- 1.What is the legislation applicable to oil and gas activities in your country? Is it federal or state legislation, or both?
Ecuador is a republic divided into provinces. Hydrocarbons legislation is included in one single set of laws applicable to the entire country. Provincial governments do not have jurisdiction over natural resources matters, except for local taxes which are not major for the industry.
- 2.Are oil and gas activities carried out by the state or a state-owned agency or national oil company (NOC)?
Yes. Oil and gas activities are carried out by the state of Ecuador through its wholly-owned companies, PETROECUADOR and PETROAMAZONAS, and the Hydrocarbons Secretariat (SH) and the National Hydrocarbons and Regulation Agency (ARCH, which is the oversight entity). Oil and gas are owned by the state of Ecuador, which in turn executes ‘services contracts’ for one or more of the required activities. Services contracts can be as broad as the whole exploration and exploitation of a specific area. The contracting company receives a mutually-agreed contractual fixed tariff, not subject to oil price fluctuations, per each produced barrel.
- 3.Is oil and gas a regulated business that can only be carried out by companies that are licensed or that receive government concessions to operate?
Yes, only companies that have executed a contract with the government can operate, except for services provided to operators, which do not need a special permit (subcontractors).
- 4.What are the regulatory agencies charged with regulating oil and gas activities?
The Ministry of Nonrenewable Natural Resources, SH, ARCH, Internal Revenue Service (SRI), and the Ministry of the Environment.
PETROECUADOR and PETROAMAZONAS are government-owned companies that explore, produce, refine, transport, store and market oil. Until recently, said companies were the contractual counterpart of private companies. The law was amended on July 27 2010 and now the ARCH has replaced PETROECUADOR as the contracting entity for the Ecuadorian government. Recently, however, PETROECUADOR executed services contracts with Schlumberger and other oil companies for enhanced production of mature fields, whereby service provides have to assume the risks of increasing production.
- 5.Are all hydrocarbons in your country deemed to be originally owned by the state? If so, when does ownership transfer to the extractor or buyer of the hydrocarbon?
Yes, that is a fundamental provision of the Ecuadorian Constitution and Hydrocarbons Law of Ecuador. The extractor or buyer never becomes the owner of the hydrocarbon.
With the new amendment to the Hydrocarbons Law, enacted in 2010, the producer is paid a service fee in cash. As an option, the producer may request payment in kind, ie, oil. Under this alternative, the amount of the service fee is divided by the price of oil at the time of payment, resulting in a number of barrels of crude oil for the producer. This would be tantamount to purchasing the oil.
- 6.How are oil and gas exploration rights or concessions granted? Is there more than one method for granting such rights (ie, concession and joint exploration agreements) or co-existing regimes applicable to different exploration or exploitation areas?
Currently “services contracts” or incorporated joint ventures are the only alternative. However, the Hydrocarbons Law also provides for production sharing and association contracts, although none of these kinds of contracts has been executed under the new Hydrocarbons Law. Concessions are not applicable for oil and gas.
- 7.Is there a public bidding or similar process? If so, is it open to foreign investors?
Yes, but only when the government calls for a bidding process. However, it is also possible to execute direct contracts in the case of government owned companies of other countries or companies that have exclusive technology. The recent trend is government-owned companies or companies claiming to have a sole source required technology (ie, PDVSA,CNPC, ENAP, ENI). Most of the oil activity is carried out by foreign investors.
- 8.Are there any minimum local content requirements related to international bidding processes?
No, there is no minimum. In certain bidding processes, however, additional points are awarded for having a local partner.
- 9.Are there any restrictions on foreign participation in such rights or concessions or in companies holding any such rights?
There are no restrictions. In general terms, the options for accessing a contract allowing for oil exploration and production are:
- acquiring contractual rights from an existing operator, provided the government has given its consent in advance;
- waiting until the government calls a bidding process; and
- being a company owned or controlled by a foreign country or a company that has unique technology for a specific activity.
Qualification as a sole provider is determined by the government at its own discretion.
- 10.Are there any restrictions on the participation in such rights or concessions by local national oil companies?
