70/30 Rule of exports confirmed

In an attempt to solve the economic and social crisis suffered by Argentina, several emergency laws and regulations were passed as of December 2001. By Economic Emergency Law No 25,561 the pegging of the Peso to the US dollar at a one to one rate was abrogated, which resulted in a significant devaluation of more than 300%. Several exchange control regulations were passed, including restrictions of transfers of funds abroad and requirements that the proceeds of exports be repatriated to Argentina (for more information on these measures, see “Banking Restrictions in Argentina – The Corralito” in Marval News # 3 of December 2001).

Decree No 1589/89 was one of the legislative pillars on which the privatization of oil fields in Argentina was founded. The Decree provided that 70% of the proceeds of exports of oil and gas could be freely disposed of by the holder of the concession (the “70/30 Rule”). At the time, the 70/30 Rule was a relevant incentive to encourage petrol companies to participate in the bids for the oil & gas fields that would be sold during the following years as a result of the deregulation and privatization of the hydrocarbon industry in Argentina. However, the 70/30 Rule as provided under Decree No 1589/89 does not apply to every oil field concession. Certain other concessions in Argentina were granted under different laws and regulations, as is the case for example of certain old concessions granted under the Mining Code of 1886.

Restrictions to transfers of funds abroad were abrogated in 1991 by Decree No 530/91. Given that no transfer restrictions existed as of such date, the 70/30 Rule became irrelevant.

Transfer of funds restrictions and repatriation of proceeds of exports obligations were reinstated as of December 2001. Among other measures, the Argentine Govenrment passed Decree No 1606/01 abrogating Decree No 530/91, and Decree No 1638/02 providing that those activities that had special exemptions granted by a law, decree or agreement with the Federal Government were not required to repatriate export proceeds.

On the grounds of the 70/30 Rule, as of December 2001 petrol companies did not repatriate to Argentina 70% of the proceeds of exports originated from concessions granted under Decree No 1589/89.

As a result of the devaluation, exporting crude oil became increasingly attractive. A significant volume of export proceeds payable in US dollars abroad were not repatriated to Argentina. The Argentine Government´s appetite to control such proceeds grew. A few bills were presented in the Argentine Congress to abrogate the 70/30 Rule which were finally not enacted, and the Attorney General issued an opinion in which he concluded that the 70/30 Rule no longer applied. The Argentine Government also initiated negotiations with the petrol companies to reduce from 70% to 50% the amount of export proceeds which would not be required to be repatriated to Argentina. A shadow of doubt was cast over the 70/30 Rule.

To eliminate the existing uncertainties, Decree No 2703/02 was passed by the Argentine Government (published in the Official Gazette on December 31, 2002) confirming the applicability of the 70/30 Rule. The Decree provides in Section 1 that the producers of crude oil, natural gas and liquid must remit to Argentina a minimum of 30% of the proceeds of exports of crude oil or its derivatives, and may freely dispose of the remaining balance.