Cornejo promotes a new Hydrocarbons Law: changes royalties and bets on Vaca Muerta

The governor of Mendoza, Alfredo Cornejo, announced the submission of a new Hydrocarbons Law project to the Legislature to update the regulatory framework for oil activity in the province and create better conditions to attract investments.

The initiative aims to replace a regulation that is around 20 years old and adapt it to the new reality of the energy industry. Among the main changes are a new royalty scheme, incentives to recover conventional production, and a specific regime for the unconventional development of Vaca Muerta in Mendoza territory.

Cornejo had anticipated the push for this reform during his speech on May 1 before the Legislative Assembly and has now confirmed the submission of the project on the eve of the Mendoza Energy Summit.

Cornejo changes the royalty scheme to attract investments

One of the main focuses of the project is the modification of the hydrocarbon royalty system.

The current legislation establishes a general royalty of 12% on production, with the possibility of reducing it to 5% depending on the characteristics of each project.

The new proposal suggests a more flexible mechanism for future tenders. The reference royalty will be 15%, but companies will be able to offer a higher or lower percentage when submitting their proposals.

The goal is for the Province to adapt the economic conditions to the characteristics of each area. In this way, it can demand a greater share when it comes to projects with better economic prospects or accept a lower royalty when necessary to make an investment viable.

Additionally, the offered royalty will not be the only criterion for defining an award. The project establishes that the total value of the initiative, the projected production, and the committed investments will also be taken into account, with a predominant weight on the latter.

Incentives to recover oil production

The reform also includes specific tools to encourage investments in conventional areas where recovering production may be more complex.

The Executive Power may establish royalty reductions to reactivate inactive wells, conduct complementary exploration, produce heavy crude, and develop enhanced recovery projects.

In certain situations and with technical justification, royalties may even be set below 5%.

The project will also allow for partial compensation of the exploitation fee when a company makes new investments related to high-risk exploration. To access this benefit, it must invest at least double the amount it intends to compensate.

In exploration permits, the fee corresponding to an extension may also be reduced by up to 80%.

Mendoza seeks to take advantage of its share of Vaca Muerta

Another central point of the initiative is that it expressly incorporates unconventional hydrocarbon exploitation concessions, a figure that was not included in the provincial regulations of 2006.

The project will allow for the conversion of concessions to this regime in accordance with national legislation and will establish a specific framework for unconventional projects.

The measure is particularly important for Malargüe and the Mendoza portion of Vaca Muerta, an area with potential to expand provincial hydrocarbon activity.

The Government of Mendoza thus seeks to establish specific rules for projects that require large investments, longer development timelines, and conditions different from those of mature conventional fields.

The law will also regulate the coexistence of mining and oil

The proposal also includes a regime to resolve possible overlaps between mining rights and hydrocarbon projects, an issue that is becoming more relevant due to the growth of mining activity in Mendoza.

As a general principle, both activities must seek their coexistence and compatibility from a technical, operational, environmental, and temporal perspective.

The overlap of projects, by itself, will not imply the expiration or extinction of any rights. Holders must exchange information and seek alternatives to allow the development of both activities.

When coexistence is technically impossible or poses risks incompatible with safety, the environment, or the rational use of resources, the Executive Power may intervene with the participation of mining and hydrocarbon authorities and prior hearing of the interested parties.

Fines linked to gasoline prices and a new control fee

The reform also seeks to update the sanctioning regime of the activity.

Currently, fines are expressed in pesos and have lost their capacity for adjustment over time. The new project proposes to calculate sanctions based on the price of super gasoline and classify violations into four categories: minor, serious, very serious, and extremely serious.

To determine the amount of each sanction, factors such as the severity and duration of the non-compliance, the damage or risk caused, the economic benefit obtained, recidivism, and the company's conduct in resolving the violation will be taken into account.

Additionally, a Hydrocarbon Activity Control Fee will be created, aimed at financing inspection, oversight, equipment, and technical strengthening tasks.

The fee will have a limit of 0.8% of the amount corresponding to royalties and/or fees of each activity.

Mendoza prepares a new framework for energy development

The implementing authority will be the Ministry of Energy and Environment, through the Hydrocarbons Directorate, which will be responsible for monitoring production and compliance with the obligations of operating companies.

It will also supervise wells from their drilling to their definitive abandonment, in coordination with the environmental authority.

With this reform, Cornejo seeks to update the rules for hydrocarbon exploitation in Mendoza and create a more flexible scheme to attract private capital, especially in production recovery projects and in the development of the Mendoza portion of Vaca Muerta.

The project must now advance in the provincial Legislature, where changes to the regime regulating one of Mendoza's main energy activities will be debated.