Mauricio Medinaceli Monrroy
Private Consultant
Oil - Natural Gas - Energy

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Notes on recovery costs in Bolivian hydrocarbons sector

Ah! How difficult is to be a dad! There are many opportunities when I hear that to be a parent, one should take previous courses and approve some type of test. The argument goes like this: "We need drive license, vote permission... even work permission, but to have a child, nothing." In response to this argument, many angry parents respond that it would be an attempt to individual rights to create such thing as a "parents’ permission". The truth is that, personally, I think that some previous guidance would be healthy, because on many occasions I questioned about my parenthood performance.

One of the most serious questions that I usually have (as a father) is I should give my child everything he wants, in other words, should I cover all his costs (even the most eccentric ones) or not? An alternative to this would be give him an "allowance" (an amount of money per month) so he can solve all his problems. If I cover all his costs he (my son) will be very happy, but if I give him an allowance, perhaps when the price of movie tickets or PS4 increased (and not the allowance) my poor son will be in trouble... and naturally, I will be, with high probability, an evil father.

The above example will help me to contextualize the recovery costs in the oil sector that emerged some days ago in Bolivia. After several news about it, I decided to review the legal regulations ( # 3278) to see the magnitude of changes. Do we really want to control every penny? Was my initial question.

Looking article 1 of the regulation # 3278 I saw the following sentence: "according to the established in the Constitution". I raised my eyebrows. Reviewing the previous cost regulation (because let me tell you that there was a previous regulation) approved by regulation # 29504, there was no allusion to Constitution.

I took off my glasses and began to see (without seeing) that white wall in front of me. The noise of a helicopter made me react (as you will read, I am still living in Afghanistan) and then I continued reading the new regulation. When I came to Article 3 I saw another novelty, the regulation now introduces Oil Services Contracts. Ok! Now, everything starts to fit, with the current constitution and previous regulation. Let's see.

The following figure attempts to show the evolution of legal laws, regulations and events since 2005. The Hydrocarbons Law # 3058 of 2005 approved three types of contracts: 1) production sharing; 2) association and; 3) operation. In 2006, because the so-called "nationalization" the Bolivian Government signed Operation Contracts. In year 2007 the new Constitution determines that exploration and exploitation activities must be carried out with Service Contracts, the new Constitution was aprove in 2009. In 2008, the regulation #29504 regulatory didn’t take in consideration the new Constitution text and continued with the regulation of Operation Contracts from the so-called "nationalization". Finally, the new regulation # 3278 of 2017 established the creation of Petroleum Services Contracts.

vlog.17.09.13.en1

Is this a simple wordplay? The answer, from my point of view, is no. What is the substantive difference between these contracts? It turns out that Operation Contracts of so-called "nationalization" are (in relation with cost recovery) a typical Production Sharing ones, this situation I discussed in several documents: link01link02link03. In a standard worldwide production sharing contract, the state allows the recovery of operating and capital cost. Returning to the fatherhood analogy, in the world, parents usually cover reasonably the costs of their children.

The new Bolivian Constitution, for its part, insinuates that parents shouldn’t cover their children’s  costs, what they should do is give them an allowance, for this reason the Constitution has the following text: "YPFB [Bolivian oil company] is authorized to sign contracts under the service regime, with public, mixed or private companies, Bolivian or foreign, so these companies, in their name and on their behalf, perform certain activities in the production chain in exchange of a fee or service payment. This "Remuneration or service payment" doesn’t necessarily imply cover costs. I must add that at the international level in a standard service contracts, the State gives a compensation to the company and this company should manage operations in order to cover (or not) operation and capital costs.

The first regulation of costs (year 2008) refers to Operating Contracts (where parents cover the children costs), but the new regulatory regulation of costs creates the figure of Oil Services Contract, where it’s not clear State's obligation to cover these costs. That is to say, under the Oil Services Contract figure there is apparently no obligation to recognize the costs, because it refers the new Constitution.

The new regulation also has other topics that are of great interest: 1) the existence of price limits for costs; 2) the ANH (regulatory body of hydrocarbons in Bolivia) is responsible for determining and approving such limits; 3) non-recognition... you read well "no recognition" of environmental liabilities prior to the signing of contracts (Article 16), by the way, this was already established in previous regulation; 4) tax issues for investments transfers (Article 13); 5) it seems to me that regulation #24051 was amended (article 15); 6) What is meant by "amount" in Article 20? Each of them is important and may be the subject of another post.

I wanted to discuss contractual issues because this new rule raised new doubts (once again) with State-Operators relationship. We are not only talking about setting limits to costs, now we introduce disturbances in the type of contractual relationship between Bolivian State and Operators. All this, once again, convinces me the need to provide a comprehensive solution to all the problems of the sector through a unique, clear, simple and consistent legal framework. Using a simple analogy, it’s time to buy a new tire... the one we have is already "very old".

Well my friends, as always was a pleasure share these ideas with you, for those interested in see this discussion you can visit my Youtube channel, see the following link. Only 10 days remain to return to my beloved Bolivia and seek new for new horizons and adventures.

Mauricio Medinaceli Monrroy

Kabul, September 13th 2017

 

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