Land Tenure System

Law Nº 26221, enacted in 1993, comprises the entire hydrocarbon legal framework and eliminated the previous government monopoly on hydrocarbon importation, transportation, refining and distribution. The Country has adopted a system of competitive bidding rounds, whereby PeruPetro allows any company that meets specified criteria to submit a bid for a block of land. The bidding criteria changes with each bid round. For more information on PeruPetro and the Peruvian contracting terms see www.perupetro.com.pe.

In order for private entities to conduct hydrocarbon exploration and/or exploitation activities, such parties must first enter into a Hydrocarbons Agreement with PeruPetro. According to the Hydrocarbons Law, there are two main types of Hydrocarbons Agreements, as follows:

1. License Agreements: Contractor exploits and sells the hydrocarbons and pays Perupetro a royalty

2. Service Agreements: Contractor exploits the hydrocarbons but PeruPetro sells the product and pays the contractor a compensation to be calculated on the basis of the hydrocarbons produced.

Requirements for Executing Hydrocarbon Agreements

1. Qualification as a Hydrocarbon Contractor Company

Any company wishing to enter into a Hydrocarbon Agreement with PeruPetro must meet certain qualifications including technical, economical, legal and financial requirements.Qualified foreign companies must either incorporate in Peru or establish a Peruvian branch.Upon qualification by PeruPetro, the qualified company must then be registered on the Hydrocarbons Contractors Registry, administered by the Peruvian Public Records Office.

2. Approval of a Hydrocarbons Agreement

PeruPetro is entitled to negotiate and execute Hydrocarbons Agreements and assume the rights and obligations arising out of said agreements. Hydrocarbons Agreements may be executed, at PeruPetro´s decision, by direct negotiation with the interested party or by means of a public bidding process. License Agreements must be approved by the Peruvian State by means of a Supreme Decree and the Ministers of Energy and Mines and of Economy and Finance.Once executed, License Agreements (and any amendments to such) must be formalized by means of a public deed and recorded before the Public Records Office.

Petrominerales License Contracts have terms that consist of two phases:

(i) Initial Exploration Phase. The initial exploration phase lasts seven years; however, the Contractor may request an extension for up to three additional years provided that it has fully complied with the minimum work programs for the four exploration phases.  The exploration phase of a License Contract is divided into four phases, and each phase has minimum work program that is defined in Exploration Work Units (EWU).Each EWU is assigned a value of $5,000, and exploration activities are assigned EWU values, as follows:

(ii)  Exploitation Phase. Upon a declared discovery, and at the Contractor’s request, the exploitation phase commences with a 30 year term (40 years for natural gas), extendable under certain circumstances.  All discoveries are reported to Perupetro.

The benefit of this system is that it permits flexibility for the exploration company to change its program without having to seek regulatory approval. If a discovery is made but it is non-commercial only for reasons of transportation, the Contractor may request a retention period of up to five years (ten years for natural gas) in order to make transportation feasible. At the end of the exploration phase, the Contractor must declare commerciality or return the block.