Member Article

Supreme Decree No. 28701 of May 1st, 2006 (the “SD”), has a legitimate basis that rests on the 2004 binding Referendum by which a majority of the Bolivian population approved the nationalization of hydrocarbons. Also, the SD was created in order to comply with campaign promises made to the various social sectors that ultimately brought the current government to power. The SD establishes that Yacimientos Petrolíferos Fiscales Bolivianos (YPFB) must commercialize all of the oil and natural gas by defining prices, volumes and conditions for commercialization and also places this entity in control of the whole production chain. Producers operating in Bolivia must also enter into new forms of agreements with YPFB within 180 days. THE SD creates a new tax/royalty or “participation” for YPFB by which private producers operating in the mega-fields of San Antonio and San Alberto must relinquish a further 32% of production at wellhead. Only three private producers have been directly affected by this measure that increases participation for the State (YPFB) from 50% to 82%. It should be noted however, that under Bolivian tax and constitutional law, new taxes are created by new laws and not through supreme decrees. Although the rest of the private producers that operate in fields producing less that 100 million cubic feet per day will continue to contribute 50% of production and not 82% as described above, the SD leaves the possibility of this percentage increasing if through audits the increase can be duly justified. The SD also imposes a mandatory sale of shares necessary for YPFB to control 51% in the companies Andina S.A., Chaco S.A., Transredes S.A., Petrobras Bolivia Refinación S.A. and C.L.H.B. S.A. Although through this measure control of the production chain is guaranteed, from a strictly legal point of view, such mandatory sale constitutes an expropriation. To this effect, Bolivian law provides for certain procedures and also requires a special law for any expropriation, formal requisites ignored by the SD. In order to take control of the companies Andina S.A., Chaco S.A. and Transredes S.A.; those shares that through the Capitalization process are currently held in escrow by the private fund administrators (AFP’s) are to be transferred to YPFB. In this case, the administration contracts held by the AFP’s will be breached and the government must negotiate with these entities in order to minimize its legal exposure. Notwithstanding the fact that a legal backdrop can de clearly identified through the referendum, the SD has been passed in violation of constitutional norms and principles. This may not only cause problems for the government from the private producers but also for the passing of future law in support of the SD. In order to pass such law, the government will necessarily have to reach consensus at Congress with the opposition.