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Latin America

Oil & Gas Handbook

2012


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Latin America Oil & Gas Handbook

Table of Contents

Argentina ............................................................................................. 1

Brazil ................................................................................................. 18

Chile .................................................................................................. 43

Colombia ........................................................................................... 59

Mexico............................................................................................... 82

Venezuela ........................................................................................ 106


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Argentina - Oil & Gas Handbook

Argentina

Argentina Upstream Industry

1. Industry Background

The hydrocarbons industry in Argentina has experienced differentstages as from the first oil discovery in 1907. Such stages began withthe state monopoly over hydrocarbons during the first decades, a

process of deregulation peaking during the 90s, and recently, acts ofnationalization.

Argentina is a federal republic divided in 23 provinces and theautonomous city of Buenos Aires, which is the capital city of thecountry. Each province enacted its own Constitution and regulatoryframework and all powers not delegated to the Federal Governmentthrough the National Constitution remain in the province.

Early developments in the industry were followed by the creation ofArgentinas first NOC, YPF Sociedad del Estado(YPF) in 1922.YPF had the monopoly of oil and gas in the country and IOCs hadaccess to the industry mainly as YPFs service providers. At thisstage, the Federal Government constitutionally retained the

jurisdiction and domain over Argentinas hydrocarbons and theexploration, exploitation, manufacture, transportation andcommercialization of oil and gas were regulated by 1967s nationalLaw No. 17,319 (Hydrocarbons Law). The Hydrocarbons Law

provided for the granting of concession-based rights with a possibility

for NOCs (YPF) of entering into other types of agreements to exploreand exploit hydrocarbons.

During the 90s the industry was highly deregulated. Servicesagreements between YPF and IOCs were converted into exploitationconcessions, and in 1992 YPF was privatized by National Law No.24,145 (Privatization Law). Therefore, YPF became a privatecompany and its shares were gradually sold to private parties.

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In 1994, the National Constitution was amended transferring eminentdomain over natural resources to the provinces but no specific

reference was made on the jurisdiction on those resources. Thissituation caused conflicts between the provinces and the federalgovernment over regulation in relation to natural resources. Many, butnot all of such conflicts, were overcame in 2007 when National Law

No. 26,197 (the Short Law) was enacted transferring the grantingand control authority of hydrocarbons to the provinces.

Following -and in some cases before- the enactment of the Short Law,

the provinces enacted legislation or executed agreements regardinghydrocarbons, which, at times, could have seen as conflicting with orcircumventing the provisions of the Hydrocarbons Law. In addition,hydrocarbons producing provinces have created their own provincialowned companies (POC).

As the federal government lacked a NOC due to YPFs privatization,and also lacked onshore areas due to the transfer made to the

provinces, in 2004 Law No. 25,943 was enacted (ENARSA Law),

creating Energa Argentina S.A. (ENARSA), Argentinas secondNOC. ENARSAs purpose is carrying out on its own or in associationwith private companies the exploration and production of oil and gasas well as industrialization, transport and trade of oil and gas andelectricity. Although the federal government transferred to ENARSAthe vacant offshore oil and gas reservoirs located within 12 to 200nautical miles, few activity has been carried out in relation tohydrocarbons.

As from 2002, the industry suffered many distortions (price caps,withholding taxes, subsidies, suspension of exports, imports of gasand fuel oil, etc.) due to governmental decisions aimed at protectingArgentinas economy and addressing a growing energy crisis

portraying a constant decrease in production and reserves combinedwith an increase of demand.

Recently, Argentina has been identified as having great potential for

unconventional horizons, specifically, as having one of the worlds

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major reserves of shale gas. This situation has generated positiveexpectations in the industry. Such reserves are located in the central

west part of Argentina in theNeuquinabasin, which includes theProvinces of Neuqun, La Pampa and Ro Negro. In this sense, manyareas were granted to IOCs in association with POC, and manyassociations between companies already holding concessions in thatarea and IOCs have been closed.

Lastly, in May 2012 the federal government enacted Law No. 26,741(Nationalization Law) declaring that 51% of the shares of YPF and

Repsol YPF Gas S.A. (YPF Gas) are subject to expropriation. Onlythe shares held by a Spanish company, Repsol, and related partieswere expropriated. According to the law, YPF and YPF Gas willoperate as private companies and YPF shall be entitled to seekinternal and external financing, and sign joint ventures or otherassociative agreements with private, public, local, or foreigncompanies. The nationalization process in still going on, but theGovernment has already taken possession of the expropriated sharesand YPFs management.

2. Legal Framework

2.1 National Laws

The Argentinean oil and gas industry is regulated by the followingprincipal national laws:

(a) Hydrocarbons Law, which was amended by the Short Law

establishing the general legal framework for the explorationand production of oil and gas (upstream). These national lawsmust be followed by the provinces, but since 2007 (when theShort Law was issued) each province has been granted theauthority to: (i) appoint the enforcement authority; (ii) grantexploration permits, exploitation concessions and agreements;(iii) collect royalties, (iv) control and supervise the permits,concessions and agreements; (v) require the fulfillment of

legal or contractual obligations in connection withinvestments, rational exploitation of resources, information

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licenses fails, the government shall be entitled to transport anddistribute gas.

Exports of natural gas are subject to the prior approval by thenational competent authority. Currently, exports can only bemade after domestic demand is satisfied. Natural gas exportsare also subject to the export withholding duty.

(d) Enarsa Law, which created ENARSA, Argentinas nationaloil and gas company. ENARSA is accountable to the federalgovernment, specifically to the Ministry of Federal Planning,Public Investment and Services (Ministerio de Planificacin

Federal, Inversin Pblica y Servicios).

(e) Nationalization Law, whereby the federal governmentnationalized 51% of YPFs shares.

2.2 Provincial Laws

The oil producing provinces have been enacting their ownhydrocarbons laws and regulations which are similar to theHydrocarbons Law, and empower their own enforcement authorities.In addition, provinces have created POCs to explore hydrocarbonsreserves in association with private parties.

3. Major Industry Players

The major oil company in Argentina is YPF. Although there are otherrelevant players in the industry as Petrobras, Panamerican Energy andTotal, YPF is a fully integrated company with presence in E&P,midstream and retailing throughout the country. YPF was originallycreated as Argentinas NOC having oil and gas monopoly, it was

privatized during the 90s and recently partially nationalized. In thissense, it is expected that, due to the states ownership of YPF, the roleof the company in the oil and gas industry in the following years beexpanded.

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State Owned

Company

IOCs Role Granting

Capacity

Privileges

them. carry interestwhich could berecovered byIOCs only ifcommercialproduction isachieved.

- POCs mayhave veto rightsin relevantoperativedecisions.

- POCsparticipatinginterest cant be

diluted and,therefore, theycant beexcluded fromthe agreements.

ENARSA One or variousIOCs canexecute granting

documents inassociation withENARSA.

ENARSA callsfor bids inrelation to

offshore E&Prights.

ENARSA holdsthe vacantoffshore areas

located within12 to 200nautical miles.

YPF YPF is currentlyassociated withIOCs in variousareas ofArgentina.

YPF currentlyholds E&Prights solely andalso associatedwith POCs and

IOCs. Due tonationalization,

Due tonationalization,newdevelopments onprivileges may

be experienced.

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State Owned

Company

IOCs Role Granting

Capacity

Privileges

newdevelopments ongranting rightsmay beexperienced.

4. Acquiring E&P Rights

4.1 Licensing Rounds

The Hydrocarbons Law establishes public bidding procedures as thesystem to award E&P rights and, alternatively, it considers the

possibility of reserving areas for state owned companies for them tocontract with third parties.

There are no limitations on the nationality of the holders of E&Prights; nevertheless, any applicant must register a domicile inArgentina, have the required technical and financial capabilities, andfulfill any other condition set forth in each bidding process.

4.1.1 Concession based E&P rights

The provinces and the federal government (depending on the locationof the area) are entitled to grant E&P rights through a bidding processto any individual or entity. The awardee/s will be the company orgroup of companies that make the highest investment offer and will beconsidered as the title holder of the corresponding E&P right.

The E&P rights under the Hydrocarbons Law are:

(i) Exploration Permits

Under an exploration permit its holder is entitled to explore, constructthe required infrastructure and have a preference to exploit the area if

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a commercial discovery is achieved. Rental and royalties must bepaid, and committed investments must be completed during the

different stages of the exploration which are: (i) an initial term of 9years which is divided into 3 sub-terms with relinquishmentsrequirements, and (ii) a 5 years extension. One additional year isgranted to each of the sub-terms in offshore exploration.

