Contributed By García Sayán Abogados
Petroleum, like any other natural resource, is owned by the Peruvian state, but it is transferred to Perupetro S.A. (Perupetro) once it is produced. Perupetro assumes the obligation to promote the exploration and production of this natural resource and is allowed to transfer its ownership to private investors through Licence Contracts in exchange for a royalty. Thus, exploration and production activities are carried out through Licence or Service Contracts executed with Perupetro.
Exploration and production activities are ruled by the Ministry of Energy and Mines (http://www.minem.gob.pe) through the Vice Minister of Hydrocarbons, the Hydrocarbons General Direction and the Energy Environmental Affairs General Direction. In addition, OSINERGMIN (Supervisory Agency of Investments in Energy and Mining) and OEFA (Environmental Evaluation and Auditing Office) deal with the compliance of technical, safety and environmental regulations and sanction the lack of compliance therewith. Regulations on this matter have a national coverage, leaving only certain specific topics to be regulated by the Regional or Municipal Governments.
Oil and gas activities are open to private companies. However, the Government participates in the market through two state-owned companies: Perupetro and Petroperu S.A. (Petroperu). As mentioned above, Perupetro is the state agency in charge of promoting and executing exploration and production contracts; it also monitors the compliance with such contracts. On the other hand, Petroperu acts as a regular oil company; it operates several refineries (mainly the one located in Talara, on the northwest coast, the second largest in the country), service stations and the North Peruvian Pipeline. In recent years, Petroperu has gone back to exploration activities by signing one licence contract with Perupetro, although oil and gas activities are still mainly carried out by private companies.
Oil and gas activities are mainly ruled by the Hydrocarbons Organic Law (Law N° 26221) and by other specific laws and regulations, the most important being the Regulation for the Activities of Exploration and Exploitation of Hydrocarbons (Supreme Decree N° 032-2004-EM). Other laws and regulations deal with environmental matters, tax stability, marketing, citizens’ participation, transportation and distribution of hydrocarbons through pipelines, etc.
Exploration activities are granted through Licence or Service Contracts executed by the oil companies with Perupetro. These contracts include two phases: exploration and production.
The Hydrocarbons Organic Law allows other types of contract as long as they are approved by the Ministry of Energy and Mines. Nevertheless, as of today, no type of contract other than the above-mentioned has been approved.
Technical Evaluation Agreements are also used by Perupetro and the oil companies for the performance of preliminary and non-invasive exploration activities (seismic exploration and drilling are not allowed).
In order to enter into a Licence or Service Contract with Perupetro, oil companies need to be legally, technically and financially qualified as such by Perupetro. Contracts may be awarded through public bidding or direct negotiation.
To qualify as an experienced oil company for these contracts, it is necessary to meet the following capabilities:
Alternatively, the economic and financial capability could be proved if:
Once the contract terms are agreed, the contract needs to go through an approval process that involves Perupetro’s board of directors, the Ministry of Energy and Mines, the Ministry of Economy and Finance, the Central Reserve Bank’s board of directors, and finally, Peru’s President, who has to issue an Executive Order (Supreme Decree) approving the contract and authorising Perupetro for its execution. Usually this approval process takes between four and six months.
If the oil company requires an area that is not totally or partially included in a contract area, in a Technical Evaluation Agreement’s area or in a negotiation process, and it is not located totally or partially within a block already approved by Perupetro, that area could be directly negotiated in a new contract.
Exploration and production activities are subject to several specific authorisations. Mainly, all activities will be subject to an Environmental Impact Assessment (EIA) to be approved by the Energy Environmental Affairs General Direction. Other authorisations such as a Deforestation Permit or the Non-Existence of Archaeological Remains Certificate (CIRA) will also be required.
It is worth mentioning that if the contract’s area is located in the area of influence of a Native Community, the decision to offer such area to oil companies will need to be subject to a Prior Consultation Process, as required by the ILO 169 Convention, to be conducted by the Ministry of Energy and Mines (General Direction of Energetic and Environmental Affairs).
