Proposed Bill to Amend the Hydrocarbons Law

For several months, the Federal Government has been discussing with the ten hydrocarbon producing provinces, grouped in the OFEPHI (Federal Organization of Hydrocarbons Producing Provinces) a draft bill to reform the Hydrocarbons Law No. 17,319 which, among other matters, adapts the existing scheme to the specificities of the exploitation of unconventional resources (the "Bill").
According to the available version of the Bill it covers regulatory, tax, promotional and environmental issues. In various aspects, the Bill follows the path paved by Decree No. 929/2013 (published in the Official Gazette on 15/07/2013), including the definition of unconventional hydrocarbon exploitation (1).
The Bill does not yet have parliamentary status.

1. Regulatory Aspects Covered by the Bill
Regarding regulatory matters, the Bill creates the figure of Unconventional Exploitation Concession ("UEC") whose main objective is the exploitation of unconventional hydrocarbons while admitting, as a complementary activity, the exploitation of conventional reservoirs. The UECs will have an initial term of validity of 35 years with an option in favor of its holder to extend the UEC for an additional period of 10 years. The Bill provides for the establishment of an initial 5-year Pilot Plan since adjudication, at the concessionaire’s option.
The Bill enables concession and permit holders to request a UEC within the limits of the area covered by such concessions or permits. It also provides for the subdivision of the area concerned, as well as the unification under the new UEC of this subdivided part with other adjacent areas covered by concessions of the same holder. This is subject to providing evidence of the geological continuity between the subdivided lots of both areas.
As for exploration permits, the Bill includes a reduction and revision of the time scheme now in force. In this regard, it splits the basic permit term in two periods (as opposed to the current three periods) and does not require the partial reversion of the area as a condition upon entering the second period, though it does require the reversion of 50% of the area to benefit from the extension period. The maximum duration of permits is reduced from 14 to 11 years in cases of exploration of onshore conventional resources and to 13 years in cases of offshore unconventional exploration.
The term of the concessions is also modified. Thus, the duration of transport concessions, currently 35 years with an extension option for another 10, is amended based on whether the transport concession originates in a conventional concession or in a UEC. For the former, the initial period is reduced to 25 years, while the latter is kept at 35.
The Bill keeps the duration of conventional onshore concessions at 25 years while increasing to 30 years the term of offshore concessions. In both cases, it provides a 10-year extension option.
Concessions now in force can also be extended under the provisions of the Bill, even in cases where these may have already been extended. Granting of this extension would be granted suject to the extent that these concessions are in production at the time of applying for the extension. For these extensions, and those that may be requested in the future both by conventional concessions and UECs, the requirement that the concessionaire have complied with their obligations under the concession is upheld. However, the advance period necessary for filing an application for extension is increased to 1 year prior to expiration of the initial term, while currently the advance period is 6 months. The granting of this extension is conditional upon the submission of an investment plan for the area, along with a commitment to pay royalties a rate 3% hier that the rate in force at the time of the extension.
Moreover, the restrictions currently preventing one same person from holding more than 5 exploration permits or more than 5 production permits is lifted.
As regards the granting of permits and concessions the Bill upholds the requirement that these be awarded after a competitive bidding process is performed. The Bill, however, provides that the bidding terms and conditions must be drafted according to the model to be adopted by the Commission of Strategic Planning of the Federal Hydrocarbons Investments Plan created by Decree No. 1277/2012 (O.G. 27/07/2012). The criterion of adjudication shall be set pursuant to the amount investment or exploration activity.
The Bill removes, with prospective effect, the possibility of reserving areas for exploitation by public companies or companies with federal or provincial government capital participation. With regard to areas that are currently reserved but with no valid partnership contract, the Bill provides that they shall be subject to a competitive bidding process under the relevant associative scheme chosen for production. In no case adjudication can be made conditional upon obligations of the private partner to finance investments of the relevant public or state company.
Regarding royalties, the Bill defines these as the only mechanism for collection of oil revenues for the provinces and provides for a maximum rate of 12%, for the production phase, which can only be increased by 3% during the extension period. The Bill also provides for a 50% reduction on the rate applicable to projects involving enhanced recovery techniques and those for the production of extra-heavy oil.

2. Tax Issues Covered by the Bill
In fiscal matters, the Bill bans municipalities from taxing any form of hydrocarbon activity. It further provides for the application of a maximum rate for Gross Income Tax of 3% for hydrocarbon production. As regards Stamp Tax, the Bill provides an exemption for contracts and instruments relating to investments, complementary services and transportation relating to exploration activities. In addition, the following rates are envisaged: (i) 0.7% for contracts and instruments relating to complementary and transport services linked to production activities.; and (ii) 0,5% for contracts and instruments relating to hydrocarbon trade.

3. Environmental Issues
Finally, the Bill establishes the minimum requirements for exploration, production and transportation both onshore and offshore. These requirements include an Environmental Impact Assessment prior to the execution of a project; monitoring and control activities, with special emphasis on soil and water resources; prioritizing the use of formation water whenever technically and economically feasible; isolation of wells for aquifer protection and the possibility of temporary restrictions on the use of water suitable for human consumption in cases of climate emergencies. It is also provided that the OFEPHI and the Federal Government shall promote the enactment of a uniform environmental regulation for the sector.

4. Promotional Scheme
The Bill provides that direct investment projects in amounts of 250 million US dollars shall be included in the promotional scheme established under Decree 929/2013 for a period of 3 years. The benefits under this scheme, consisting mainly in free disposition over 20% of the project output along with the foreign currency obtained from its export and the guarantee that in case export restrictions are imposed for the supply of the local market, the producer shall be allowed to charge the international price and shall have access to the foreign exchange market for the purchase of foreign currency with the amounts paid in local tender. Currently, under the provisions of Decree 929/2013, these benefits are only granted to projects involving a direct investment of more than $ 1,000 million within five years.
According to the Bill, the benefits of the new projects will be implemented starting in the third year after implementation and will apply over 20% of production of conventional and unconventional exploitation projects, and over 60% of offshore projects.

5. Debate Generated in Relation to the Bill
The provinces’ main objections concern the proposed constraints regarding both their participation in oil revenues and in the definition of (i) projects approved as beneficiaries of the promotional scheme and (ii) the terms for the adjudication of new permits and concessions and for the extension of current concessions.
These discrepancies are focused on the provisions of the Bill covering the following topics: (i) the definition of royalties as the only mechanism of collection of oil revenues, (ii) the restriction to charge a re-entry fee as a prior condition for the extension of concessions, (iii) the right to request a 10-year extension of current concessions, and (iv) the definition of the bidding terms and conditions model.

6. Final Comments
We understand that, though perfectible in several aspects, the Bill demonstrates a decision aimed at creating more favorable conditions encouraging the expansion of the sector and, if enacted, it would solve some of the issues that must be addressed to create necessary conditions to attract the investment required for the development of unconventional resources to achieve self-sufficiency.
Notwithstanding the powers of the Federal Government in the matter, it would be convenient that the producing provinces adhere to the Bill in order to avoid future conflicts and to provide predictability for private agents.
 
 1. Extraction of liquid and/or gaseous hydrocarbons through unconventional stimulation techniques applied to reservoirs located in geological formations of schists and slates (shale gas or shale oil), tight sands (tight oil and tight gas), coal layers (coal bed methane) and, in general, from any reservoirs distinguished by the existence of low-permeability rocks.