OIL & GAS IN CHILE - REALITY AND TRENDS

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development and Investment
(Apr 2009)
CHAPTER 16B
OIL & GAS IN CHILE - REALITY AND TRENDS
Ali Shakhtur S.
Línea de Negocios Exploración y
Producción Enap Sipetrol S.A.
Santiago

Ali Shakhtur is the Legal Director of ENAP E&P and Enap Sipetrol S.A.. Before being appointed to his current position, Mr. Shakhtur worked for Sipetrol (UK) Limited in London as Head of Legal Affairs for the MENA region. He holds an LL.B from Universidad Gabriela Mistral (Chile), an LL.M in Commercial and Corporate Law from the London School of Economics and Political Science (U.K.) and an MSc in Management from Universidad Alcala de Henares (Spain). He is the founder of the Centre for International Commercial Studies-Chile (CECINT) and has been a speaker in seminars and events on various topics such as Renewable Energy, Oil & Gas and Negotiation.

I. Introduction.

The Oil & Gas reality of Chile is somehow particular. It has not been the subject of many discussions or studies mainly because the impact of the E&P business and activities in the economy has been very limited.

However, the situation is changing, the sources of energy have become a topic of general interest and discussion and -as a consequence- concern and interest in the E&P business have increased. The limited development of the Oil and Gas regulation in Chile has raised questions and given space to new ideas and proposals.

1.1 A Bit of History. Oil in Chile has been always linked to Magallanes, where it was discovered in 1945. After several attempts in other regions of the country the exploration focused almost exclusively in that area.

Production is very low compared to our neighbors' and until some years ago the interest of International Oil Companies (IOC) was very limited due to the geological high risk.

The higher prices and regional reality (with an increasing need for natural gas) made the difference, and about five years ago some IOC demonstrated more interest in investing in Chile, especially in the Magallanes Basin. This finally motivated the Government to launch the successful 2007 Bid Round where an important number of companies took part.

Today, we are in the exploration phase in all the awarded areas. Their results will probably draw the picture for the years to come and will allow us to conclude (or have a much better understanding) on the real potential and production trend of the Magallanes Basin.

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1.2 The Oil & Gas Sector in Chile. As it will be detailed below, the national oil company of Chile (ENAP) may conduct E&P activities in all the territory of Chile, either on its own or associated with other companies through the execution of a Special Operating Contract (CEOP).

So far, the E&P activities in Chile have been clearly led by ENAP acting on its own under to the law mandate. The activities of IOCs and contribution in production are not yet substantial.

But the trend is changing and there is an incipient E&P market which I believe will strengthen the position of Chile in the global E&P reality due to the "clear rules" and "certainty" for the foreign investor. Yet, there is room for improvement and the Government understands that there is a clear need for a more efficient process.

II. Regulatory Frame and the Special Operating Contract (CEOP).

2.1 Political Constitution (1980).¹ Hydrocarbons (and all mines) are exclusively owned by the state of Chile and can only be explored and exploited; a) directly by the State, b) by the state owned companies, c) through administrative concessions or d) Special Operating Contract.

2.2 Law Decree Nº 1.089 (1975).² It specifies some particular treatment for the CEOP and the Contractor under a CEOP. It allows the President to grant - in the same presidential decree approving terms and conditions of a CEOP- tax reductions or exemptions, custom duties exemptions, temporary admission regime for equipments (5 years plus yearly extension if needed), right to recover all VAT paid for the acquisition and import of goods relating to the activities, among other particulars.

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2.3 Environmental Law and General Law. All companies and entities must fully comply with the environmental law (Ley 19.300³ and related regulation) which establishes different criteria (depending on the type of activity and impact) for Environmental Impact Assessment, going from a simple declaration (Environmental Impact Declaration) to a comprehensive study (Environmental Impact Study). The leading authority is the CONAMA⁴ which centralizes the reports of all the relevant departments (agricultural authority, water regulation authority, tourism authority, local authorities and private entities among others). Also a meeting with the interested community is considered and all the doubts and indications taken into account to approve a final plan. The time of this ranges from 90 to 180 days approximately.

2.4...