The state derives value from oil and natural gas production via the royalty charged to the oil companies with Licence Contracts, according to the Hydrocarbons Organic Law (Law N° 26221). Royalties may be calculated, at the company’s choice, based on two methodologies: Production Scale or Economic Result. In both cases, royalties may fluctuate between 5% and 20-25%. In Service Contracts, Perupetro pays the oil companies a retribution in cash (although in some cases it is paid in kind) using the same methodologies, for the services rendered, and remains the owner of the produced hydrocarbons which are then sold in the market.
The decision on which methodology is to be used must be made when the oil company makes a declaration of commercial discovery for a block, at which point the exploration phase of the Licence or Service Contract will end and so all the benefits granted for such phase.
In addition 5% of the after-tax profit must be shared with the oil company’s employees.
The current income tax rate is 29.5%. The income tax rate in effect on the date of the Licence or Service Contract's execution will remain the same during the contract term due to the tax stability benefit granted by law.
There are some special benefits provided by law for the exploration phase, namely: (i) the importation of equipment and materials (included in a list approved by the Government) is exempted from customs duties; and (ii) the 18% sales tax (VAT) paid by the companies can be early reimbursed by the Tax Authority.
Oil companies can keep their accounting in foreign currency.
Petroperu has no special rights in connection with upstream licences, since state-owned companies and private companies must be subject to the same legal conditions according to the Peruvian Constitution. Nevertheless, there is a tendency to grant Petroperu the option to be part of new contracts with a participation not to exceed a 25% interest.
There are no legal local content requirements; nevertheless, the Licence and Service Contracts require the oil companies to have training programmes for college students. Moreover, local employment commitments will depend on the terms agreed between the oil companies and local communities and included in the Environmental Impact Assessment (EIA) or other agreements.
The oil company must submit with Perupetro an “Initial Development Plan” within 180 days after the declaration of commercial discovery, which must contain a description of the physical and chemical characteristics of the discovered hydrocarbons, an estimation of reserves, a well development schedule for drilling, details of transportation and storage systems, environmental and safety measures, a general activities schedule and an economic evaluation. Perupetro must send its comments on the plan no later than 60 days before the plan’s initiation deadline.
As previously mentioned, exploration and production rights are granted through Licence or Service Contracts that include two corresponding phases.
The exploration phase could have an extension of up to seven years and may be extended, under special conditions, for three more years. The exploration phase is divided into periods in which compliance with certain minimum activities (i.e. reinterpretation of existing data, acquisition of seismic information, drilling of exploratory wells) is agreed and guaranteed by bank performance bonds to be supplied by the oil company to Perupetro.
The production phase has an extension of 30 years for crude oil and 40 years for non-associated natural gas and condensates from the date on which the exploration phase ends. In the production phase, the contractor must present an annual work programme and a budget plan; and another one regarding production and development activities for the next five years.
The relinquishment requirements are established in the Licence or Service Contract according to the exploration phase’s periods. By the end of the exploration phase, 50% of the original contract area must be relinquished, unless the oil company assumes an additional exploration commitment to be carried out during the production phase. For the production phase, the oil company can only retain the areas in which the discovered reservoirs are located plus a buffer zone.
The assignment of rights is considered an amendment to the Licence or Service Contract. Since only oil companies duly qualified by Perupetro can be part of a contract, its assignment is subject to the same approval process as a new contract.
It is worth mentioning that the rights granted through a Licence or Service Contract cannot be used as a bank guarantee and therefore transferred to the creditor. Bear in mind that the new party to a Licence or Service Contract will need to be an oil company duly and previously qualified by Perupetro to assume the debtor’s position in the contract.
The distribution and transportation of hydrocarbons through pipelines is considered a public service and requires a concession contract executed with the Ministry of Energy and Mines.
The planning, construction and operation of refineries (processing) is authorised by the Ministry of Energy and Mines.