No, Ecuadorian national oil companies have the same rights for participating. Operators need to give preference to services provided by local companies. Local is understood as being owned by Ecuadorian investors. Having an Ecuadorian subsidiary or establishing a branch in Ecuador does not turn a foreign investor into an “Ecuadorian” for receiving preferential treatment.
- 11.Are companies or consortia that are awarded exploration rights given priority to operate and exploit the fields? How is priority structured and documented?
Yes, exploration and exploitation contracts have always contemplated that whoever has invested in exploration has exclusive or preferential rights to exploit or produce the reserves that they have discovered.
- 12.Who has title to assets imported to develop and produce petroleum hydrocarbons?
The contracting company has title to such assets and is allowed to amortise them in accordance with local rules. Nonetheless, the contracting company cannot sell them or create any lien over them without the government’s approval because at the end of the contract those assets will revert to the state of Ecuador.
- 13.How are federal, state and local governments recompensed for granting companies rights or concessions to conduct oil and gas exploration and production?
The state of Ecuador is the sole and exclusive owner of produced oil and gas, and sells most of them or uses them for its own refineries. It pays the contracting company a contractually fixed tariff per produced barrel. Said tariff can be paid in dollars or in kind (oil); if paid in oil, the contracting company receives the oil and can sell it as it wishes.
- 14.May companies or consortia that hold oil and gas exploration rights compulsorily acquire property or rights of way to carry out exploration or production activities? Are these compulsory acquisitions governed by special judicial or administrative proceedings?
Contracting companies can either acquire the land they require through direct negotiations or request the government to start an expropriation process. Contracting companies are not obliged to acquire any land; they do so because they need the land for their operations.
- 15.Are natural gas exploration and production activities regulated separately or subject to the same regulation applicable to oil exploration and production? Are there different royalties or other government charges payable by companies that conduct natural gas production activities?
The same hydrocarbons law covers both oil and gas, with certain minor variations for gas.
- 16.Do foreign ownership restrictions apply to the oil and gas sector in your country?
No, there are no special restrictions for foreigners. Repatriation of proceeds or profits or any monies sent abroad from Ecuadorians or foreigners is subject to payment of 5 per cent of the amount sent.
The capital outflow tax does not apply to dividends, after income tax, distributed by locally organised companies or foreign companies domiciled in the country to other foreign companies or individuals not domiciled or residing in Ecuador and as long as such companies or individuals are not domiciled or reside in fiscal havens or lower-tax jurisdictions. This exemption is not given when dividends are distributed to foreign companies with shareholders that are individuals or companies residing or domiciled in Ecuador who, in turn, are shareholders in the company domiciled in Ecuador that distributed the dividends in the first place.
- 17.Are there any minimum domestic participation rules or any labour law rules relating to domestic and foreign workers (eg, permits for foreign workers)?
Yes, there are limits. Only 5 per cent of administrative employees and 25 per cent of technical staff can be foreign. These percentages may change contractually or depending on the stage of the project.
- 18.Does local law mandate a particular entity with authority over the sector?
Yes, local law regulates the entire activity through the Ministry of Non-renewable Natural Resources, SH, ARCH. The Ecuadorian Constitution provides that only as an exception are private investors allowed to conduct oil exploration and production. If the government is able to conduct oil and gas exploration and production through its wholly-owned companies (PETROECUADOR, PETROAMAZONAS), then it should not allow private investors to do so.
- 19.Are there any limitations on vertical integration in the oil and gas industry?
No, there are not. The same company or affiliates may engage in upstream and downstream, and use their own affiliates to provide services. Local transfer pricing rules apply for tax matters.
- 20.Are oil and gas activities carried out through incorporated entities with limited liability or by consortia or other types of unincorporated joint ventures? Are joint venture partners jointly and severally liable for the obligations undertaking?
Oil and gas activities can be, at the decision of the investor, carried out by branches of foreign companies, locally incorporated companies, consortiums or joint ventures formed by branches of foreign companies or by locally incorporated companies (consortium is a single entity for tax purposes). The law is quite flexible in this aspect with the main rule being that foreign companies have to either establish a branch in Ecuador or incorporate a local subsidiary and provide a guarantee from the parent company. In most cases, all joint venture partners are jointly and severally liable for the obligations undertaking.
