Overview (September 2000)

Exploration and Exploitation

The Chilean Constitution (Article 19(24)) stipulates that the state has exclusive dominion over all mines, including all hydrocarbon deposits. The Constitution also recognizes that deposits may be explored and exploited by private persons, by way of judicial concessions.

Liquid or gaseous hydrocarbon deposits are subject to special laws and judicial concessions do not apply. The exploration, exploitation or separation of liquid or gaseous hydrocarbons fields may be performed directly by the state or state companies, or by private persons through administrative concessions, or through special operations contracts according to conditions established by the president by supreme decree.

The state performs exploration, exploitation and separation activities of hydrocarbon deposits through the National Petroleum Company and its affiliates. Current economic policy prioritizes the participation of private investors in the exploration of these fields, through special operations contracts between the state and the investor. The National Petroleum Company may join with corporations or private persons who have such contracts, if agreed.

Investors may also request an administrative concession for hydrocarbon exploration and exploitation from the Ministry of Mining. In practice, however, private companies have opted for special operations contracts. These contracts are between the state (as owner of fields) and one or more private companies (the contractor).

In the exploration stage, contractors perform a series of tasks at their own expense (eg, geological studies, exploration drilling). Risks are assumed exclusively by the contractor. When a commercial field is discovered, the contractor performs exploitation operations and is obliged to make corresponding investments and deliver hydrocarbons to the state. The contractor receives the agreed payment from the state, either in dollars or directly in petroleum.

The law takes into account the fact that parties to special operations contracts may agree to a clause stating that the contractor shall pay a tax (on the amount he is paid) equivalent to 50% of his payment. This replaces income tax and if applicable, the property owners, shareholders and partners of the investor company are likewise exempt from paying income tax on profits arising from the contracts. If income tax or the alternative 50% tax applies, taxes to be applied to the contractor may be lowered by the president up to a maximum of 100%, taking into account the following:

• the difficulties inherent in the geographic exploration or exploitation area defined in the contract;

• the lack of treaties that eliminate double taxation between the investor's tax home and Chile; and

• how onerous the other stipulations of the contract are for the contractor.

The president may also partially or fully exempt the contractor from paying taxes or duties on imports of machinery or goods for exploration and exploitation. Other tax and exchange rate benefits are available to contractors (eg, free access to the bank system dollar market).

Finally, the law guarantees that the special operations contract is binding and must remain unchanged for as long as it is in effect.

Refining

Any person may undertake refining activities, so long as he or she complies with the safety rules applicable to the fuel handling industry and the environment.

Petroleum Logistics Activities

The law allows the free development of petroleum logistics activities (maritime terminals, storage and transport). Companies must be registered in the registry of the Superintendency of Electricity and Fuels, and must comply with the relevant regulations and environmental rules. Only the installation of maritime terminals is subject to concession granted by the Ministry of Defence.

Distribution of Liquid Fuels

Access to, and performance of, activities related to the distribution and commercialization of liquid fuels is unrestricted. It is only necessary to comply with environmental, safety and other rules that regulate those activities.

Prices

Hydrocarbon prices are set freely by the market. The domestic price of petroleum (ie, the price at which the national petroleum company sells to refineries) is determined by the parity price of imported crude equivalent to domestic crude. For petroleum derivatives, the price is related to parity with imports of the respective derivative. The retail price is that charged to the refinery, plus transport and storage costs, distribution margins, value added and other relevant taxes. The price of natural gas is set by the prices of Argentine and Chilean producer basins, as set out in long-term contracts.

Petroleum Price Stabilization Fund

The Petroleum Price Stabilization Fund is intended to ease domestic price fluctuations that are caused by variations in international prices of gasoline, domestic kerosene, diesel petroleum, fuel oil and liquid gas.

The fund operates by way of a reference price band with lower, middle and upper reference prices set by the Ministry of Mining with the National Energy Commission. As long as prices of imports into Chile are within the band, no tax or credit is applied. If the weekly price is higher than the upper reference price, a subsidy is applied and charged to the fund. Alternatively, if the parity price is lower than the lower reference price, a tax is accrued to the fund. It is estimated that the impact of the fund will be neutral in the long term (ie, the amount of the subsidy should be offset by the amount collected in taxes).

Gas Transport and Distribution

The public service of gas transport and distribution by pipeline is regulated by Decree 323 of 1931 as amended, and by Supreme Decree 263 of 1995. The most relevant aspects of these rules are described below.

Concessions
A concession is needed to provide gas transport and distribution services. Such concessions are granted by presidential decree. The decree granting the concession must be published in the Official Gazette and must be reduced to public document within 30 days following its publication.

Concessions may be provisional or definitive. With provisional concessions the concessionaire may perform studies for the preparation of a works project. Definitive concessions are granted for an indefinite period. The concessions are not exclusive; it is possible to grant more than one for the same transport or distribution area. Definitive concessions authorize the concessionaire to construct, maintain and exploit the transport or distribution system, and to use easements and rights of way necessary for the construction of the installation. Agreement with regard to the constitution of the easement, its exercise and the form of payment of the indemnity is reached either between the concessionaire and the person affected, or by judicial resolution. The amount of indemnity to be paid by the concessionaire for the constitution of easements must cover all damage caused to the owner of the lands or of the concession affected by the easement.