Storage, distribution and marketing are subject to licences and permits (but not concession contracts), also granted by the Ministry of Energy and Mines, but it is necessary to be registered with the Hydrocarbons Registry of the Supervisory Agency of Investments in Energy and Mining (OSINERGMIN).
There are no national monopolies in Peru with respect to downstream operations.
As previously mentioned, the distribution and transportation of hydrocarbons through pipelines is considered a public service and requires a concession contract executed with the Ministry of Energy and Mines. Operators of pipelines must request a concession, which will be granted for a period of no less than 20 years and no more than 60 years. Concessions can be granted via public bids or on the request of an interested party.
Once granted the concession contract for the pipeline, the operator is required to allow non-discriminatory access to third parties, wherever economically and technically feasible, and provided that the third party has entered into a Transportation Service Agreement.
In general, the methodologies for setting tariffs for transportation and distribution are approved by OSINERGMIN by proposal of the pipeline owner, which includes capital expenditure, operating expenditure and earnings.
Downstream operations are subject to the general tax regime in which, among others, the income tax rate is currently 29.5% and the sales tax (VAT) rate is 18%. However, and subject to the execution of a Juridical Stability Agreement with ProInversion (a Peruvian Government agency), under certain conditions, investors may be granted with tax stability, exchange stability rights, the reimbursement of sales tax during the preoperative stage of the project, and other benefits.
As set forth in 3.4 Typical Fiscal Terms Under Downstream Licences, there is no special tax regime for downstream operations, unless a Juridical Stability Agreement is executed.
Nevertheless, in the specific case of investment in natural gas processing plants, several benefits can be granted through contracts signed with the Ministry of Energy and Mines. Some of these benefits are tax stability, temporary importation of goods without paying any importation taxes, exchange stability rights, and the possibility to keep accounting books in foreign currency.
There are no special rights or benefits for the execution of these activities granted to national companies.
There are no legal local content requirements for investors. Commitments with respect to local employment will depend on the terms agreed between the oil company and local communities included in the EIA or in other specific agreements.
In addition to the main characteristics mentioned in previous questions, every oil or gas asset (pipelines, refineries, storage plants, etc) has an EIA that includes an abandonment plan which could include decommissioning, depending on the kind of infrastructure.
With respect to pipelines used in transportation or distribution concessions, they must be be transferred to the Government upon the contract’s termination. The Government will decide to either operate such assets by itself or re-offer such operation to private investors.
Refineries, storage plants that decide to terminate their processing operations must filed an Abandonment Plan with the Hydrocarbons General Direction according to the Regulations for Environmental Protection in Hydrocarbons Activities.
The concession contract by itself does not grant any rights with respect to the land in which infrastructure will be built. After executing the concession contract, oil companies may acquire property for these purposes, purchasing or leasing the land from its owners. They may also request easements or rights of way on public or private property for the construction of its facilities, pipelines, etc. The property owner must be compensated. If no agreement can be reached between the owner and the oil company, the latter may request from the Ministry of Energy and Mines the expropriation of private lands. The Ministry of Energy and Mines will study the request and impose the easement, and the oil company will have to pay an indemnity to the owner. In addition, the investor may ask the Government to expropriate the land as long as such request is considered a matter of national and public need and is duly documented and supported.
It is worth mentioning that, within 50 kilometres of the Country’s border, a foreigner cannot acquire any rights with respect to mines, forests, water, energy sources and others unless they obtain approval through a Supreme Decree duly approved by the Council of Ministers.
Operators of pipeline transportation service concessions must perform their activities respecting the rules of free competition and antitrust, and may not offer or grant benefits or privileges between users for the same class of service.
The access to the transportation service is limited by the available capacity of the pipelines, and the Ministry of Energy and Mines regulates the Access Conditions to the Transportation System, which include the service terms and conditions, commercial conditions (including the rights of the users to negotiate them), and conditions for priority to answer access requests.
OSINERGMIN fixes the maximum tariffs that the operators may charge for transportation services.