(ii) Exploitation Concession

Under an exploitation concession, its holder is entitled to exploit thearea, extract the hydrocarbons, build and operate the required facilitiesand obtain a transportation concession. Rental, royalties and taxesmust be paid, and committed investments must be completed.Exploitation concessions have a term of: (i) 25 years, and (ii) a 10years extension.

(iii) Transportation Concession

The Hydrocarbons Law also provides for the granting of 35-year

transportation concessions for oil, gas and petroleum products basedon competitive bids. The respective provinces also have the authorityto grant such transportation concessions within their territories. Theterm of a transportation concession may be extended for an additional10-year term upon the approval of the authorized national or

provincial executive agency. Holders of exploitation concessions havethe right to obtain a transportation concession to transport oil, gas andother petroleum products they produce.

4.1.2 E&P contractual rights

The other system consists of the provinces or de federal government(depending on the location of the areas) reserving areas in favour ofstate owned companies for them to call for bids for the granting ofE&P contractual rights.

This system is the latest trend in Argentina after the enactment of the

Short Law. In this sense, ENARSA has made calls for bids for thegranting of association rights in offshore areas assigned by the federal

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evaluation.

Investment Offer. N/A Second item takeninto considerationfor offersevaluation.

Association Fee. N/A Third item taken intoconsideration foroffers evaluation.

4.1.3 Private Transactions

Private transactions to acquire E&P rights such as sale of shares orassets are valid in Argentina. In the latter case, the acquiring/assignee

party will most likely have to be approved by the correspondingenforcement authority.

Argentinas non-conventional horizons potential, specially in theProvince of Neuqun, has generated the execution of transactions offarm-in / farm-out whereby private companies holding exploitationconcessions have associated with other oil companies with expertisein such exploitation techniques.

4.2 Granting Instruments2

Parties Private oil companies and thecorresponding POC or NOC.

Term Exploration terms may vary. In generalthere is a 6-year exploration term plusone year extension. If there is a

2The table has been prepared taking into consideration general terms of

agreements executed in the Province of Neuqun by IOCs in associationwith Neuquns POC.

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commercial discovery, the exploitationterm will be of 25 years plus a 10-year

extension.

Minimum Work

Program

Depends on the offer made by thecompany or companies in the bidding

process.

Fiscal Regime /

Government Take

See Section 5 below.

Title to Oil The company or companies are ownersof the hydrocarbons extractedaccording to their participating interestin the agreement.

Assignment Allowed in case of affiliates. PreviousPOC or NOC consent required in caseof third parties plus granting a ROFO

to the existing partners.

Local Content

Requirements

75% of local personnel must be hired.

Relinquishment N/A

Abandonment Requires the unanimous vote of theparties to the agreement. The operator

shall comply with abandonmentregulations.

Unitization N/A

Dispute Resolution First good faith negotiations. If suchnegotiations fail the dispute shall besubmitted and solved by the arbitraltribunal of the Buenos Aires Stock

Exchange. The appeals to the arbitral

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Government Take Rate Payment Base

Signature Bonus3 Companies must payan association feeconsisting of a lumpsum.

May vary dependingon the area in whichE&P will be

performed.

NOCs / POCs

Participation4

Offer

Companies mustoffer a free carryinterest to state

owned companies.

N/A

Investment Plan Companies mustoffer an amount ofinvestments that theyare willing to

perform in thecorresponding area.

Yearly allocatedaccording to theexploration term.

Payment ofInspection and

Monitoring Fee5

Companies mustmake a monthly

payment to coverinspection andmonitoring fees.

May vary dependingon the area in whichE&P will be

performed.

Contribution to

Investigation

Institutions

6

Companies mustoffer a lump sum as

a contribution tosuch institutions.

N/A

3This item has been included in bidding calls for association with the POC ofNeuqun.4Idem.

5Idem.6Idem.

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Payment for

Capacitating

Enforcement

Authority7

Companies mustannually pay anamount forcapacitatingenforcementauthoritys

personnel.

Equivalent to certainquantity of workingunits specified in the

bidding documents.

Federal Taxes Main federal taxesare:

(i) Income Tax(35%);

(ii) Value AddedTax (21%);

(iii) Minimum

Presumed IncomeTax (1%);

(iv) As from 2002,the federalgovernment imposedwithholding exportduties on oil exports.

N/A

(i) Applied on netincome.

(ii) Applied on thevalue of goods orservices.

(iii) Applies taking

into considerationthe value of assets.

(iv) When the WTIprice exceeds areference price set atUS$60.90/bbl the oil

producer onlyreceives US$42/bbl,and the FederalGovernment theremaining amount.If the WTI price isunder the reference

price, but over US$45/bbl a 45% export

7Idem.

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withholding dutyapplies.

Provincial Taxes (i) The GrossReceipt Tax appliesat a rate that, ingeneral, does notexceed 3%.

(ii) Stamp tax is adocumentary tax at arate that varies from1 to 4%.

(i) Applies to grossreceipts ofcommercialactivities at a ratethat vary depending

on the jurisdiction.(ii) Applies to thevalue of theagreement. The ratevaries depending oneach province.

6. Procurement of Goods and Services

6.1 Procurement by Public and Government-Controlled Entities

Public agencies general procurement requirements include theregistration of the goods or service provider in the registry of state

providers and compliance with the provisions of the applicablecontracting procedure (direct purchase, private bidding, and public

bidding).

Also, buy national requirements apply to Governmental Entities,State Owned Companies and Public Services Concessionarieswhereby, with certain exceptions, they are obliged to grant preferenceto national goods and services over foreign ones; if the price isreasonable (reasonable price and nationality are defined in theregulations according to specific criteria).

Please note that the recent nationalization of YPF may have an impactin E&P procurement rules.

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6.2 Local Content Policy

Under the Hydrocarbons Law, companies holding exploration permitsand/or exploitation concessions must hire at least 75% of localemployees. Similar principle and percentages are included in

provincial regulations and in bidding documents (e.g., Province ofNeuqun). The operator may be exempted from complying should noqualified personnel are available.

6.3 Special Tax Regimes

There are no special tax incentives applicable to procurement ofdomestically manufactured goods and services for the upstreamindustry.

7. Environmental liability

From an environmental point of view, specific authorizations inrespect of the different stages of development (exploration, productionor transportation) are required. For each stage a different

environmental impact study must be made and periodically updated.According to the activities being performed in the areas, IOCs mustapply for specific permits or authorizations, or be registered with

provincial and federal agencies to carry out such activities complyingalso with the applicable environmental regulations.

Natural Gas Exploration, Development Production

E&P activities in relation to natural gas are governed by the same set

of rules applicable to oil.

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Brazil

Brazil Upstream Industry

1. Legal Framework

The Brazilian petroleum industry has significantly evolved over thepast decades. The main events that affected the countrys legalframework were the enactment of (i) Constitutional Amendment #9/1995, which allowed private companies to engage in E&P activities(the 1995 Constitutional Amendment), (ii) Law # 9,478/1997 (the

Petroleum Law) and, more recently, (iii) Laws # 12,276/2010,12,304/2010 and 12,351/2010 (the Pre-Salt Rules).

As determined by Article 177 of the Federal Constitution of 1988,from 1953 to 1997all oil and gas exploration and production activitieswere performed by Petrleo Brasileiro S.A. Petrobras1(PETROBRAS). During this period, players supplied goods andservices to the Brazilian oil and gas industry as PETROBRASscontractor.

To attract private investors to the Brazilian market, on 10 November1995, the Brazilian Congress enacted the 1995 ConstitutionalAmendment, which amended Article 177 allowing the BrazilianGovernment to also contract private companies to perform theactivities comprised within the Federal Governments monopoly.

The enactment of 1995 Constitutional Amendment was the turning

point from which a variety of changes were introduced in the nationalpetroleum sector, the most important of which occurred on 6 August1997, when the Brazilian Congress regulated the aforementionedAmendment # 9 by enacting Petroleum Law.

Among other important changes, the Petroleum Law established theBrazilian energy policy, regulated activities comprised within theFederal Government oil and gas monopoly, created the National

1PETROBRAS was created in 1953 by Law # 2,004 of 3 October 1953.

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Brazil - Oil & Gas Handbook

Council of Energy Policy (CNPE) and the National PetroleumAgency (ANP).

