Exploration and Exploitation Contracts
On August 19th, 1993 was enacted the Organic Law of Hydrocarbons, Law Nº 26221, effective as of November 18th, 1993. This rule is intended to promote investment in Hydrocarbons exploration and exploitation activities, for that, among other things, determines the creation of PERUPETRO S.A. as a State Company for Private Law of the Energy and Mines Sector. This company representing the State negotiates signs and monitors contracts about hydrocarbons, as Technical Evaluation Agreements. Also commercialises, through third parties and under the principles of free market, the hydrocarbons from the areas under contract, in the form of services.
In addition, the law Nº 26221 states that Hydrocarbons exploration and exploitation activities be made in the form of License Contracts and Service Contracts or other forms of contracting authorized by the Ministry of Energy and Mines, which are governed by private law and that once approved and signed, may be amended only by written agreement between the parties, the amendments must be approved by Supreme Decree.
The License Contracts for Hydrocarbons Exploration and Exploitation, concluded between PERUPETRO an the Contractor, have the following central features.
Costs and Risks
During the exploration phase the Contractor is obliged to make a minimum investment, meeting with the Exploratory Work Units defined in each one of the contracts. Once the Commercial Discovery is made, the Contractor shall prepare an Initial Development Plan that is approved by PERUPETRO, then must submit the following documents:
a) "An annual work program and detailed budget of revenues, costs, expenses and investments for the next calendar year”.
b) “An annual work program and detailed budget of revenues, costs, expenses and investments for the Exploration, aiming to find additional reserves, if it is the case”.
c) “A work program and its projection of revenues, costs, expenses and investments related to the Development and/or Production for the next five (5) calendar years”.
The contractor shall provide and be responsible for all economic and financial technical resources required for the execution of the Operations.
The hydrocarbons “in situ” are owned by the State. The right of ownership of the Hydrocarbons extracted is transferred by PERUPETRO to the contractor in the Subscription Date, as stipulated in the contract and in the article 8º of the Law Nº 26221. The Contractor agrees to pay the State, through PERUPETRO, the royalty in cash under the conditions and opportunity established in the Contract.
Moreover, article 39 of the Organic Law of Hydrocarbons Nº 26221 provides that the contractor will have “the free availability of Hydrocarbons that are entitled under the Contract and may export free from all taxes, including those requiring specific mention”. Additionally, in “case of national emergency declared by Law, under which the State must acquire Hydrocarbons from the local producers, it will be done according to international prices according to valorisation mechanisms and payment that will be established in each contract.”
The deadline for the exploration phase is 7 years and for the Oil exploitation phase is the remaining to meet jointly with the exploration phase, 30 years; on the other hand, for natural gas non-associated and natural gas non-associated and condensate exploitation, will be to complete 40 years.
After the exploration phase the Contractor may request the commencement of Commercial Production with the declaration of the Commercial Discovery, may request a hold of this right when:
a) ”That the contractor can demonstrate to the satisfaction of PERUPETRO, that the volumes of Hydrocarbons discovered in the Contract Area are insufficient to economically justify the construction of the Main Pipeline.”
The Supreme Decree Nº 017-2003-EM states the criteria used to calculate the royalties and participations in the upstream of the oil/gas sector of Peru. This rule states that the Contractor can choose between two methodologies, by Production Scale or by Economic Result, when making a Declaration of Commercial Discovery and “will depend on their investments and costs estimates that could be done in the Contract Area; after which cannot make any change in methodology”.
It is applied on the profit of the operation with a rate of 30%. Additionally, the “State, through the Ministry of Economy and Finance, warrants the Contractor, the benefit of tax stability during the Term of the Contract, which shall be subject, only, to the tax regime prevailing at the date of Subscription, according to the provisions of the “Regulation of the Guarantee of Tax Stability and the Tax Regulations of the Law Nº 26221, Organic Law of Hydrocarbons”, approved by Supreme Decree Nº 32-95-EF, in the “Law that regulates Stability Contracts with the State under Sectorial Laws – Law Nº 27343” as appropriate and in the Amendment Law in Hydrocarbons – Law Nº 27377.”
Finally, according to Law Nº 27624 provides that companies “are entitled to a final refund of the General Sales Tax and Municipal Promotion Tax to pay for the execution of activities directly related to exploration during the exploration phase of the Contracts and for the execution of the technical evaluation Agreements”.