Trading of natural gas through pipelines includes the participation of regulated and free customers. The first group receives the gas through the distribution system while the second includes customers that, due to the volume required for their activities, acquire the gas directly from the producer. There are no specific limits for the trading of gas.
There are no commercial restrictions on importing and selling crude oil or exporting it. Exportation of crude oil is not subject to any tax.
Neither are there any commercial limitations or restrictions on the sale and purchase of fuels or other hydrocarbon by-products, such as diesel, petrol, HAL, HAS, Turbo A1 and JP5, benzine and white spirit, unless they are sold in certain specific areas of the country due to national security issues. In such cases, companies must first be registered in the Regulated and Supervised Products Registry with the Tax Authority (SUNAT).
Downstream concession can be assigned only with the approval of the Ministry of Energy and Mines as the counterpart of transportation or distribution concession contracts.
Peru is a signatory to many Free Trade Agreements with several countries such as Canada, South Korea, Japan, China, Indonesia, Thailand, Mexico, Chile and the USA, and with the EU and EFTA.
Peru is also a member of World Trade Organization (WTO), Mercosur, the Andean Community, APEC and the Pacific Alliance. In the near future, treaties signed with Trans-Pacific Partnership (TPP) countries, Australia, Brazil, Guatemala and Pacific Alliance countries will come into effect.
Peru is also a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which has been in force since 5 October 1998, and a signatory to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which has been in force since 8 September 1993.
The main environmental laws are:
The main environmental regulators are:
The websites for each national agency are:
Depending on the project, a contract with the Government may be needed as explained before in order to have the investor considered as the project’s title holder and be able to obtain other additional permits and authorisations before commencing operations.
The main prior permit is the EIA, which contains commitments that the companies have to follow to mitigate, and preserve the environment from, possible damage that may be caused by their activities. In connection with the environment, authorisations for the use of water and the use of audited chemical products are also required.
It is worth mentioning that if the project is to be developed in a Natural Protected Area, the oil company will need to obtain a binding Prior Opinion from the Natural Protected Areas National Service (SERNANP) and each EIA will require a favourable Prior Technical Opinion report also from SERNANP.
With respect to occupational health and safety, companies will need to prepare a risk study and a contingency plan for their activities duly approved by OSINERGMIN. In addition, labour laws require internal health and safety regulations and the hiring of special insurance protection due to the risk involved in these activities.
Peru is a signatory to the MARPOL 73/78 Convention and their maritime principal authority is the General Direction of Captaincies and Coastguard (DICAPI), a body of Peru’s Navy.
DICAPI has similar duties in maritime aspects to OEFA, SENACE and OSINERGMIN.
Decommissioning is a part of the abandonment plan which must be approved by the same authority that approved the EIA (Ministry of Energy and Mines). The abandonment plan must consider the commitments assumed by the company in the EIA.
The abandonment plan must be secured with a bank guarantee in an amount of 75% of the plan’s value. The security must be in effect until the Environmental Auditory Office approves the fulfilment of the plan.
Recently, in April 2018, the Peruvian Government approved the Climate Change Framework Law (Law N° 30754), which regulates legal principles, climate change mitigation measures, management tools for climate change and financing of these measures. The enactment of the regulations of this law is pending.
Nowadays, Peru has a policy of promoting investment in natural gas activities, especially in LNG. In that sense, the following regulation establishes a framework for these activities:
At the present time, Congress is analysing a proposal to amend the Hydrocarbons Organic Law, specifically with respect to upstream activities. Such proposal includes the extension of the exploration phase to ten years and of the production phase to 40 years for all hydrocarbons. In addition, an extension of the contract term for 20 years will be an option, provided that a work and investment programme is agreed with Perupetro for such additional term. With respect to royalties, only the Production Scale methodology will remain allowing that, in certain cases, royalties may even go below 5%. Other benefits and provisions aiming to strengthen Perupetro’s role are also being considered.