The CNPE is a council linked to the President of Brazil and chaired bythe Minister of Mines and Energy, whose responsibilities involve

proposing to the Executive Branch the national policy for the energyindustry. The ANP is the federal regulatory agency in charge ofcontracting, regulating and inspecting Brazilian oil and gas sector.

The Petroleum Law confirms the Federal Government monopoly overexploration and production activities and further states that theseactivities may be carried out upon concessions or authorizations ,

by companies incorporated under Brazilian law, with head offices andadministration in Brazil. There is no legal restriction whatsoever as tothe nationality of the quotaholders/shareholders of these companies,meaning that foreign companies are free to establish subsidiaries or

branches in Brazil to engage in oil and gas exploration and productionactivities.

Following the discovery of the pre-salt province, the Braziliangovernment started to re-evaluate the countrys E&P legal framework.

In 2010, Law # 12,351 (the Pre-Salt Law) came into force andintroduced a production sharing system for the exploration and

production of hydrocarbons located at the pre-salt and strategic areas2.

Even though the Pre-Salt Law still needs further regulation, it isimportant to note that the PSC regime is restricted only to the pre-saltarea, as geographically defined by the Law, and to other strategicareas, which are tied to special interests for national development andshall be determined by the Executive Branch as having lowexploratory risk and high potential for petroleum production. Blocksnot comprised within the pre-salt and the strategic areas, shall be

2Strategic Areas are those: of interest for national development, delimited by

an act of the Executive Branch, characterized by low exploratory risk andhigh potential for production of oil, natural gas and other fluid hydrocarbons.

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subject to concession agreements awarded in accordance with thePetroleum Law.

Law # 12,351/2010 specifies that the rules to be followed by ANP forthe bidding process shall include the publication of invitations to bid,the submission of a draft PSC, the indication of the bidding judgmentcriteria and other information necessary for the performance of the

bidding process. The winning bid shall be awarded to the bidderproviding the highest allocation of Profit Oil to the Brazilian FederalGovernment.

Law # 12,351/2010 also provides for a Signature Bonus and Royaltyobligations, but it does not define their amounts, other than clarifyingthat neither will be recoverable out of the Cost Oil. The alreadyexisting royalty percentages apply under the PSC system until specificrules are enacted relating to pre-salt or strategic areas. If the area islocated onshore, a participation payment of up to 1% of the value of

production must be paid to the landowner. The customs and taxincentives applicable to the Brazilian oil industry expressly apply to

the activities under the new legal framework.

Under the new system, the Ministry of Mines and Energy enters into aPSC with a joint venture composed by Petro-Sal (a state-ownedcompany newly created to manage Pre-Salt assets), PETROBRAS3and, if the area is open for bidding, the winning bidder.

It is worth to highlight that, under the PSC, the joint venture ismanaged by an operating committee with powers to define explorationand production plans, determine the annual work program to besubmitted to the ANP and generally supervise oil and gas operations.Half of the members of the operating committee are appointed byPetro-Sal (including the chairman of the committee) and the other half

3Petrobras has been designated as mandatory operator for all blocks coveredby the Pre-Salt Law and shall hold a minimum participation of 30% in suchventure. Petrobras minimum participation could be increased at the discretion

of the CNPE or if it is successful in participating at pre-salt bid rounds andincreasing its participation on such blocks.

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are appointed by Petrobras and other contractors, if applicable. Theoperating committees chairman appointed by Petro-Sal has special

veto and voting rights.

Petro-Sal was created by Law # 12,304/2010 as a new state-ownedcompany to be engaged in the management of the PSC, oil and gassales contracts, the representation of the Federal Government on thePSC operating committee, and in any unitization agreement, as well asto be the responsible for assessing the exploration and production

plans, ensuring compliance with local content requirements,

monitoring project execution, auditing costs and expenses.

Petro-Sal will be funded primarily from the revenues received by theBrazilian Government under the PSCs plus its share of SignatureBonuses and also management fees under oil and gas sales contracts.Petro-Sal will be managed by a Board of Directors and an ExecutiveBoard, which shall include representatives from various Governmentalministries, all of them appointed by the Brazilian President.


The Petroleum Law has also revoked Law # 2,004/53, which createdPETROBRAS. PETROBRAS is now governed by the Petroleum Law(and by its Bylaws), which provides that PETROBRAS shall performits activities on a free-competition basis, meaning that its position inthe market shall be leveled to the position of private investors engagedin E&P activities in Brazil.

Be that as it may, PETROBRAS is still the major petroleum companyin Brazil, with dominant presence in E&P, midstream and downstreamactivities throughout the country. Since the enactment of thePetroleum Law, however, various bid rounds have been promoted bythe ANP and several International Oil Companies (IOCs) andBrazilian independent companies have acquired E&P concessionrights in the country. Up to 2012, seventy eight (78) differentcompanies have acquired E&P concessions, out of which fifty three

(53), including PETROBRAS, assumed operatorship over BrazilianE&P assets.

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Companies interested in acquiring the rights to explore for, developand produce petroleum in Brazil must undergo a transparent and

public bidding process, whose rules are defined in the Petroleum Law,the Pre-Salt Law, the ANP regulation, and in the applicable bidinvitation, which is published before the start of the bidding

procedure.

3.1.1 Concession Regime

The biddingprocess for concession awards usually involves thefollowing steps: (a) delivery of an declaration of interest; (b)

payment of a participation fee; (c) withdrawal of the informationpackage; (d) legal, technical and financial qualification; (e) filling ofthe required guarantees; (f) tender of the bids; (g) judgment of the

bids; (h) ratification of the judgment of the bids; and (i) execution ofthe concession agreement.

Once qualified from technical, legal and financial perspectives, acompany may elect to offer bids individually or jointly with otherqualified companies, in which case the group of companies mustcommit to organize a consortium (i.e., a non-incorporated joint-venture) if they are awarded with a concession. The consortiumagreement must abide by the provisions of Articles 278 and 279 ofLaw # 6,404/1976, as amended (the Corporation Law), as well as

the applicable provisions of the Petroleum Law. Pursuant to thePetroleum Law, consortium members must be held jointly andseverally liable for all obligations set forth under the concessionagreement (Petroleum Law, Article 38, II).

Foreign companies may also qualify for participating in the biddingprocess. However, if a foreign company is awarded with a concession,it must organize a Brazilian subsidiary or branch, with head office andadministration in Brazil, prior to executing the respective concessionagreement (Petroleum Law, Article 5).

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HISTORICAL EVALUATION CRITERIAHISTORICAL

In addition to acquisition of E&P rights though bid rounds,assignment of E&P rights are also allowed and are actually quite

popular in Brazil. Assignment of E&P rights in Brazil requires theANP prior approval form the ANP; assignments performed withoutthe Agencys prior approval shall be null and void.

3.1.2 Production Sharing Regime

Similarly to the Concession Model, Article 15 of the Pre-Salt Lawestablishes that, among others, the bid invitations shall provide for thefollowing information:

(a) Description of the blocks being offered, the estimatedexploration period, the investments and the minimumexploratory programs;

(b) Respective judgment criteria;

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(c) Minimum percentage of Profit Oil to be allocated to thegovernment;

(d) Constitution of the mandatory consortium and PETROBRASstake at such venture;

(e) Limits, terms, conditions and criteria for calculating andappropriation by the winning bidder of the Cost Oil, as well asfor the production volumes and corresponding royalties due;

(f) the criteria for the definition of Profit Oil allocated to the

winning bidder; and

(g) the minimum exploration program and the correspondingestimated investments

The bidding process is expected to simpler than the one used under theconcession regime, as the main judgment criteria shall be the share ofProfit Oil to be awarded to the Federal Government by the winning

bidder.

3.2 Granting Instruments

3.2.1 Concession Agreement

The concession agreement is a bilateral instrument, pursuant to whichthe granting authority (ANP) awards to the concessionaire, the right toexplore for and produce hydrocarbons in a given block, within adefined period of time. The parties rights and obligations are defined

in the concession agreement and in the regulations issued by the ANP,and its essential clauses are set forth under Article 43 of the PetroleumLaw.

The concession agreement is divided into two (2) phases: (i)exploration; and (ii) development and production. The exploration

phase may last from three (3) to eight (8) years, whereas thedevelopment and production phase may last twenty-seven (27) years

(subject to being extended if requested by the concessionaire andagreed by the ANP).