Concessions may be transferred or given in guarantee of any obligation and are subject to seizure. However, transfers, encumbrances, guarantees or seizures may not paralyze or hinder public service, nor the concessionaire's compliance with his obligations. In the event of transfer, the new holders become concessionaires, with all the respective obligations.

The president may cancel a concession in the event of non-compliance with certain formal requirements or concessionaire obligations. Goods belonging to a concession which has been cancelled are auctioned or sold directly and the concession is renewed in the name of the new owner.

The right of the concessionaire to construct the easements approved in the concession decree may be cancelled, if the concessionaire does not initiate procedures to implement them within six months following the public document of the concession decree.

Open access system
Transport concessionaires must operate according to the open access system, that is, the service offered by the companies must be made in equal economic, commercial, technical and informational terms, with regard to available transport capacity. No equivalent requirement exists for distribution companies.

Obligation to provide distribution service
Supply companies must provide gas to whoever requests it within the service areas defined in their concessions, as long as it is compatible with the capacity and security of their installations.

Gas transport and distribution prices
Gas transport and gas supply companies set their prices freely. The law stipulates that distribution companies must comply with certain publicity requirements regarding their prices. Prices may not be discriminatory. Nevertheless, the Antitrust Agency may request that the Ministry of Economy fix rates for a gas supply company which is obtaining monopoly profits as defined in the Gas Service Law. Once market conditions allow for a return to free prices, those fixed rates may be abandoned.

Sanctions
The Gas Service Law establishes sanctions that may range from imprisonment (eg, for those who intentionally obstruct or damage transport or distribution networks) to cancellation of the concession (eg, if the installations are not constructed on schedule) and fines (eg, for non-compliance of safety rules), depending on the nature of the infraction.

Environmental Regulation

The hydrocarbon sector is regulated by the Law of Environmental Bases 19,300 and the Regulation for the Environmental Impact Evaluation System (Supreme Decree 30, 1997). These laws determine which projects or activities could alter the environment and so must enter the environmental impact evaluation system.

In the hydrocarbon sector, the following projects or activities may be subject to environmental impact evaluations:

• petroleum and gas mining development projects, including prospecting, exploitation, separation plants and disposal of residues and inert materials;

• oil, gas and mining pipeline systems; and

• the habitual production, storage, transport, disposal or reuse of hazardous, explosive, radioactive, inflammable, corrosive or reactive substances.

State agencies responsible for the administration of the evaluation system are the regional environmental commissions and the National Environmental Commission. These agencies are regulated by the Law of Environmental Bases 19,300 and by the regulations of the Consultation Council contained in Decree 86 of May 8 1995 (as amended).

International Treaties

Natural gas
On July 7 1995, a protocol was signed as part of the Agreement of Economic Complementation between Chile and Argentina. The protocol regulates gas interconnection and the provision of natural gas between the two countries. The protocol was incorporated into domestic law in November 1995.

Through the protocol, Chile and Argentina undertake to develop juridical regimes for the free commercialization, exportation, importation and transport of natural gas between the two countries. Terms of sale and gas transport contracts shall be freely negotiated among the parties. The main points are summarized as follows:

• The respective law of each country and the agreements contained in the protocol itself constitute the legal framework for the sale, exportation, importation and transportation of gas;

• Gas pipeline operation is regulated by the open access system;

• In the event of an act of God which would temporarily affect shared infrastructure employed in the exportation of gas between the two countries and in domestic consumption, the parties shall proceed to maintain the proportional distribution which was obtained under normal operating conditions;

• Tax treatment of gas imported into Chile and Argentina may not be at a rate higher than that established for petroleum derivative imports, nor lower than that established for those products for which natural gas is used as raw material (as long as the latter is not higher than the former), as fixed in each country;

• Tax treatment of gas exports in both countries may not be at a rate higher than that established for exports of petroleum derivatives, nor higher than that established for products for which natural gas is used as raw material, as fixed respectively in each country;

• Both countries are committed to the exchange of information on the natural gas market and other matters, such as permits, licences and concessions related to the exportation, importation and transport of natural gas; and

• The protocol contains norms to regulate the resolution of controversies that may arise with regard to its interpretation or application.

Liquid hydrocarbons
On August 20 1999, Chile and Argentina signed another protocol to regulate the commercialization, exploitation and transport of liquid hydrocarbons (ie, crude petroleum, liquid gas, and liquid products derived from petroleum and natural gas). This protocol is not yet in effect; both countries have yet to incorporate it into their domestic law.

For further information on this topic please contact Patricio Prieto or Claudio Undurraga at Prieto & Cía by telephone (+56 2 280 5000) or by fax (+56 2 280 5001) or by e-mail ([email protected] or [email protected])

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