- 21.May oil and gas be pledged or encumbered to secure the repayment of debt? How?
Not while oil is not yet produced and transported to the port. This has always been an issue for financing. Companies can only pledge or encumber oil once they have received title to such oil at the port of exportation as payment of their services.
- 22.Can oil and gas rights that are subject to a lien be sold or transferred freely by the secured creditor?
No. Government approval is required prior to any transfer of rights; otherwise, contractual rights may be lost.
- 23.Is oil and gas output freely exportable in your country? Are there any limits or quotas applicable to oil and gas production? Is there access to export pipelines? What licences are required for oil and gas exports? Are duties applicable?
All oil and gas are owned by the government and it is the government’s sole decision what it does with the oil – either use it for its own refineries or export it. Some private operators receive payment in kind for their services and, once payment has been made, the investor can sell the oil. There are no export duties but transportation has to be done through FLOPEC, a government-owned entity that controls petroleum tankers. There is enough shipping capacity through the two existing pipelines, running from the Amazon Basin to the Pacific Ocean, Port of Balao where the government exports oil. There are no limits or quotas, except for “production rates”, which is the rate of production that the government approves in order for the operating company not to damage the reservoir or the field due to overproducing.
- 24.Are prices for oil and gas set or fixed by the government?
Contracting companies execute services contracts whereby they are obliged to commit to a certain minimum of investments agreed in advance and to receive a fixed tariff (adjustable only for inflation) per produced barrel. The tariff is paid in US dollars or in oil, depending on the availability of oil and what the parties have agreed on in the contract.
The Ecuadorian government exports its oil at international market prices.
- 25.Are oil and gas exports taxed under the general income tax regime or is there specific petroleum tax legislation?
Yes, oil contractors pay income tax as per the general income tax regime. There are some variations for oil and gas, mainly that interest paid on loans and not deductible for income tax and also amortisation of investments done through produced barrels.
- 26.Do special environmental rules apply to oil and gas exploration and production?
Yes, besides general rules, there are also specific rules for oil and gas.
- 27.Are environmental regulations in your country consistent with any international standards?
To a large extent, yes, but community consultation is also mandatory.
- 28.Must companies in the oil and gas industry obtain special environmental or other government permits (other than licences or concessions to carry out oil and gas exploration and production) in to operate in your country?
Irrespective of the oil contract, all companies need to have Environmental Impact Studies (EIS) approved by the government for any part of their projects and an environmental licence; otherwise, they cannot operate. Community consultation is part of the process for obtaining approval of the EIS. Oil exploration and production are not allowed in certain environmentally protected areas, unless approved by the National Congress and the president of the country.
- 29.Does the government (including any development banks or agency) provide financing, subsidy or other support to companies undertaking oil and gas exploration or production?
No, it only supports companies wholly owned by the Ecuadorian government.
- 30.Are there any tax stability or similar regimes available to foreign investors undertaking investment in the oil and gas industry in your country?
No, there is not a general tax stability regime applicable to investments made in the oil and gas sector, which, as indicated, is subject to the general tax regime. Contracts have traditionally included clauses allowing an adjustment of tariffs if tax rates change. However, it is important to point out that the Consolidated Income Tax Rate and Employee Profit-Sharing amounting to 36.25 per cent have been stable for many years. Nonetheless, there have been changes in the interpretation of the 12 per cent value-added tax and lately the IRS keeps creating additional exemptions to what is considered acceptable deductible expenses.
Lately, the Ecuadorian government has made a big effort to renegotiate oil contracts and it is likely that the future will see greater stability.
- 31.Are oil and gas activities generally protected under bilateral investment treaties entered into by your country?
Yes they are. The Ecuadorian government, however, has announced that it will denounce and terminate investment bilateral investment treaties that have been signed by Ecuador.
- 32.Are there any dispute resolution systems specific to the oil and gas industry? Does state immunity apply in disputes?