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Concessions for the exploration, development and production ofpetroleum imply the concessionaires obligation to explore for

hydrocarbons, at its own account and risk, and in the event of success,to produce crude oil or natural gas from the respective block. Theownership of these products will be conferred to the concessionaire,after their extraction, along with all charges relating to the payment oftaxes due and the corresponding legal or contractual participations.

The Concession Agreement authorizes the total or partial assignmentof acreage within the concession area upon prior ANP authorization.

Assignees shall have to meet the technical, economic and legalrequirements set by the ANP for a company to become a concessionholder in Brazil.

Subject to the provisions of Law # 9,307/1996 (also known as theArbitration Law), disputes arising from the concession agreementshall be settled by arbitration. The arbitration shall be conducted in thecity of Rio de Janeiro, in Portuguese language, according to the

procedural rules of the International Chamber of Commerce (ICC)

and based on the applicable Brazilian material law.

During the first term of the exploration phase, the concessionaire shallintegrally perform the Work Units correspondent to the MinimumExploratory Program attached to the concession agreement.Concessionaires shall provide the ANP with financial guarantees forthe Minimum Work Program, in the form of irrevocable letters ofcredit, guarantee insurance or an oil pledge agreement. The failure to

comply with the Minimum Work Program commitment shall entitlethe ANP to enforce such guarantees.

Amongst the variety of obligations under the concession agreement, itis important to highlight the minimum Local Content requirementsand the government takes, which will be further addressed below.

3.2.2 Production Sharing Contract

The BrazilianGovernment is yet to issue the first iteration of theProduction Sharing Contract to be utilized by the countrys petroleum

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industry. Be that as it may, the Pre-Salt Law establishes the mainrequirements for the formation of such agreement, as well as defines

mandatory provisions that shall be included in every PSC awarded inBrazil.

As already mentioned, Petrobras will be the mandatory operator of aconsortium eventually constituted to undertake activities at Pre-Saltand strategic areas, of which Petro-Sal shall also be part of. Article 29of the Pre-Salt Law defines the essential provisions of every PSC to begranted in Brazil, including, among other: (i) parameters for definition

and calculation of Cost Oil, Profit Oil and royalties; (ii) duration ofexploration and production phases, (iii) government takes, (iv) workprograms, (v) pricing, (vi) marketing; and (vii) relinquishmentobligations.

4. Government Takes

The Petroleum Law and Decree # 2,705/1998 establish that theconcession agreements must provide for the following government

takes

4

:

(a) Signature Bonus.

The Petroleum Law was the first Brazilian law to foresee the signaturebonus (Articles 45 and 46). By legal definition, signature bonus is theamount offered by the bidders during the public bidding processes

promoted by the ANP, and its minimum amount is established by thebid invitation. The signature bonus must be paid in Brazilian currency,

at once, prior to the execution of the concession agreement resultingfrom the applicable bidding process. A portion of the amountcollected upon the payment of the signature bonus will be set aside as

4The Petroleum Law also establishes, in case of onshore blocks, what iscommonly called Owners Take, which consists of a payment to thesurface owners of the property equivalent, in local currency, to a variablepercentage between 0.5% (zero point five percent) and 1.0% (one per cent) of

the petroleum production, according to ANPs criteria (Article 52 of thePetroleum Law).

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income for the ANP, to meet its operating needs previously specifiedin the approved budget.

(b) Royalties.

Royalties are a financial compensation that must be paid by theconcessionaire, on a monthly basis, in Brazilian currency, as of thedate at which the concessionaire starts producing oil and gas in agiven field. The Petroleum Law establishes the royalty rate from afixed five percent (5%) to ten percent (10%) of the hydrocarbon

production, according to its reference price. The ANP may reduce thisroyalty rate, in the corresponding bid invitation, down to a minimumof five percent (5%) of the production, taking into account geologicalrisks, production forecasts, and other relevant factors, as per Article47 of the Petroleum Law and Article 12 of Decree # 2,705/1998.

(c) Special Participation.

Special participation is an extraordinary financial compensation due

by the concessionaires only in cases of large volume of production orhigh profitability, payable, on a quarterly basis, in connection witheach field of a given concession area. The special participation will beassessed by applying progressive rates varying from ten to forty

percent (10% to 40%) over the net revenue of the quarterly productionof each field, considering the deductions provided for in the applicablelegislation. Such deductions depend on the area of the deposit, thenumber of years of production, and the respective volume of quarterly

production.(d) Payment for the Occupation or Retention of the Area.

The payment for the occupation or retention of the area was created bythe Petroleum Law (Article 51) and further regulated by Decree #2,705/98. The bid invitation and the concession agreement will

provide for the amount payable for the occupation or retention of theconcession area, to be assessed at each calendar year, as from the

execution date of the concession agreement, falling due by eachJanuary 15 of the subsequent years.

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(e) Penalties.

The concessionaires failure to pay any of the government takesdescribed above is subject to the penalties established under ANPOrdinance # 234 of August 12, 2003 (Ordinance # 234/03), whichmay escalate from fifty percent (50%) to one hundred percent (100%)of the total amount of the government takes due.


Royalties 10% (ANP mayreduce it to 5%considering,amongst otherfactors, the involvedgeological risks)

Hydrocarbonproduction

Special

Participation

Between 10% and40%

Net revenue of thequarterly production

of each field

Landowner royalty Exploration phase:from R$10 to R$500

per km or fraction;(ii) extension of theterm of theexploration phase:

two hundred (200%)of the amountestablished for theexploration phase;(iii) development

period of theproduction phase:R$20 to R$1,000 perkm or fraction; and(iv) production

Extension of theproperty

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phase: R$100 toR$5,000 per km orfraction

Signature Bonus The minimumsignature bonus isdetermined by the

bid invitation.


5.1 Procurement by Public and Government-Controlled Entities

Agreements executed by PETROBRAS for the acquisition of goodsand services shall be preceded by a public tender, which is governed

by Decree # 2,745/98 and PETROBRASs Manual for Contractual

Procedures (Manual de Procedimentos Contratuais). ThePETROBRAS tender procedure shall follow the general principlesthat guide the Public Administration, such as isonomy and morality

between the participants.

As a general rule, to take part in PETROBRASs public tenders,bidders shall be previously registered at PETROBRAS supplierdatabase. For registration purpose, the interested companies must

provide PETROBRAS with the legal, technical and financialinformation and documentation required, pursuant the intendedenvisioned supplier category.

5.2 Local Content Policy

Local content is the commitment undertaken by the E&Pconcessionaires vis--vis the ANP for acquiring local goods andservices. Local content is a judgment factor used by the ANP for the

judgment of the bids at the bid rounds promoted for the award ofonshore and offshore blocks. The chart below depicts the local content

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percentages undertaken by E&P concessionaires from Brazil Rounds 1to 10.

5.2.1 Regulatory Framework

The Brazilian local content policy has evolved overtime. From 1999to 2004, local content was primarily governed by the relevant

provisions of each concession agreement.

In 2007 the Brazilian government has published a new set of rulesaiming to increase the local content levels in the oil and gas E&Pindustry.

The newly edited ANP resolutions are briefly described below:

ANP Resolution # 36: sets the criteria and procedures for thecalculation of Local Content based on the rules provided in

the Local Content booklet attached to the Resolution;

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ANP Resolution # 37: sets the criteria and procedures forregistration and accreditation of the entities that will be in

charge of local content certification;

ANP Resolution # 38: sets the criteria and procedures for theauditing of the companies authorized to certify Local Content;and

ANP Resolution # 39: sets the schedule, format and contentof the local investments reports to be presented by the

operators to the ANP.

Except as otherwise provided under the applicable regulation, theconcessionaires failure to achieve the local content percentagesundertaken vis--visthe ANP may trigger heavy penalties. If theconcessionaire fails to meet its local content obligations and the non-achieved percentage is less than 65%, the applicable ANP fine shallcorrespond to 60% of the value of the non-achieved local content. Onthe other hand, if the non-achieved percentage is greater than 65%, the

fine shall escalate from 60% to 100% of the value of the non-achievedlocal content. The graphic below illustrates how the Local Contentfine may escalate, depending on the amount of the non-achievedcommitment:

Non-Achieved Local Content %

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5.3.1 General OverviewCompanies engaged in the oil and gas industry must pay all themandatory Brazilian taxes applied to any other industry.

This section aims at summarizing the most significant tax aspects thatmay particularly affect oil and gas companies.

