Contractual Changes in the Hydrocarbons Regime - International Law Office

Following the issue of Supreme Decree 28701 (for further details please see "President Takes Radical Steps to Nationalize Hydrocarbons") the government granted a 120-day period for oil and gas companies engaged in the exploration, exploitation and production of hydrocarbons to cease activities under the joint venture contracts executed under the now-superseded Law 1689/1996 and to comply with the new contractual framework. This period ended on October 28 2006.

The measures set down in the decree were taken because the joint venture contracts stipulated that the hydrocarbons extracted from the earth were completely owned by the private companies carrying out the extraction. The contracts also established very favourable conditions for private companies (eg, a high income return and a flexible tax regime).

Following the enactment of the Hydrocarbons Law (3058/2005) the hydrocarbon industry is to be returned to state control through Yacimientos Petroliferos Fiscales Bolivianos (YPFB), the state-owned oil company. The decree also established a tax increase for two of the country's main oil production fields.

As a result, the government has drafted a model contract to be used for negotiations with private companies. Agreement has been reached with all the companies, resulting in the execution of 44 new contracts, which have already been approved by Congress.

The model contract establishes:

• the objective of the contract, stating that private companies will no longer be partners of the state - instead, they are now service providers;
  
  
• the non-grant of explored and exploited hydrocarbons property and, therefore, the removal of the ability to commercialize such property;
  
  
• a significantly smaller compensation to companies compared with that set out by the joint venture contracts;
  
  
• control and observation of the companies' activities by YPFB at any time;
  
  
• YPFB's involvement in the companies' research and exploitation policies; and
  
  
• the condition that, in case of arbitration, proceedings will take place in La Paz under Bolivian law and will be carried out in Spanish.

The contracts are due to be officially notarized shortly. Once this has taken place, the new contractual framework for the hydrocarbons sector will be complete.

However, although the new Hydrocarbons Law was enacted in May 2005, the regulations pertaining to that law have yet to be issued. Such regulations are necessary in order to reactivate the sector effectively. The government is expected to issue these regulations within the first few months of 2007.

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).