Overview (December 2005)

Introduction
Issues
Authorities and Institutions

Introduction

The new Hydrocarbons Law (3058) came into force on May 19 2005. It supersedes the previous law of April 30 1996, which was part of the capitalization process led by former President Gonzalo Sánchez de Lozada.

The Bolivian Constitution establishes that hydrocarbons reservoirs are non-transferable and are directly controlled by the state. The right of the state to explore, exploit, commercialize and transport hydrocarbons can be exercised through time-limited concessions or contracts.

Law 3058 is the result of the same social unrest that led to the fall of President Gonzalo Sánchez de Lozada in February 2004. The main purpose of the law is to ensure that "Bolivians could regain property on hydrocarbons". Therefore, Article 5 of the new law provides that:

"all hydrocarbons are recovered at the wellhead for the Bolivian state. The state exercises its ownership rights over these hydrocarbons through Yacimientos Petroliferos Fiscales Bolivianos [YPFB]."

In addition to the reservoir provision, one of the most significant changes made by the new law is the increase (from 18% to 50%) in the percentage received by the government from all exploitation of hydrocarbons.

Issues

Law 3058 defines and regulates a number of oil-related activities, including:

• exploration;
  
  
• exploitation;
  
  
• refining;
  
  
• transportation via pipelines;
  
  
• commercialization; and
  
  
• natural gas distribution via networks.

Exploration
This includes the surface geological, aerial photogrametric topographic, gravimetric, magnetometric, seismic and geo-chemical surveys, as well as the drilling of wells and any other job that leads to determining the existence of hydrocarbons in a geographic area or zone.

Exploitation
This includes:

• drilling development and production wells;
  
  
• laying out gathering lines;
  
  
• building and installing storage and processing plants;
  
  
• separating liquids and liquefiable products;
  
  
• primary, secondary, and improved recovery; and
  
  
• any other activity in the soil and subsoil that is dedicated to the production, separation, processing, compression and storage of hydrocarbons.
  
  

Article 65 of Law 3058 allows YPFB to enter into the following contracts, as defined by Article 138:

• share production contracts, under which an entity performs by its own means, under its sole responsibility and representing YPFB all exploration and exploitation operations. The share production contract holder will receive an in-kind participation after royalties and taxes are paid;
  
  
• operation contracts, under which an entity performs by its own means, under its sole responsibility and representing YPFB, all exploration and exploitation operations. The operation contract holder will receive a payment for services provided, which could be a production percentage payable in kind or in cash; and
  
  
• association (joint venture) contracts, under which an entity under an operation contract makes a commercial discovery and enters into a joint venture agreement with YPFB for the performance of exploitation and commercialization activities. The association contract holder will receive a participation against production which can be payable in kind or in cash.

These contracts are regulated by Law 3058 in Articles 65 to 84.

The model contracts have not yet been approved by the Executive - they must be approved by a special decree.

Refining
These are the processes that transform oil into other products (eg, lubricants, grease, paraffin, asphalt, solvents, liquid petroleum gas) and the by-products and intermediate products that these processes generate.

For hydrocarbons refining activity, the Superintendency of Hydrocarbons will award an administrative licence, which will be granted once a concessionaire has met the legal, technical, economic and administrative requirements to be detailed in the regulatory norms. The concessionaire must comply with the Forestry Law, the Municipalities Law, the Irrigation Law, the Potable Water and Basic Sanitation Law and the Safety and Environmental Norms in the industrialization, refining and storage processes.

Transportation via pipelines
This is the activity of transferring hydrocarbons, oil-refined products and liquid petroleum gas from one place to another by means of pipelines, using complementary facilities. The distribution of gas via networks and gathering lines are excluded from this definition.

If a company wants to carry out this service, it must be be awarded a concession from the Superintendency of Hydrocarbons, by complying with the legal, technical and economic provisions and/or by winning a public bidding process, at the request of the party, according to the regulations.

The activity of transportation via pipelines is governed by the open access principle, according to which everyone has the right, without discrimination, to have access to a pipeline. To this end, it is presumed that capacity is always available, as long as the concessionaire does not prove the contrary to the superintendency.

Commercialization
Commercialization is the sale of hydrocarbons as result of a 'commercial discovery' - the detection of hydrocarbons in one or more reservoirs in a field that is within the contract area, the exploitation and production of which is supported by an economic analysis proving profitability.

Natural gas distribution via networks
This is the activity of providing natural gas as a public service to users in the area of concession, as well as building networks.

The concessionaires for the distribution of natural gas via pipelines will have the exclusive right to provide natural gas to all consumers in the geographical area of the concession, except for thermal electric generation plants, refineries and natural gas industrialization projects.

Authorities and Institutions

The following are the key bodies responsible for hydrocarbons in Bolivia.

The Ministry of Hydrocarbons, as set out by Law 3058, is the authority in charge of promoting and supervising state policy on hydrocarbons. Its specific responsibilites include:

• defining, evaluating and controlling compliance with national hydrocarbons policy;
  
  
• issuing norms for the proper application of Law 3058 and the performance of national hydrocarbons policy;
  
  
• supervisisng the proper compliance with legal provisions in the area of hydrocarbons;
  
  
• determining the price of hydrocarbons at the fiscalization point for the payment of royalties and participations;
  
  
• establishing the price policy for the domestic market; and
  
  
• establishing the export policy for the sale of hydrocarbons.

Under Law 3058 YPFB was re-founded as an autarchic public company under the supervision of the Ministry of Hydrocarbons. The law provided that YPFB will be administrated by a board of directors, an executive president, an administration and control vice president and an operations vice president. YPFB exercises ownership rights on behalf of the state for all hydrocarbons, executing petroleum contracts and performing all activities relative to the hydrocarbon productive chain. It must administer and supervise the performance of petroleum contracts and in doing so it controls exploration and exploitation activities, preventing damage to oil fields and maximizing production. It must also control the quality and volume of the production of hydrocarbons for purposes of taxes, royalties and participations. YPFB is also the aggregator, seller and administrator of natural gas export contracts.

The Superintendency of Hydrocarbons is the regulating entity for the transportation, refining, byproduct sales and distribution of natural gas through networks. In addition to the attributions granted through the legal disposition which created this institution, and in accordance with Law 3058, its most important attributions include:

• protecting consumer rights;
  
  
• granting concessions, licences and authorizations for regulated activities;
  
  
• granting permits to export hydrocarbons and their byproducts according to the regulations;
  
  
• authorizing imports of hydrocarbons;
  
  
• keeping a national register of individual and collective persons that carry out hydrocarbon activities in Bolivia;
  
  
• approving tariffs for regulated activities and setting prices according to the regulations;
  
  
• monitoring compliance with the rights and obligations of the entities that are subject to its competence;
  
  
• requesting information, data, contracts and other information considered necessary to carry out its responsibilities from the individual and collective persons that carry out hydrocarbon activities; and
  
  
• regulating the supply of hydrocarbon byproducts and periodically establishing the volumes of byproducts that are needed to satisfy internal demand and the raw materials required by the sector's industrialization projects.

For further information on this topic please contact Rodrigo A Henriquez Essmann at Indacochea & Asociados, Abogados by telephone (+591 3 535 356) or by fax (+591 3 581 200) or by email (rhenriquez@indacochea.com.bo).