5.3.2 Special Custom Regime of Export and Import of Goods

Applied to Activities of Researching and Mining of Oil andGas Fields REPETRO

In order to develop the petroleum industry, the Brazilian Governmentenacted Decree # 3,161/1999, providing for a special customs regimeknown as REPETRO. This regime is intended to provide oil and gasexploration and production companies with access to listed equipmentupon a reduced tax burden. It also aims at offering local suppliersfavorable conditions vis--visforeign equipment.

REPETRO is currently ruled by Decree # 6,759/2009 and by BrazilianIRS Normative Ruling # 844/08, as amended by Normative Rulings #1,070/2010, 1,089/2010 and 1,284/2012. The REPETRO shall remainin force until December 31, 2020.

The REPETRO regime is available for equipment listed under IRSNormative Ruling # 844/08 (REPETRO assets). In a nutshell, thefollowing assets may qualify for the REPETRO regime: (i) vesselsused on activities of research and production of oil and gas fields andthe ones destined to storage and the support of the relevant activities,(ii) machines, apparels, instruments, tools and equipment destined tothe activities of oil and gas research and production, (iii) oil and gasdrilling and production platforms and platforms destined to supportsuch activities, (iv) automobile vehicles assembled with machines,apparels, instruments, tooling and equipment destined to the activitiesof research and production on oil and gas fields; (v) structures

conceived to support platforms.

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exchange purposes, that is to say, exempted from federal taxes(Article 9 of the IRS Normative Ruling # 844/08).

The REPETRO Temporary Admission allows the importer toimport listed equipment with full suspension of federalcustoms duties (i.e., import duty, federal excise tax, PIS andCOFINS) for their length of stay in the country. REPETROapplicant must provide the Brazilian IRS with, amongstothers, the following documents: (i) Request for theConcession of the Regime (Requerimento de Concesso do

Regime or RCR); (ii) Liability Statement (Termo deResponsabilidade), through which the applicant undertakesto pay the value corresponding to the taxes suspended if itfails to comply with REPETROs conditions; and (iii)instrument of guarantee, if the value of the taxes suspended ismore than twenty thousand Reais (R$ 20,000.00).

REPETROs assets may stay in Brazil, under temporary admission,for the length of the contract which supported the regime request (i.e.,

concession agreement, services agreement executed with theconcessionaire or its subcontractor). If the temporary admission wasgranted under an operational lease; rental or free loan agreement, theregime will be granted for the term of such agreements. Thetemporary admission of vessels must observe the term granted by the

Navy authorities for the vessels operation within the country.

5.3.3 Bounded Warehouse Special Customs Regime

Normative Ruling # 513, issued by the Brazilian IRS, on February 17,2005, provides for the possibility of operating the bonded warehouseregime, applicable to the construction and conversion of offshore oilrigs and offshore rig modules, on rigs under construction orconversion, on quaysides, or in any other industrial seashore facilities,intended for the construction of maritime structures, oil rigs and rigmodules.

The bonded warehouse regime may be applied to materials, parts,pieces, and components used on offshore rigs under construction and

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conversion in Brazil, intended for exploration and production of oiland gas, and contracted by foreign companies. In order to qualify for

the regime, a Brazilian company must be contracted by a foreigncompany for the construction or conversion of an oil rig or module.This regime provides for the suspension of the federal taxes levied onimports - i.e., Import Duty, Federal Excise Tax (IPI) and FederalSocial Contributions (PIS and COFINS). It also applies to the taxeslevied on the local acquisition of goods - i.e., Federal Excise Tax (IPI)and Federal Social Contributions (PIS and COFINS), provided suchgoods are incorporated into the oil rig or module to be exported. As a

matter of fact, the suspension of federal taxes means that no taxeswill be due, provided the oil rigs or rig modules under construction orconversion are intended for exportation.

The bonded warehouse regime will also apply to oil rigs and rigmodules that are notionally exported from Brazil - i.e., whenever theseassets are acquired by a foreign buyer, without leaving the Brazilianterritory, and are delivered, by order of such foreign buyer, to the legalentity contracted to carry out their construction or conversion, the

payment shall be made in convertible currency.

5.3.4 The State Value-Added Tax (ICMS) in the State of Rio deJaneiro

ICMS is a value-added tax on sales and services, payable uponimportation of an asset into Brazil, or upon its sale or transfer withinBrazil, or as to certain communications and intra and interstate

transportation services, at the time when the service is provided.

ICMS rates and tax benefits depend on the type of transaction, andvary from state to state, but are usually levied at a rate of seventeen oreighteen percent (17-18%). In the State of Rio de Janeiro, the currentICMS applies at a nineteen percent (19%) rate (18% plus an additional1% intended for the state fund for struggle against poverty, created byLaw # 4,056/2002) on local transactions and 16 % on imports ofgoods (15% is the actual ICMS rate and 1% refers to the state fund for

struggle against poverty).

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5.3.4.1 Convenio ICMS 130/07

Under the Brazilian Constitution, ICMS benefits must be created uponthe agreement of all Brazilian States and the Federal District through aspecific legal act called Convenio ICMS. The Convenio ICMSworks as a general authorization under which each State (or theFederal District) shall enact its own provisions.

At State level, the REPETRO regime is governed under ConvenioICMS 130/2007, which authorized the States and the Federal Districtto exempt and reduce the ICMS tax basis on imports, under theREPETRO, of listed assets destined to oil and gas activities.

Among the benefits granted by the Convenio ICMS 130/2007 let ushighlight the following:

(a) ICMS tax basis reduction on imports, under REPETRO, oflisted assets, as provided by the Sole Annex of the relevantConvenio, applied to installations destined to oil and gas

production so that the total ICMS tax burden would be 7.5%,under the noncumulative system, or 3%, under the cumulativesystem, according to the option performed by the taxpayer.This tax treatment is also granted to imports of inputs,accessories, parts and pieces destined to guarantee theoperation of the listed oil and gas assets;

(b) ICMS exemption or tax basis reduction on imports of listedgoods so that the total ICMS tax burden would be 1.5%

without the accruing of the corresponding ICMS credit;

(c) ICMS exemption for the imports of equipment destined to beused for the provision of services during the exploration phaseand to imports of equipment to be used for temporary servicesin both exploration and production phases, provided that, inthe case of the latest, they stay in Brazil for less than 24months.

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(d) ICMS exemption on transactions preceding the exit of assetsand goods manufactured in Brazil, destined to entities

domiciled abroad, and subsequently followed by theimportation of the same assets and goods under REPETRO to

be used in oil and gas exploration and production installations,within or outside the State in which the manufacturer islocated.

5.3.5 Contribution for Intervention in the Economic Domain(CIDE) on Fuels

Law # 10,336/2001 created CIDE which is the contribution levied onthe import and sale of certain types of fuel (i.e., gasoline and itschains, diesel and its chains, aviation kerosene, and other types ofkerosene, oil fuel, liquefied petroleum gas - including that fromnatural gas and from naphtha - and ethyl alcohol fuel, as per its Article3), at the rates fixed in Article 5.

However, Decree # 5,060/2004, amended by Decree # 7,764/2012,

reduced the CIDE rates to zero levied on listed products, includinggasoline (and its chains) and diesel (and its chains).

CIDE taxpayers are the producers, formulators or importers of liquidfuels. Note that the CIDE amounts paid may be deducted from PISand COFINS levied on the sales of liquid fuels in Brazil.

Note that according to Article 10 of Law # 10,336/2001, CIDE doesnot apply to sales of goods to trading companies, with the sole

purpose of exportation.

6. Environmental Liability

Brazilian environmental policy is implemented at federal, state andmunicipal levels. The Federal Environmental Protection Agency is theBrazilian Institute of the Environment and Renewable Resources(Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais

Renovveis- IBAMA). IBAMA is responsible for implementingenvironmental policy at the federal level, which includes the issuance

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Also with respect to environmental licensing proceedings, it isimportant to mention that except in certain cases, onshore oil & gas

exploration and production, as well as activities of midstream anddownstream are conducted by the State in which the activity isdeveloped. The environmental licensing proceedings for suchactivities vary depending on the legislation of each State, butgenerally comprise three phases, each of them concluded with aPreliminary License, an Installation License and an OperatingLicense. Also in general terms, the first step of the proceeding shall be

preceded by the preparation of environmental studies by the applicant

and the conduction of public hearings, as the case may be.

