The Bill to Amend the Hydrocarbons’ Law Agreed between the Federal Government and the Oil Producing Provinces

After nearly 5 months of negotiations, on September 16, 2014, the Federal Government and the oil producing provinces members of OFEPHI (1) (Mendoza, Santa Cruz, Chubut, Neuquén, Rio Negro, Salta, Formosa, La Pampa, Jujuy and Tierra del Fuego (the “Provinces”) signed a federal agreement (the “Agreement”) that sets the basis for the amendment of federal hydrocarbons’ Law No. 17,319 (the “Bill”). The proposed amendments include specific rules for the exploration and production of unconventional hydrocarbon resources, among other matters. The Agreement also sets the basis for the implementation of a uniform fiscal regime at provincial and municipal levels for the upstream sector.
On same date, the National Executive submitted the Bill to the Federal Congress. The Bill has been put on the Senate’s legislative calendar for this week.

1. The Bill
The Bill approved by the Agreement introduces important changes to the draft bills initially proposed to the Provinces by the National Executive to amend the Hydrocarbons’ Law. (2) Among the main differences between said initial drafts and the Bill approved by the Agreement it is worth noting the following:

1. Conventional and unconventional production concessions, including those which at the time the Bill is enacted are in effect -even if they have been already extended-, can be prolonged indefinitely for additional 10-year periods, provided that (i) at the time the application for the extension is filed the concession is under production; (ii) the concessionaire has complied with its obligations under the concession and (iii) the concessionaire submits an investment plan for development of the area. In this case, the Province, or the Federal Government -depending on the location of the reservoirs-, may condition the extension to the payment by the concessionaire of an extension bonus which maximum amount will be equal to the proved reserves of the concession at the end of its duration multiplied by 2% of the average basin prices for the previous 2 years. Royalties due during the extended duration will be 3% higher than those applicable immediately before the extension is granted, with a cap of 18%.
   
2. In the event that an Unconventional Exploitation Concession (“UEC”) is granted to the holder of a conventional concession, conventional production from reservoirs located within the boundaries of the UEC after the duration of the conventional exploitation concession expires, will be subject to a bonus payable by the concessionaire to the Province or the Federal Government, as the case may be. The maximum amount of this bonus is equal to the proved reserves of said reservoirs at the end of the conventional concession’s duration multiplied by 2% of the average basin prices of the 2 years preceding the granting of the UEC. Royalties due in connection with the production of conventional resources within the area covered by the UEC due after the duration of the conventional concession expires may be increased up to 3% with respect to the royalties in effect at that time, up to a maximum of 18%.
   
3. The Bill provides that the model bidding terms and conditions on which basis new exploration permits and production concessions will have to be awarded by the Provinces or the Federal Government, as the case may be, will be adopted jointly by the Provinces and the Federal Secretary of Energy.
   
4. The Bill authorizes a reduction of up to 25% of the royalties payable under UECs that are granted during the 3 years following its enactment. This reduced rate applies during the 10-year period immediately following the end of the relevant pilot project period which has a maximum duration of 5 years. The Bill also provides for a 50% reduction of the royalties applicable to offshore projects and to projects that involve enhanced or improved oil recovery techniques and extra-heavy oil.
   
5. Pursuant to the Bill, the Federal State and the Provinces will work towards the establishment of a uniform environmental legislation for the upstream and midstream sectors, whose priority purpose will be for the best practices for the environmental management of hydrocarbons’ exploration, exploitation and/or transport activities to be implemented so that these activities are conducted ensuring an adequate protection of the environment.
   
6. According to the Bill, the Federal Government will include in the promotional regime established by Decree No. 929/2013 (3) direct investment projects for an amount of 250 million of US Dollars, provided that the investments are made in a foreign currency. The benefits under this promotional regime will apply to 20% of the project’s production, in the case of on shore projects –whether conventional or unconventional- and to 60%, in the case of offshore projects.
   
7. The Bill provides the following contributions payable to the Provinces in connection with investment projects subject to the promotional regime described in 6) above: (i) 2.5% of the initial investment to develop corporate social responsibility projects, payable by the project’s owner and (ii) a contribution, and this amount must be determined by a federal agency (4) on the basis of the size and scope of the project, to develop infrastructure projects in the relevant Province, payable by the Federal Government.
   
8. The proceedings for the extension of production concessions pending before a Province at the time the Bill becomes in effect will have to be concluded within a 90-day term following its enactment.
   

2. The Agreement
The Agreement reached among the Federal Government and the Provinces sets forth 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:

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

 
 


1. Federal Organization of Oil Producing Provinces.
2. See “Proposed Bill to Amend the Hydrocarbons Law” published in Marval News # 143, dated August, 29, 2014.
3. See “New Regime for the Promotion of Investment on Hydrocarbons Production and regulation of Unconventional Hydrocarbons Production” in Marval News # 130, dated July 31, 2013.
4. The Commission for Planning and Strategic Coordination of the National Oil Investment Plan created by Decree No. 1277/12.