CHAPTER 19 COMPARED STUDY OF BOLIVIA, PERU AND VENEZUELA'S LEGAL FRAMEWORK ON NATURAL GAS (UPSTREAM ACTIVITIES)

• Jurisdiction: Derecho Internacional

Mining and Oil and Gas Law, Development, and Investment - Book 2
(Apr 2007)
CHAPTER 19
COMPARED STUDY OF BOLIVIA, PERU AND VENEZUELA'S LEGAL FRAMEWORK ON NATURAL GAS (UPSTREAM ACTIVITIES)
Miguel I. Rivero Betancourt
Attorney
Perez-Duin, Gutiérrez & Rivero, Abogados
Caracas, Venezuela

MIGUEL I. RIVERO BETANCOURT

Miguel I. Rivero Betancourt graduated in 1991 as Attorney at Law, Universidad Católica Andrés Bello, Caracas, Venezuela with Specialization in International Economic and Integration Law (thesis pending) from Universidad Central de Venezuela. He also earned an LLM in Natural Resources and Environmental Law and Policy with Specialization on Energy Law and Policy (2003) from University of Denver in Denver, Colorado, USA.

His practice areas are Oil and Gas, Economic International Law and Litigation. He presently renders support in different operational areas to oil companies participating in strategic associations and in mixed enterprise.

He interned for the Legal Department of Exxon Exploration Company, Houston, Texas, USA, in 1998 and for the law firm Baker and Hostetler in Denver, Colorado, in 2003.

Mr. Betancourt was Professor in Antitrust Law for the University of Metroplitana in Caracas, Venezuela (2004-06) and is now Professor in Legal Issues for International Negotiation at the same university. In 2005 he was Professor in Contract Law and Gas Upstream Activities for the University of Monteavila in Caracas, Venezuela.

1.- Introduction.

The following paper provides, from a legal point of view, a compared study of upstream activities in the legal regimes on gaseous hydrocarbons of Venezuela (152.32 TCF),¹ Bolivia (26.122 TCF)² and Peru (11.473 TCF),³ countries located in first, second and fifth place in natural gas proven reserves in Latin America, respectively.⁴

Clear game rules and governmental policies that stimulate foreign investment are variables considered by investors when deciding to contribute with resources and technology in a certain project and especially in those countries of frequent legislative mutability. In case of exploration and production projects (E&P) (upstream) of non-associated natural gas, since they are businesses that imply high investments, intensive payments made in the first years of the project and whose return of the investment occurs in the medium and long term, investors tend to analyze the investment taking into account diverse aspects. One of these

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aspects is the existence of clear and stable game rules during the life of the project.

In this sense, we must remember that in the nineties, laws oriented to regulate the activities of the industry of the natural gas were enacted in most of the South American countries (such as Argentina, Bolivia, Colombia, Chile and Peru), whose main purpose were to obtain the development of the national industry by attracting national or foreign investments. These reforms were made within the scope of the world-wide economy globalization process that stimulated the liberalization of the markets, the elimination of the state monopolies, the promotion of private investment and the reduction of the enterprise activity of the state.⁵ Nevertheless, the motivations that originated these reforms, have changed in the last years mainly due to high prices of oil and assumption to power of nationalistic governments, which have turn from a friendly regime or of free access to foreign investment (Bolivia) into one of evident restriction to this investment.

We will emphasize in this paper the most relevant differences on such subjects as: Exploratory Programs; Development Plans; Retention Right; Royalties and Participation; Property of Extracted Gas; Tax Regime; Special Considerations; Stability Contracts Clause; Settlement of Controversies; Free Currency Availability; among other aspects; factors that, in our criterion, will serve to the investor as

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analysis elements in order to determine which of the studied regimes, indeed stimulate or, on the contrary, deviate national and international private investment. In a first approach, we must indicate that the content of the legal regimes on gaseous hydrocarbons of Bolivia, Peru and Venezuela, shows similarities regarding their general objectives and structure of the laws. Nevertheless, from a revision and analysis of the same, there could be evidenced the different treatments such regimes give to the aspects before mentioned related to upstream activities, due to the influence of such factors as reserves, production, consumption, development of internal market, capital, technological level and political system; among others aspects to be developed in the following pages.

2.- Legal Framework.