The environmental liability includes three ranges of liability: civilliability, administrative liability and criminal liability. The civilenvironmental liability consists in the obligation of a party causing anenvironmental damage to recover the environment or indemnify thecommunity for such damage. The environmental legislation alsocontemplates the piercing of the corporate veil theory whenever theexistence of the legal entity is considered to be a barrier to therecovery of the damage.

Causing environmental damage, however, may also triggeradministrative and criminal liabilities, which consist in sanctionsimposed over the party causing the damage.

Law # 9,605, of 13 February 1998, and Decree # 6,514, of 22 July2008, define environmental crimes and administrative infractions,

respectively and establish the applicable penalties. Both administrativeand criminal sanctions may be imposed over individuals and legalentities that cause environmental damage, including officers, partners,and members of the board of directors, managers and employees.

Criminal and administrative sanctions imposed over legal entities mayvary from warnings to fines that may reach up to R$ 50,000,000.00(fifty million reais) and the suspension of the activity, the prohibitionto obtain public lines of credit or prohibition to contract with Public

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Authorities. Criminal sanctions over individuals may includeimprisonment.

In addition to these statutes, there are several other supplementaryrules regarding mandatory environmental audits, implementation ofenvironmental impact evaluation, preparation of emergency andcontingency plans in case of accidents, use of chemical dispersants,and communication of accidents, among others.



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Chile - Oil & Gas Handbook

Chile

Chile Upstream Industry.


The Chilean Oil and Gas Industry is mainly developed by the Statethrough public companies or through special agreements with privateentities. It is a highly regulated market.

Officially founded: June 19, 1950, Law N 9618. After discovering the

first oil well in the country, at Springhill sector in Magallanes, onDecember 29th 1945, the Chilean Government was determined tocreate Empresa Nacional del Petrleo (National Oil Company) orENAP, by its acronym in Spanish, which was officially established onJune 19, 1950, with the publication of Law N 9,618.

ENAP was created in order to explore, exploit and benefit the depositsof hydrocarbons, whether in Chile or abroad, whether directly orthough third parties.

2. Legal Framework

The Chilean oil and gas industry is regulated by the following laws:

(i) Chilean Constitution of 1980 which sets out (in Article 19 N 24) the States absolute, exclusive, inalienable andimprescriptible ownership of hydrocarbon deposits (inc. 6).The Constitution states that the President of Chile may grantto the State and its companies, or to private companies,through individual Supreme Decrees, exploration and

production rights with respect to oil and gas deposits. Suchrights are granted either through administrative concessionsor special (exploration and exploitation) operating contracts(Contrato Especial de Operacinor CEOPs).

(ii) Decree D.F.L. N2 of 1987 consolidating the revised,

coordinated and systematized text of the Mining Decree Law1,089 of 1975. The Decree establishes standard terms for

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CEOPs, including definitions, contractor guarantees, taxregime, payment terms and importation regime.

(iii) Decree D.F.L. N1 of 1987 consolidating the revised,coordinated and systematized text of the Law N 9,618 whichcreated ENAP.

(iv) Law N 18,410 of the year 1985, which created theSuperintendence of Gas.

(v) Decree D.F.L N 323 of 1931, the Gas Act. which regulates

the transport, distribution, concession system and network gasrates, and related State functions.

The Superintendence of Gas and the Mining Ministry also may, fromtime to time, include special decrees and norms regarding thecommercialization, facilities and prices regarding the oil an gasmarket.


The main player in Chile is ENAP, which was created in the 60s inorder to explore, exploit and benefit the deposits of hydrocarbons,whether in Chile or abroad, whether directly or though third parties.

In the year 2011, Chile produces 132,463 m3 of raw petroleum andimports 9,930,418 m3.

ENAP is 100% State owned, and the second largest Chilean state-

owned company (after Codelco). The 2011 Revenues and EBITDAwere of US$10,835 mm and US$372 mm, respectively. ENAP is theonly refiner in Chile, and satisfies approximately 66% of Chileandemand for refined oil products

Off course there are other playes, mainly distributors of oil and Gas asCopec, Shell, Petrobras, among others.

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3.1 Relationship among the Government, NOC and IOCs

Regarding the relationship of NOC and IOCs, in Chile there is nodifference on the economic treatment. The State is the owner of allhydrocarbons, whether liquid or solid, and grants special licensestrough CEOPs to third parties for the exploration, exploration and

benefit of hydrocarbons.

ENAP, as the only NOC able to explore and exploit hydrocarbondeposits, acts jointly with NOC and IOCs to perform the investmentand works needed.



In Chile, the exploration and exploitation of oil and gas is madetypically trough a CEOP, between the Mining Ministry and thecontractor.

A contractor may be a local or foreign entity, and may consist of oneor more companies. Under Chilean law, ENAP must carry outexploration and exploitation operations in partnership with a third

party by means of a CEOP.

4.2 Granting Instruments

Special Exploration and Exploitation Contracts (CEOPs)

As noted above, CEOP is a contract entered into by and between theState (represented by the Mining Ministry) and a contractor for theexploration, exploitation, or other beneficial use of hydrocarbondeposits, the requirements and conditions of which are determined bya Supreme Decree of the President of Chile pursuant to aconstitutional mandate.

The process for granting and execution of CEOPs:

(i) Process for Granting and Execution of CEOPs

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Retribution/compensation may be monetary or in-kind (through sharing of hydrocarbons with the State).

(2) Tender convened by the Ministry of Mining: Theproposals described above are submitted to theMinistry of Mining as part of the tender process.Tender procedures are determined pursuant to aMinisterial resolution, with timing matters such asdeadlines based on local law. Tenders also enumeratethe evaluation criteria for prospective contractors.

(3) Supreme Decree of the President of Chile: The nextstep is for the President to issue a Supreme Decreewhich may set forth the principal terms andconditions of the respective CEOP providing the legalframework to be adjusted by the respective CEOP.The Supreme Decree is published in the OfficialGazette and is implemented by the StatesComptroller General (Contralora General).

(4) Council Report of the National EnergyCommission(Comisin Nacional de EnergaorCNE): The Council of Ministers of the CNE mustissue a favorable report prior to the conclusion of theCEOP.

(5) Agreement of the Central Bank Council: The

Central Bank Council must issue an agreement onexchange rate matters relating to the CEOP uponrequest by the interested party and prior to theexecution of the CEOP. Such agreement issubsequently attached as a schedule to the CEOP.

(6) Opinion of Internal Tax Authority: Upon requestby the interested party and prior to the execution ofthe CEOP, the States internal tax authority (Servicio

de Impuestos Internos) will issue an opinion

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determining how to implement the tax regimeprovided by the respective Supreme Decree and the

CEOP.

(7) Signing of Contract: The CEOP is entered intobetween the contractor and the State (represented bythe Ministry of Mining). The CEOP is approved

pursuant to a resolution issued by the Ministry ofMining.

(ii) Phases of the CEOP

Chiles current policy is to enter into CEOPs for terms up to35 years. Generally, CEOPs have the following phases:

(1) Exploration: Exploration operations are defined inCEOPs as the activities developed by the contractorfor the purpose of determining the existence of oil andgas, and the quantity and quality thereof through

geological geochemical, geophysical, 2D and 3Dseismic and exploratory surveys, among otheractivities. An exploration phase is subdivided intosuccessive exploration periods. The contract mayaccede to the next exploration period subject to thefulfilment of minimum work obligations for the prior

period specified in the respective CEOP. Theinvestment committed for each exploration period issecured by a bank guarantee letter equivalent to theamount of such investment for the respectiveexploration period.

(2) Exploitation: Exploitation operations are defined asactivities carried out by the contractor to develop and

produce the oil and gas reserves discovered in theexploration phase. An exploitation phase commenceson the date when a commercial discovery is declared

with respect to a hydrocarbons deposit. Thecontractors obligations during this phase are

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determined by a development and production plansetting forth details related to the exploitation

operations, which must be approved by the Ministryof Mining.

(iii) Coordination Committee Overseeing the Performance ofthe CEOP

The Coordination Committee is a body responsible foroverseeing the performance of CEOPs. Each CEOP has its

own Coordination Committee, which consists of an equalnumber of representatives of each party to the CEOP.

The functions of the Coordination Committee are determinedby the respective Supreme Decree and are set forth in theCEOP. The Coordination Committee, inter alia: (a) definesthe scope (i.e., shape and size) of exploration areas; (b)approves budgets and work programs; (c) approves themaximum efficient production for each deposit; and (d)

requires technical inspections and accounting reports.

