National Congress enacted a Law modifying the Hydrocarbons’ Law

The law passed did not deviate from the bill submitted to Congress by the National Executive Branch, which had been agreed upon between the Federal Government and the provinces members of the Federal Organization of Oil Producing States (Mendoza, Santa Cruz, Chubut, Neuquén, Rio Negro, Salta, Formosa, La Pampa, Jujuy and Tierra del Fuego, the "OFEPHI").
Law No. 27,007, besides amending some aspects of the Hydrocarbons Law mostly linked to the exploration and production of unconventional hydrocarbons, the extension of the concessions and the royalties rates, also modifies the promotional scheme for the industry established under Decree No. 929/13, among other key issues for the sector.
The main amendments to the Hydrocarbons Law approved by Law No. 27,007 are as follows

a. Concessions for Unconventional Production

Law No. 27,007 confers legal status to production concessions for unconventional hydrocarbons (CENC) that had been created by Decree No. 929/13. To this effect, 'Unconventional Hydrocarbon Production’ is defined as the extraction of oil and gas through unconventional stimulation techniques applied to deposits in geological formations characterized by the presence of rocks with low permeability: shale or slate rocks - shale oil and shale gas-, compact sandstones -tight sands, tight oil and tight gas-, layers of coal -coal bed Methane-.
CENCs may be requested by the holders of exploration permits or conventional production concessions, which are currently in force or which may be granted in the future.
The duration provided for the CENCs is of 35 years with the possibility of extensions for 10-year terms.
While the main purpose of the CENCs is unconventional production, conventional exploration and production are allowed as ancillary activities subject to payment of a production bonus and an additional royalty of 3%.

b. Duration of Exploration Permits

The basic term of permits for conventional exploration is divided into 2 periods of up to 3 years each plus a discretionary extension up to 5 years. Thus, the maximum possible duration of exploration permits is reduced from 14 to 11 years.
For unconventional exploration, the basic term of the permit is divided into two 4-year terms, plus one discretionary extension of up to 5 years; this is a maximum of 13 years.
In the case of off shore permits, the two periods of the basic term are of up to 4 years and the extension for 5 year is foreseen.
At the end of the first period of the basic term, the permit holder may choose (i) to revert 100% of the area subject to the permit or (ii) to keep the entire area and enter in the second period of the basic term.
At the end of the basic term, the possibility of access to an extension period will be subject to the reversion of 50% of the area and the proper compliance of the permit obligations.

c. Duration of Production Concessions

The term of conventional production concessions has been maintained in 25 years. For CENCs, a 35-year term is provided, including an initial pilot plan of up to 5 years. For offshore production, concessions will be granted for 10 year periods.
In all cases 10-year extensions are foreseen.

d. Duration of Transport Concessions

According to Law No. 27,007, transport concessions will be granted for the same term as the production concession from which they originate, plus the possibility of an extension for a 10-year term. Thus, transport concessions arising from a conventional production will be granted for a 25-year term and those originating in a CENC for a 35-year term. Until present all transportation concessions were granted for 35 years.

e. Extension of Production Concessions

Under the previous Hydrocarbons Law regime, the concessions could be extended only once for a 10-year term.
Law No. 27,007 establishes successive extensions to conventional and unconventional concessions for 10-year periods. Even the concessions currently in force and those which have already been extended once can be extended again.
Until present the extension was subject to the concessionaire having properly complied with its obligations under the concession.
Law No. 27,007 introduces the following requirements : (i) the extension must be requested 1 year before the due date of the concession (under the regime of the Hydrocarbons Law the extension had to be filed 6 months before the due date of the concession); (ii) the concession must be under production at the time the extension is requested(iii) the concessionaire must present an investment plan consistent with the development of the concession; and (iv) the extension is subject to the payment of an extension bonus of a sum equivalent to the proven reserves multiplied by the average basin price of the previous two years and of an additional 3% royalty over that in force at the time of granting the extension up to a maximum of 18%.

f. Limits to the Amount of Permits and Concessions

Law No. 27,007 eliminates the maximum limit of 5 concessions and 5 permits per holder, established by the Hydrocarbons Law.

g. Granting of Permits and Concessions

Law No. 27,007 maintains the requirement that permits and production concessions must be granted through competitive bidding processes and reaffirms the principle that this power remains in hands of the provinces or the Federal State according to the location of the deposits, in accordance with the amendments to the Hydrocarbons Law introduced by the 'Short Law' No. 26,197.
Nonetheless, the new law provides that the bidding terms and conditions, intended for purposes of granting permits and concessions, must conform to a model that will be developed within 6 months jointly by the Committee established by Decree No. 1277/12 and provincial authorities.
It also provides that the awarding criteria must be the largest investment or production activity, replacing the vague existing criteria which referred to the most convenient offer to the interests of the Nation.