In Bolivia,⁶ the Hydrocarbon Law 3058 of May 17, 2005, which was enacted in fulfillment of the Referendum of July 18, 2004 on the hydrocarbon policy in Bolivia, regulates the hydrocarbon related activities and recognizes the value of the natural gas as strategic resource. Within the dispositions of this Law and in fulfillment of the mentioned Referendum, the Bolivian State nationalized (through Supreme Decree Nº 28701 of May 1, 2006) the Mineral Resources of Hydrocarbons in the country and provided that as of May, 2006, companies that perform oil and gas production activities, are obligated to give to Yacimientos Petrolíferos Fiscales Bolivianos (YPFB), all hydrocarbon production. This new legislation is opened to private investment, however a clear backward movement

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exists in comparison with the advantages offered by the Hydrocarbon Law of 1996, when YPFB was privatized, and an important amount of contracts for hydrocarbons exploration and exploitation were granted to transnational companies. This atmosphere has changed radically with the entering into effect of the Hydrocarbon Law of 2005, the nationalization of hydrocarbons industry and the nationalization of the YPFB.

In Peru,⁷ Supreme Decree Nº 042-2005-EM of October 7, 2005, approves the Only Text of the Hydrocarbon Law Nº 26221 of August 20, 1993, and this text rules Hydrocarbon activities in its territory, on the base of free competition and free access to the economic activity to obtain the well-being of the human being and the national development. It is important to mention that with the approval of the Unique Text of 2005, the interest and political will of Peru to develop natural gas industry is reaffirmed and it is the legislation that offers greater and better incentives to foreign investment.

In Venezuela,⁸ on the other hand, upstream activities on not associated gaseous hydrocarbons matter, are regulated by the Decree with Rank and Force of Organic Law of Gaseous Hydrocarbons (The Gas Law)⁹ and its Regulation,¹⁰ which are not reserved to the State and provide the liberalization and expansion of the natural gas industry, with the purpose of increasing significantly gas consumption through national and foreign investment. The Gas Law, constitutes a good law to stimulate

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private investment; nevertheless, it is a timid legislation regarding regulation and use of legal stability agreements and its public policies toward foreign investments, seemed to be subordinated mainly to political motivations, instead of commercial or of businesses.

Hydrocarbon laws of Bolivia and Peru also applied for upstream investments of liquid hydrocarbons. In Venezuela, however, the regime of gaseous and liquid hydrocarbons is regulated in separated laws and only for non-associated natural gas. Liquid hydrocarbon, associated natural gas and condensate are under Venezuelan Organic Hydrocarbon Law.¹¹

3.- Property of Reservoirs and Produced Hydrocarbons.¹²

Bolivia, Peru and Venezuela, have a similar regime since the State is the owner of the reservoirs. In the case of Bolivia and Venezuela, the hydrocarbons reservoirs existing in the national territory must belong to the Republic, are inalienable, public domain and may not be acquired through adverse possession. Peru does not make these references, but we thought that the effects are the same.

In Bolivia, well head hydrocarbons property is recovered for the State, whose rights of property will be exercised through the YPFB, which will exercise the proprietor right on the totality of hydrocarbons and will represent the State in Oil Contracts

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subscription and all the productive chain activities execution.¹³ The Hydrocarbon Ministry, in coordination with YPFB, is responsible for all aspects of hydrocarbons policy in the country, and the Hydrocarbon Superintendence of the Sector Regulation System (SIRESE) is the Regulating Body for activities of transport, refinement, commercialization of derived product and distribution of natural gas by networks.

In Peru, PERUPETRO, S.A. is the legal organization that represents the State in negotiating, subscribing and supervising, in its capacity as contractor, the Contracts provided by Law, and it also has the property right on extracted hydrocarbons, and such right will be transferred to Licensees when License Contracts are subscribed.¹⁴ The Energy and Mines Ministry is in charge of elaborating, proposing and applying the policy of the sector and the Supervisor Organism of Investment in Energy (OSINERG),¹⁵ is in charge of controlling the legal and technical aspects of the hydrocarbon activities within the territory of the Republic of Peru.

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In Venezuela, the National Executive, by means of the Energy and Mines Ministry, will have national authority on hydrocarbons matter and the Gas National Entity (ENAGAS) has authority to promote the development of the sector and the competition in all phases of gaseous hydrocarbons industry related to transport and distribution activities. Although it is not expressly set forth in the Law, in Venezuela, the property on produced hydrocarbons is admitted when therefore it is provided in the License.¹⁶ Ay this respect, it is important to...