(iv) Grounds for Termination of the CEOP

CEOPs may be terminated in the following instances: (a)upon a decision by the contractor to terminate any exploration

period in accordance with the terms of the CEOP; (b) by ajudicial order, upon a breach by the contractor of itsobligations under the CEOP; (c) expiration of the term of theCEOP; (d) a force majeure event occurring outside of Chilefor over three years; or (e) any other grounds specified in theCEOP.

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The tax regime applicable to the contractors oil and gas operations inChile is governed by CEOPs and relevant Chilean regulations. Themost significant of these taxes are currently the following:

(1) First Category Income tax (Impuesto de Primera Categora)currently at a rate of 18,5% for commercial year 20121,calculated on an annual basis on corporate net profits;

(2) Withholding tax of 35% on dividends or profits paid to non-resident shareholders or quota-holders, against which iscreditable the First Category tax effectively paid on suchdividends or profits;

(3) Value Added Tax (VAT) with a rate of 19% on domesticsales of goods and provision of certain services. VAT paid onthe account of domestic purchases can be reimbursed to the

contractor if the contractor has no sales in Chile. The VATreimbursement must be requested from the applicable taxauthorities within two months of payment of VAT by thecontractor; and

(4) Withholding tax on service fees paid to foreign beneficiaries,at a general rate of 35%. However, if the services performedqualify as technical or professional, the applicable

1Please note that according to law No. 20.455 of 2010, the First Category taxwas increased to 20% for commercial year 2011, decreased to 18,5% for year2012 to finally return to its ordinary 17% rate as from commercial year 2013.Nevertheless, the Government has announced a tax reform -currently being

discussed before the Chilean Congress- which includes a permanent increaseof the First Category tax to a 20%rate, as from commercial year 2012.

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withholding tax rate is 15% -or 20% if between related partiesor if the beneficiary resides in a tax-heaven territory-2.

Current Regional Tax Incentives

The XII Region of Magallanes of Chile has different tax, customs,labor and other benefits aimed to promote development of suchregion.

5.1.1 Navarino Law Number 18,392, as amended.

Since 1985 and for the following 50 years, Law 18,392 created apreferential tax and customs treatment for certain entities establishedin the preferential zone of the XII Region of Magallanes andexclusively performing industrial, transport, tourism and mining orocean exploitation activities and established within preferential zonelimits.

Hydrocarbon extractive activities and those related to processing such

substances are expressly excluded from the preferential treatment

3

.

The entity must obtain an authorization from the RegionalGovernment Authority (Intendente Regional), which will indicatethe location/address of the entity. Such authorization will beincorporated under a public deed and signed by the Regional Treasuryon behalf of the State of Chile and the representative of the entity.This public deed will be considered for all legal purposes as anagreement (contract/law) between the State of Chile and the entity,

which shall incorporate expressly all the rights, benefits, exemptionsunder Law 18,392.

2Please note that Double Tax Treaties -when applicable- may reduce oreliminate applicable rates.3To this effect, industrial entities are deemed to be those that develop theiractivities in a factory or plant (i) elaborating, preserving and/or transformingnatural substances or already elaborated, and (ii) performing those industrial

services necessary to perform industrial processes. Such entities must use atleast a 25% of employees and supplies from the preferential zone.

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Benefits are lost if activities are not initiated within a 2 year termsince granted, or if activities are suspended during 1 year or more at

any time.

1.1 Tax Benefits Under Navarino Law.

a) Corporate Tax Exemption.

b) Customs Duties Exemptions. Duty Free Zone. Theimport of assets is exempt from customs duties,currently at a 6% rate assessed on the transactional

value or CIF as the case may be4. Imports are alsoexempt from Value Added Tax (VAT), currently at a19% rate. Both taxes under the normal customsregime are payable on Customs clearance. Theexemption also applies to all other charges and fees -e.g. dispatching fees- charged by Chilean Customs.

These exemptions applies to the import of foreign assets

necessary for the developing of activities e.g. primary assets,partially elaborated assets, parts or pieces, machinery,equipment, etc. Certain assets are excluded (e.g. guns andvessels).

c) VAT Exemption. Sale of assets imported from thePunta Arenas Duty Free Zone to the entities areexempt from VAT. In addition, the sale of Chileanassets (from the rest of the country) to the entities and

that are necessary to perform its activities and broughtinto the preferential zone are considered as an exportfor VAT purposes and thus are also VAT exempted.Also, sales and services rendered by individuals orentities domiciled or resident in the preferential zoneto individuals or entities residents in the same zone, in

4Please note that according to the language of the upcoming tax reform -

currently being discussed before the Chilean Congress- the custom duties willbe gradually reduced to 0% until the year 2015.

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respect to assets located and/or used or activitiesrendered in the zone are also VAT exempted.

Sale or services rendered by the entities to the rest of thecountry are subject to ordinary 19% VAT.

d) 20% Reimbursement by Treasury. Chilean Treasurywill reimburse a 20% of the sales (VAT excluded) tothe rest of the country or for services rendered fromthe preferential zone to the rest of Chile, excluding

the extension zone of the Punta Arenas Duty FreeZone.

e) Real Estate Tax Exemption. Real Estate orimmovable property located in the preferential zoneis/are exempt of Real Estate Tax.

5.1.2 Benefits for the Areas ofPorvenir and Primaveraof the XIIRegion of Magallanes contained in Law 19.149 of June 1992.

This Law grants similar benefits to those contained in Law 18,392 butexclusively refers to such 2 areas Porvenir and Primavera- of the XIIRegion of Magallanes.

5.1.3 Tax and Customs Benefits of Decree Law 1,089 of 1975 reSpecial Operation Agreements for the Exploration andExploitation or Benefit of Hydrocarbons.

The Tax and Customs Benefits Decree Law 1,089 of 1975 regardingCEOPs, refunded in DFL N2 of 1987 (Decree Law 1,089)

provides a special exception tax regime for CEOPs that applies in lieuof the general tax regime. In addition to the Decree Law 1,089, the taxregime under each CEOP is also subject to a Presidential Decree and a

public deed containing the CEOP, the terms of which describe the taxtreatment granted to the respective CEOP. Furthermore, CEOPsusually include a specific Revenue Ruling issued by the Chilean tax

authority.

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Decree Law 1,089 sets forth the regulations pursuant to which theState authorizes private companies to explore and exploit oil and gas

reserves within its borders. It also sets forth special applicable taxtreatments and/or benefits aimed at providing incentives for suchactivities. Such tax incentives are granted to (i) contractors which areincorporated in Chile and which have entered into a CEOP; and (ii)subcontractors not incorporated or resident in Chile.

Such tax special treatment addresses not only compensation paidpursuant to a CEOP or a sub-contract but also other fiscal terms such

as special VAT benefits and special customs regimes applicable to theimportation of property or equipment into Chile for operationspursuant to the CEOP. For instance, Decree Law 1,089 affords theapplicability of a special customs regime towards the importation intoChile of property and equipment required under a CEOP.Furthermore, Article 8 of Decree Law 1,089 renders in-kind (i.e.,hydrocarbon) payments to contactors under CEOPs exempt from alltaxes. Additionally, all contracts and documents (including the CEOPitself) evidencing such payment are exempt from any applicable stamp

taxes.

With regards to compensation paid to contractors under the CEOP,Article 5 of Decree Law 1,089 provides two alternative tax treatmentsfrom which the President of Chile may choose, and which treatment isthen set forth in a Supreme Decree. These two treatments areconsidered to be more favorable to the contractor than the standardChilean income tax regime and are described below:

(1) Treatment 1. No other direct or indirect tax otherthan a 50% tax will affect the compensation paidunder the CEOP. This special tax regime applies togross amounts paid to the company as compensationunder the CEOP. No tax deductions are allowed underthis regime. The President may lower this tax belowthe 50% rate, but such lower tax is rarely granted.

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6. Environmental liability

The Chilean environment law N19.300 indicates that the holder ofany project or activity covered by Article 10 of the law (includingprojects involving oil and gas assets) must submit an EnvironmentalImpact Statement or develop an Environmental Impact Study asappropriate.

According to Article 10 of the Environmental General Basis Lawprojects designed to carry out the following activities must first beevaluated and assessed. These projects undergo environmental impact

assessment at all stages, namely, design, construction, operation andclosure.

Aqueducts and other water-carrying infrastructure.

Electricity transmission lines.

Electricity generation plants with more than 3 MW ofinstalled power.

Nuclear reactors and associated installations.

Airports, road terminals, highways and public roads.