h. Reserved Areas and Carry

Law 27,007 eliminates, with effects to the future, the possibility for the Federal Government and the Provinces to reserve areas for the exploitation by public entities or state-owned companies. However, contracts already executed by said provincial entities or companies for the exploration and development of reserved areas remain protected.
On the other hand, in the case of areas which had already been reserved by a province but which are not yet subject to a contract for exploration or development, the province will be allowed to choose the contract to be entered into for its development. However, the possibility of conditioning the award of said contracts to private investors to the condition that they finance the percentage of the investments corresponding to the provincial state-owned oil company is forbidden.

i. Canon & Royalties

Law 27,007 updates the values ​​of the canon applicable under exploration permits and production concessions. In the case of exploration permits, it establishes the possibility of compensating it up to 90% with investments in exploration during the second period of the basic term and of the extension.
Royalties are defined as the only means available to grantors to collect oil revenues. Besides, the general 12% rate provided in the Hydrocarbons Law is maintained. Similarly, the possibility of reducing the rate in exceptional cases up to 5% is also maintained, as well as the possibility of increasing it 3% in the successive extensions. It also introduces a maximum limit in all cases of 18%.
Law No. 27,007 further provides the possibility of reducing royalties up to 25% for the CENCs requested within the first 36 months as of applicability of said law.
It also provides the possibility for the grantor to apply a reduced rate of up to 50% for projects of (i) tertiary production, (ii) extra-heavy oil and (iii) offshore.

j. Promotional Regime

Law No. 27,007 provides that the National Executive Branch shall include in the Promotional Investment Regime established by Decree No. 929/2013 (1) the direct investment projects that contemplate investments for an amount of 250 million of US Dollars in a 3-year period. Currently, the benefits under this regime apply to projects for amounts higher than 1,000 million US Dollars in 5 years.
The benefits under this promotional regime will be enjoyed after the third year and shall apply to 20% of the production of the project, in the case of on shore projects –whether conventional or unconventional- and to 60%, in the case of offshore projects. To qualify as an off shore project, the wells’ depth measured between the surface and the seabed must be of at least 90 meters.
Law No. 27,007 provides two contributions payable to the Provinces in connection with the projects subject to this promotional regime: (i) 2.5% of the initial investment to develop corporate social responsibility projects, payable by the owner of the project and (ii) a contribution, which amount shall be determined by the Commission created by Decree 1277/12 considering the size and scope of the project, to develop infrastructure projects in the relevant Province and payable by the Federal Government.
It also establishes that capital goods and supplies which are essential for the performance of investments by the companies registered before the Investments Registry created by Decree No. 1277/12, imported by said companies or by companies providing services to them, shall be granted reductions on import taxes established by Decree No. 927/13 (2).

k. Environmental Matters

Law No. 27,007 does not establish specific minimum environmental standards for hydrocarbon activities. However, it establishes that the Federal Government and the provinces shall work towards the establishment of a uniform environmental legislation for the industry. Its priority purpose will be to implement good practices for environmental management of hydrocarbons’ exploration, exploitation and/or transport activities in order to develop the activity with an adequate protection of the environment.

l. Fiscal Regime

Law No. 27,007 provides that the Federal Government and the provinces will promote the adoption of uniform fiscal legislation to endorse hydrocarbon activities.
The agreement signed on September 16, 2014 among the Federal Government and the Provinces members of OFEPHI in which amendments to the Hydrocarbons’ Law also were considered, also established the basis for a uniform and stable provincial and municipal fiscal regime for the upstream industry.
The bases of this regime will be as follows:

• The Turnover Tax applicable to hydrocarbons’ production activities will be capped at 3%.
• During the term of a permit or concession, the Provinces and the municipalities can neither impose on their holders new taxes nor increase those existing at the time the permit or concession was granted, except for services’ fees (‘tasas retributivas de servicios’) and contributions for improvements (‘contribuciones de mejoras’). This stability guarantee does not exclude general tax increases.
• Current stamp tax’s rates shall not be increased and the financial agreements entered into for purposes of structuring the investment projects or securing the investments shall be exempted from stamp tax.

m. Plan Gas Programs

Law No. 27,007 refers to Plan Gas I and Plan Gas II programs and ratifies that these programs, and those programs to be created in the future to promote the production of natural gas, shall be administrated by the Commission created by Decree No. 1277/12.

n. Enarsa and Off-shore Contracts

It is provided that off-shore areas that were awarded to Enarsa (Energía Argentina Sociedad Anónima) and that are not currently subject to a contract providing for their exploration and development shall revert to the Federal Secretariat of Energy.
In the case of off-shore areas which are subject to a contract, the National Executive Branch is empowered to negotiate with the holders of said contracts their conversion into exploration permits or production concessions, as the case may be.

ñ. Provincial Extension Processes

Regarding the extension processes regarding production concessions granted by the Federal Government and pending before provincial authorities at the time Law No. 27,007 becomes in effect, it is provided that said processes must be concluded within the next 90 days.

o. Effective Date

Since Law No. 27,007 does not set forth its effective date, it will take effect as of November 9, 2014.

1. For more information about the promotional regime established by Decree No. 929 see Marval News No. 130 at http://www.marval.com/publicacion/?id=6002.
2. For a description of the scheme established by Decree No. 927/13 See Marval News No. 133 at http://www.marval.com/publicacion/?id=6020&lang=en.