General issues, such as labour and environmental matters, are resolved through general justice administration channels. Contractual disputes are resolved through the mechanism defined in each contract, ie, local arbitration, local justice, and regional arbitration. Tax matters are resolved through the regular tax courts, and government decisions can be appealed at the Administrative Court. There is no special judicial system for hydrocarbons matters.
- 33.Do anti-corruption rules apply to the oil and gas industry?
Yes. In addition to criminal punishments, most oil exploration and production contracts include anti-corruption rules.
Contributing Author
Contributing Editor
Carlos Albarracín
Chadbourne & Parke LLP
Questions
- 1.What is the legislation applicable to oil and gas activities in your country? Is it federal or state legislation, or both?
- 2.Are oil and gas activities carried out by the state or a state-owned agency or national oil company (NOC)?
- 3.Is oil and gas a regulated business that can only be carried out by companies that are licensed or that receive government concessions to operate?
- 4.What are the regulatory agencies charged with regulating oil and gas activities?
- 5.Are all hydrocarbons in your country deemed to be originally owned by the state? If so, when does ownership transfer to the extractor or buyer of the hydrocarbon?
- 6.How are oil and gas exploration rights or concessions granted? Is there more than one method for granting such rights (ie, concession and joint exploration agreements) or co-existing regimes applicable to different exploration or exploitation areas?
- 7.Is there a public bidding or similar process? If so, is it open to foreign investors?
- 8.Are there any minimum local content requirements related to international bidding processes?
- 9.Are there any restrictions on foreign participation in such rights or concessions or in companies holding any such rights?
- 10.Are there any restrictions on the participation in such rights or concessions by local national oil companies?
- 11.Are companies or consortia that are awarded exploration rights given priority to operate and exploit the fields? How is priority structured and documented?
- 12.Who has title to assets imported to develop and produce petroleum hydrocarbons?
- 13.How are federal, state and local governments recompensed for granting companies rights or concessions to conduct oil and gas exploration and production?
- 14.May companies or consortia that hold oil and gas exploration rights compulsorily acquire property or rights of way to carry out exploration or production activities? Are these compulsory acquisitions governed by special judicial or administrative proceedings?
- 15.Are natural gas exploration and production activities regulated separately or subject to the same regulation applicable to oil exploration and production? Are there different royalties or other government charges payable by companies that conduct natural gas production activities?
- 16.Do foreign ownership restrictions apply to the oil and gas sector in your country?
- 17.Are there any minimum domestic participation rules or any labour law rules relating to domestic and foreign workers (eg, permits for foreign workers)?
- 18.Does local law mandate a particular entity with authority over the sector?
- 19.Are there any limitations on vertical integration in the oil and gas industry?
- 20.Are oil and gas activities carried out through incorporated entities with limited liability or by consortia or other types of unincorporated joint ventures? Are joint venture partners jointly and severally liable for the obligations undertaking?
- 21.May oil and gas be pledged or encumbered to secure the repayment of debt? How?
- 22.Can oil and gas rights that are subject to a lien be sold or transferred freely by the secured creditor?
- 23.Is oil and gas output freely exportable in your country? Are there any limits or quotas applicable to oil and gas production? Is there access to export pipelines? What licences are required for oil and gas exports? Are duties applicable?
- 24.Are prices for oil and gas set or fixed by the government?
- 25.Are oil and gas exports taxed under the general income tax regime or is there specific petroleum tax legislation?
- 26.Do special environmental rules apply to oil and gas exploration and production?
- 27.Are environmental regulations in your country consistent with any international standards?
- 28.Must companies in the oil and gas industry obtain special environmental or other government permits (other than licences or concessions to carry out oil and gas exploration and production) in to operate in your country?
- 29.Does the government (including any development banks or agency) provide financing, subsidy or other support to companies undertaking oil and gas exploration or production?
- 30.Are there any tax stability or similar regimes available to foreign investors undertaking investment in the oil and gas industry in your country?
- 31.Are oil and gas activities generally protected under bilateral investment treaties entered into by your country?
- 32.Are there any dispute resolution systems specific to the oil and gas industry? Does state immunity apply in disputes?
- 33.Do anti-corruption rules apply to the oil and gas industry?
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