Harbours, shipyards and maritime terminals.

Land and tourist development projects not covered by urbanplanning regulations.

Some urban regulations.

Mining projects.

Gas and oil pipelines.

Industrial manufacturing projects.

Agriculture and cattle projects.

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Fishing and aquiculture projects.

Hazardous substances production, transport, storage, disposaland recycling.

Liquid waste treatment and disposal projects.

National parks and natural reservations projects.

Mass chemical distribution over populated sectors.

The developer of a proposed project must produce an EnvironmentalImpact Study (EIS) or an Environmental Impact Declaration (EID).According to the criteria established by the Environmental GeneralBasis Law, projects which have a bigger environmental impact needto present an EIS which is a larger, more detailed and more expensivedocument than a simple EID. If a project has the effects,characteristics or circumstances described in article 11 of the law, thenthe project must therefore be submitted to the Environmental Agency

through an EIS.

When deciding whether an EIS is necessary the EnvironmentalAgency will consider the following issues:

(a) Risks to public health due to the amount and type ofemissions or waste to be generated by the project.

(b) Adverse effects on the levels and quality of natural resources

in the surrounding area.

(c) Human displacement or a significant change in the way of lifeof local communities within the area of the project.

(d) Proximity to communities, natural resources or protectedareas.

(e) Change to the landscape and tourist value of the place where

the project will be located.

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(f) Change to sites of archaeological, anthropological orhistorical interest.

Regarding (c) and (f), most archaeological sites are located in northernChile, and most settlements of indigenous people are located in thesouth, in the Ninth Region. Indigenous groups and NGOs representingthe interests of indigenous people have a very strong presence andactive role in Chilean public life.



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Colombia - Oil & Gas Handbook

Colombia

Colombia Upstream Industry.


Since the Constitution of 1886, Colombia declared the State-ownership of the subsoil, including all minerals. Starting in 1905,Colombia has administered its oil and gas reserves through publicconcession agreements granted by the government that implied the

payment of a royalty.

By the mid-twentieth century, oil production was obtained from thecommercial exploitation of properties given in concession. The mostsignificant concessions in terms of production were those of DeMares, Barco and Yond, which together represented over 90% ofcrude oil production.

Prior to the reversion of the De Mares Concession technical reportswere showing a decline in production which made severalinternational companies move their investments to other oil countries.This scenario imposed the need for a new strategy to encourageforeign investment in exploration and exploitation activities,materialized with the issuance of a new oil law in 1961 and wasfinally completed by Law 20 of 1969.

These new laws permitted Ecopetrol as manager of the subsoil since1969 to partner with private (foreign or national) companies in order

to develop exploration and exploitation activities. The agreementswere basically risk contracts, in which the partner assumed all theexploration costs until a discovery was made, when Ecopetrol startedto share 50% of the development investments and costs and received50% of production after royalties. The royalties would be not less than16%

In 1974, the exploration and exploitation scheme in changed with the

issuance of Legislative Decree 2310, whereby the concession regimenwas abolished and which established that the exploration of

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hydrocarbons of national property would be carried out exclusively byEcopetrol, directly or through partnership contracts, services operation

contracts, or other type of contract different than concessionagreements. These were known as association contracts whereby allthe exploration activities were born by the private partner on its ownaccount and risk, over a period not exceeding six years and remainedfree to withdraw from the designated area at any time without penalty,

provided they fulfilled their annual exploration commitments. Once adiscovery was made in the opinion of Ecopetrol, it reimbursed in oilhalf the cost of the exploration wells that entered production and it

received 50% of the product after royalties, which were set at the20%.

This was the regime that operated for nearly thirty years, until asignificant reform took place in 2003 that dramatically changed theColombian upstream industry. By means of Decree 1760 of 2003 themanagement and control of the Colombian hydrocarbons resourceswere transferred from the state-owned company Ecopetrol to anindependent governmental agency created for such purpose, the

National Agency of Hydrocarbons (ANH).

Up until then, Ecopetrol concentrated both roles (i) the administrationand control of the hydrocarbons resources of Colombia and (ii) thetypical exploration and exploitation activities of a commercial oilcompany.

With this reform Ecopetrol was restructured as a public stock

company and the ANH was created as administrator and regulator ofthe hydrocarbons resources of the nation.

As of January 1st, 2004 one of the main purposes of the ANH is thecompetence to enter into the new exploration and exploitationcontracts (E&P Contracts), subject to the terms and conditions setforth by the agency as regulator. These contracts are awarded as theresult of public bids known as Colombian Rounds, as explained

below.

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2. Legal Framework

Since 1886, hydrocarbons, under the general category of minerals,have been reserved as property of the Nation. The ColombianConstitution establishes that as a general rule, the Colombian Nationis the owner of subsurface and the natural non-renewable resources ofthe territory (article 101 and 102).

The basic statute that regulates the Oil and Gas industry is thePetroleum Code (Decree 1056 of 1953). This Code establishes thatcontracts for exploration and exploitation of hydrocarbons aregoverned by Colombian law and are subject to the jurisdiction ofColombian courts. Foreign companies who want to enter into oilcontracts and undertake exploration and exploitation activities, mustestablish a Colombian branch, complying with the formalities of theColombian Commercial Code. The Colombian branch must bedomiciled in Bogota.

Additionally, the petroleum industry and its activities of exploration,

exploitation, refinement, transportation and distribution are declaredas public utility.

Resolution 181495 of 2009 from the Ministry of Mines and Energyregulates specifically the technical aspects of exploration andexploitation activities in Colombia. Exploration is defined in theaforementioned resolution as the studies, works and programsdeveloped in order to determine the existence and location ofhydrocarbons in the subsurface.

To start exploitation activities, the contractor must first submit thedesign of production facilities and obtain approval from the Ministryof Mines and Energy. Once the facilities are installed they will bechecked to verify if they correspond to the approved design, otherwisethe authorization to start the corresponding exploitation will not begranted.

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In addition, the contractor must provide an analysis of operationalrisk, environmental global license and copies of permits or approvals,

without prejudice to other documents or information as required.


The creation of Ecopetrol was authorized by means of Law 165 ofDecember 27, 1948 which finally led to the establishment of thecompany, on August 25, 1951 as a state-owned company in order toreceive the reversion of the De Mares Concession. Ecopetrol startedits activities in the hydrocarbon sector as a state-owned industrial and

commercial company in charge of administrating the nationshydrocarbon resources, and began to grow as other concessionsreverted and became part of its operation.

As indicated before, Ecopetrols situation changed after 2003, with theorganization of Ecopetrol as a public stock company one hundred

percent state-owned, eliminating the administration role and devotingthe company to commercial activities in competitive terms with the

other oil companies in the upstream sector, with greateradministrative, budgetary and labor autonomy.

Later, in 2007, Law 1118 of 2006 authorized the capitalization ofEcopetrol by means of an issuance of shares of up to 20% of itsownership, in which Colombian citizens and the so-called solidaritysector could participate. The democratization of shares took place inmid 2007 of 10.1% of its capital share acquired by private investors.This capitalization meant another significant change in its

shareholding nature, and also in the way of conducting business.funding its operations, entering new lines of business and increasingacquisition plans. Ecopetrol became a business oriented company,with a legal framework closer to private law.

Ecopetrol is current trading in the Colombian, New York, Lima andToronto Stock Exchange with international presence. Today is thelargest oil company of the country with a strong presence in the

exploration and exploitation activities focused on petroleum, gas,petrochemicals and alternative fuels,

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3.1 Relationship among the Government, NOC and IOCs

In Colombia after the 2003 reform, by means of which the NOCbecame another economic agent which competes with IOCs in equalterms in the licensing rounds that the ANH undertakes to allocateareas for exploration and exploitation purposes. Nevertheless,Ecopetrol still have some areas that can be managed and operateddirectly or through contracts with private parties (those blocks that are

part of its patrimony as a consequence of the 2003 spin-off andseparation of roles reform). Other than that, the ANH is the sole

governmental agency competent for granting new rights forexploration and exploitation of Colombian hydrocarbons to oilcompanies, including Ecopetrol.

Thus, after the in 2003 reform that opened the upstream sector inColombia our NOC does not have any privileges in the licensingrounds of the ANH.


Colombia has managed its national hydrocarbons resources troughdifferent type of contracts: (i) until 1974 through concessionagreements, (ii) From 1974 until 2004 through association contractswith Ecopetrol and (iv) as of January 1st, 2004 by means t

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