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State Operations in the Hydrocarbons Sector - International Law Office

International Law Office

Energy & Natural Resources - Bolivia

State Operations in the Hydrocarbons Sector

July 09 2007

Upstream Market
Downstream Market
Comment


This update outlines the degree of control that Yacimientos Petrolíferos Fiscales Bolivianos (YPFB), the state-owned oil company, has acquired and plans to acquire in the hydrocarbons sector.

Upstream Market

On May 17 2005, as a result of the national referendum carried out on July 10 2004, former President Carlos Meza Gisbert enacted Law 3058. The new law repealed Law 1689, which had previously regulated the sector. Article 5 of the law provides for:

    "the recovery of the ownership of any and all hydrocarbons at the wellhead in favour of the Bolivian state, which will exercise its ownership rights over any and all hydrocarbons through YPFB."

Article 16 of the law provides that oil and gas companies are obliged to surrender in favour of the state any and all hydrocarbons produced under the contractual terms established by the state. This represented a 180-degree change with respect to the control and availability of hydrocarbons and their derivatives: Law 1689 had granted rights to hydrocarbons at the wellhead and elsewhere to companies undertaking exploration and exploitation, termed 'upstream' companies. The companies had executed joint venture contracts with the state which established their right to make free commercial use of the hydrocarbons.

The entry into force of Article 5(2) of the new law required upstream companies to replace their joint venture contracts with new contracts (based on model contracts established by the law) within 180 days. The upstream companies initially refused to do so, arguing that the requirement was against the rule of law, and threatened to take their case to international arbitration. As a result, the upstream companies and YPFB did not agree new contracts within the 180-day period.

On May 1 2006 President Evo Morales enacted the Supreme Decree on Hydrocarbon Nationalization (28701/2006). Article 1 of the decree restates the terms of Article 5 of the law, which states that hydrocarbons are to be brought under the ownership, possession and total control of the state. Similarly, Article 2 of the decree echoes Article 16 of the law in requiring upstream companies carrying out oil and gas production activities within the Bolivian territory to surrender their production operations to YPFB. However, Article 3 of the decree provides that upstream companies will be unable to continue operating in Bolivia unless they (i) accept the terms of the regulation, and (ii) regularize their activity through agreements that comply with such terms and other legal and constitutional requirements within a 120-day period beginning on the date on which the regulation was enacted.

All of the upstream companies complied with these requirements, concluding operation contracts within the term and thereby terminating the joint venture contracts. The operation contracts became binding on May 2007 when they were officially notarized.

Pursuant to the entry into force of the operation contracts, upstream companies will perform only exploration and exploitation activities, whereas YPFB will control the commercialization of the hydrocarbons and determine the availability of hydrocarbons in both the internal and external markets.

Furthermore, Article 6 of Supreme Decree 28701 provides that the shares in Transredes SA, Empresa Petrolera Chaco SA and Empresa Petrolera Andina SA, which were part-owned by pension fund administrators, be transferred to YPFB without payment or other consideration. In order to implement this measure the government enacted Supreme Decree 28711; Article 3 set an ultimatum for the mandatory transfer of the shares. The transfers were completed and YPFB acquired shares of the equity of Transredes (34%), Empresa Petrolera Andina SA and Empresa Petrolera Chaco (just under 49% in both cases). The latter two companies are upstream companies; once YPFB acquires a majority interest in them, it will be able to control their hydrocarbon fields.

On May 13 2007 the president and his cabinet enacted Supreme Decree 28130, which relates to the upstream business. It provides for the assignment of traditional and non-traditional zones to YPFB in accordance with Articles 34 and 35 of Law 3058, identifying zones that may be developed only by YPFB (either alone or in partnership with third parties in an entity termed a 'mixed economy company'). It also provides that a company may enter into such a partnership with YPFB only on condition that it:

  • has executed a study agreement (subject to evaluation);

  • is from a state which has agreed an energy cooperation pact with Bolivia (ie, Venezuela); or

  • is already developing fields in Bolivia.

Therefore, YPFB's potential partners for hydrocarbon exploration and exploitation activities in a mixed economy company are limited to:

  • companies which have not previously invested in the country, but which have previously concluded a study agreement and received YPFB approval;

  • Petróleos de Venezuela SA; and

  • the current upstream companies.

Downstream Market

The sub-sector of downstream operations comprises:

  • hydrocarbon transportation by pipeline;

  • natural gas distribution through existing networks;

  • storage;

  • refining; and

  • retail commercialization.

Hydrocarbon transportation
Hydrocarbon transportation by pipeline is carried out by Transredes SA, Gas Oriente Boliviano Ltd, Gas Transboliviano SA, Compañía Logística de Hidrocarburos Boliviana SA (CLHB) and Transierra SA.

In Supreme Decree 28701 the government declared its aim of obtaining over 50% of the shares in Transredes and CLHB, thereby taking control of the two companies. Moreover, on May 13 2007 the government enacted Supreme Decree 28129 with the aim of securing the continuity of hydrocarbon transportation. It extends the validity of the present transportation contracts between upstream companies and transportation companies for 180 days, after which the operation contracts will come into force. Once this term has elapsed, YPFB will participate in the execution of new transportation contracts as a party to the upstream operation contracts. This measure will allow the state, acting through YPFB, to establish and modify the parameters of operation of transportation companies in the industry.

Distribution, storage and refining
The distribution of natural gas is undertaken by private companies (eg, Sergas), mixed economy companies (eg, Emdigas) and YPFB - this sector is not exclusively under state ownership.

The main company involved in storage is CLHB, which is also active in the transportation sub-sector and is expected to be controlled by YPFB soon.

A few weeks ago the passing of Supreme Decree 29128 authorized the chief executive officer of YPFB to buy out Petrobras Bolivia Refinación SA, the owner of the two biggest refineries in the country,(1) for $112 million, and the deal was agreed. The first half of the payment was made in June; the second will follow in August. As agreed, YPFB took over the control and administration of one refinery on the first payment.

Retail commercialization
This sub-sector involves the bottling and distribution of liquefied petroleum gas (LPG) and the wholesale commercialization and retail distribution of compressed natural gas.

YPFB has a LPG bottling plant in La Paz and also owns some LPG distributors. However, two bottling operations are privately owned: Repsol YPF Gas Bolivia SA in La Paz and Flamagas SA in Santa Cruz. The majority of LPG distributors are owned by small companies.

The wholesale intermediaries between the refineries and the liquid fuel retail stations used to be private companies (ie, Copenac SA, Dispetrol SRL, Petrobras Bolivia DistribuciĆ³n SA and Pexim SRL). However, Law 36058 and Supreme Decree 28772 have transferred this activity to YPFB. The majority of Bolivia's retailers of liquid fuel and compressed natural gas are owned by private companies.

Comment

YPFB controls the activities which comprise the upstream sub-sector, although it must find partners in order to develop them.

In the downstream sub-sector, YPFB controls refining and if it acquires the necessary holding in Transredes and CLHB, it will extend its influence. However, it is very difficult for the state-owned company to intervene effectively in the natural gas distribution networks and in retail commercialization.


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).


Endnotes

(1) Guillermo Elder Bell and Gualberto Villarroel.


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