) was introduced in the oil and gas legal framework.
Investors were invited to participate in international tenders to explore for oil and gas and, to the extent discoveries of commercially exploitable hydrocarbons, were made, investors entered into the development and production phase of the contract. The initial exploration period was for four year term. In the event of a commercially exploitable discovery, investors were granted a 20 year exploitation term. In the event that the investors failed to discover commercially exploitable hydrocarbons, the investors (or Contractor) had to shoulder the full cost and risk associated with the exploration.
Where commercially exploitable hydrocarbons were discovered, the investor was entitled to recover its exploration investments, cost and expenses and to receive a "Service Fee" for capital and technology it contributed (the "R" factor). This Service Fee was a tender parameter and offered by the investor during the tender process. The Service Fee was associated with and fluctuated with daily oil or gas production, the higher the production rate, the lower the R factor. The balance of the production belonged to the State.
Reimbursement of investments, cost and expenses, along with the payment of the Service Fee was paid in US dollars or, at the election of the investor, in kind (crude oil or natural gas).
During the second half of the 1980's, 13 contracts were signed with large oil and gas companies, including, among others: Occidental Petroleum, BP Petroleum, Atlantic Richfield (ARCO), TENNECO, ESSO, PetroCanada.
By the early 1990s, several of the companies successfully discovered commercially exploitable hydrocarbons and had established production. As a consequence of lower than anticipated oil prices, while the investing companies were receiving their reimbursement of investments (IC&E) and, in some cases, payment of the required Service Fee, the State was receiving little or no
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benefit - given the low oil price, the oil produced and the revenue received was inadequate to fully compensate the oil companies for their investments, pay the Service Fee and provide the state with expected amounts of oil.
THE PARTICIPATION CONTRACTS
In 1992, Congress enacted new amendments to the Law on Hydrocarbons and a new contractual form was created, known as the "Participation Contract". The Participation Contract was intended to simplify the compensation methodology, ensure that the state received a portion of the oil, even at low oil prices, and reduce the bureaucratic approval processes in the Service Contract. As per the tender rules, companies participating in an international bidding process were to offer the government a percentage of the oil produced in the Contract Area with the remaining percentage of the oil produced allocated to the investor (the "X" factor). From this percentage, the investor would recover all their investment, cost and expenses along with, profits, if any. Investors assumed the full risk that they might not be reimbursed for their investments and might not earn a profit. The state assumed no risk, as it received a percentage of the oil produced in the Contract Area, unburdened by any cost. Several "X" factors were...
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