Hydrocarbons Law

The purpose of this Law is to establish the legal regime for the investigation, exploration and exploitation of hydrocarbon deposits and other associated substances, as well as the activities of transformation or refining, transport by pipelines or gas pipelines, commercialization and storage of exploited substances. The State shall promote, develop, regulate and control these activities.

The deposits of petroleum, natural gas and other hydrocarbons are under the direct, inalienable and imprescriptible domain of the State, regardless of their location on the surface or in the subsoil of the territory of the Republic, including the territorial sea, its contiguous zone, the exclusive economic zone and the continental shelf.

The State through the Secretary of Natural Resources may directly exercise the operations referred to in Article 1, and may also authorize or contract the investigation, negotiate and execute operating contracts with specialized companies, in accordance with the provisions of this Law. The State may also exercise such operations through a public company that it may establish for this purpose, in which case the decree creating it shall establish which of the attributions that this Law assigns to the Secretary of Natural Resources shall be exercised directly.

are declared to be of public necessity and utility the activities mentioned in the

of this Law and the execution of the works that these require, as well as the acquisition or temporary occupation of land, its improvements, and other property, or the establishment of the easements that may be necessary for their development.

the Executive Branch shall formalize the principles and norms applicable to the activities inherent to hydrocarbons and to other associated substances, especially in the following matters:

• 1)

  selection of areas for investigation and exploration;

• 2)

  minimum bases for the execution of operating contracts;

• 3)

  conditions and requirements of bids for the selection of contractors;

• 4)

  conservation of deposits and administration of reserves;

• 5)

  optimal utilization of hydrocarbons;

• 6)

  transformation or refining, transport, storage, industrialization and commercialization of hydrocarbons;

• 7)

  safety of installations;

• 8)

  environmental preservation;

• 9)

  policy of cooperation and technological assistance with countries, companies or other organizations; and,

• 10)

  others as determined by the regulations.

The execution of the aforementioned principles and norms is the responsibility of the Secretary of Natural Resources, without prejudice to the attributions that other organs or organisms of the State may have by Law.

The following may not request or acquire, whether directly or indirectly, in partnership or individually, the permits or operating contracts referred to in this Law: the President of the Republic; those designated to the presidency; the Secretaries of State; the Deputies to the National Congress; the Magistrates of the Supreme Court of Justice; the Chief of the Armed Forces, the Chiefs of the forces that comprise them, the Chief of the General Staff and the Commanders of Units; foreign diplomatic representatives; and, in general public officials or employees who must directly or indirectly intervene, decide or opine on petroleum matters. This prohibition extends to parents, spouses and children, but does not include petroleum rights acquired prior to the date of taking office, nor those acquired by inheritance, bequest or donation or those that either spouse brings to marriage. The prohibition also applies to those in default with the State for any payment or benefit derived from a petroleum right or related to it, or for any other cause, unless they provide bond or guarantee by pledge, mortgage or deposit a sum sufficient to ensure payment of the amounts in dispute. Chapter II Preliminary Investigation.

The Secretary of Natural Resources shall promote the execution of geophysical surveys in the areas that it previously determines, for which purpose it shall request bids from companies specialized in these works. The technical information from these surveys shall serve for companies interested in the execution of operating contracts to formulate their bids and the corresponding minimum exploratory programs. First Section Joint Geophysical Surveys

The Secretary of Natural Resources shall promote the execution of joint geophysical surveys with companies interested in the subscription of operating contracts, who shall finance the corresponding works. For this purpose the preliminary characteristics of the survey and the bids from companies specialized in these works received by the Secretary shall be examined jointly with the interested companies, in order to establish the final characteristics and the selection of the company with which the corresponding contract shall be executed, a copy of which shall be delivered to each participant.

For purposes of the preceding article the Secretary of Natural Resources shall execute an agreement with the participating companies in which their respective rights and obligations shall be stipulated. The cost of the survey shall be distributed in equal parts among the different companies. The Secretary shall receive free of cost the information resulting from the works as soon as they are completed.

If after the agreement is executed, other companies express their interest in acquiring the information obtained from the survey, the Secretary of Natural Resources may authorize them upon payment of the price that each of the participants shall have paid, plus an additional twenty (20) percent. This income shall be distributed by the Secretary in equal parts among each of the original participants.

The information obtained from the survey shall be maintained as confidential by the Secretary of Natural Resources and by all participants, until the date on which the corresponding operating contracts are executed. This confidentiality shall not be required of the participants when it concerns their parent companies or their subsidiaries, in which case these shall maintain the information with the same confidential character.

The participants in the survey may assign or transfer their rights and obligations with prior authorization from the Secretary of Natural Resources, provided that the assignor remains jointly and severally liable with the assignee for pending financial obligations.

For the subsequent execution of operating contracts, competition among all those who possess the information from the surveys shall be promoted. Second Section Permits for Geophysical and Geological Investigation.

Interested persons who meet the requirements provided in Article 22 may request from the Secretary of Natural Resources the granting of permits to conduct geophysical and geological investigations directed at determining areas of hydrocarbon interest. These permits shall be published in the official newspaper "La Gaceta" and their duration shall not exceed eighteen (18) months from the date of their publication. In the authorized areas, no other permits may be granted during the validity of a prior one. The depth of drilling or prospecting carried out by virtue of these permits shall not exceed three hundred (300) meters.

The holders of permits have the following obligations:

• 1)

  To begin investigations in the authorized area within a period of six (6) months from the date of the permit's validity and in accordance with the work program that shall be approved by the Secretary of Natural Resources;

• 2)

  to provide the human, technical, and financial resources required to carry out the work program;

• 3)

  to comply with the norms and provisions referred to in article 26 of this law that are applicable;

• 4)

  to deliver to the Secretary of Natural Resources at no cost all information resulting from the work within the thirty (30) days following its completion;

• 5)

  to establish bonds to respond for damages or losses that may be caused, in the terms and conditions established by regulation; and,

• 6)

  such other obligations as the regulation may determine.

The Secretary of Natural Resources shall maintain the information obtained from the survey as confidential for the two (2) years following the date of receipt. After this period has elapsed, it may freely dispose of such information.

Within the confidentiality period, the company holding the permit shall have a preferential option to enter into an operation contract with the State for the exploration and exploitation of a block to be delineated within the authorized area, for which purpose it may submit its offer to the Secretary of Natural Resources. The President of the Republic, following the corresponding technical and economic evaluations, shall decide whether the execution of the contract is appropriate, or whether, on the contrary, it is appropriate to promote competitive bidding, in which the proponent may participate.

If competitive bidding is chosen, interested parties must acquire from the permit holder a copy of the information resulting from its work. The total purchase price shall be its cost plus thirty (30) percent. This price shall be apportioned among the interested parties. The permit holder shall be obligated to make available to the interested parties all information obtained without any discrimination, subject to payment as referred to in the preceding paragraph.

After the confidentiality period has elapsed, the execution of operation contracts may be agreed upon through direct negotiation or through competitive bidding, as decided by the President of the Republic considering reasons of opportunity, merit, or national convenience. The regulation shall develop this provision. Chapter III Operation Contracts

An operation contract is that executed in accordance with the laws of Honduras between the State and a specialized company for the conduct of activities of exploration, exploitation, transformation or refining, transportation, storage, and commercialization of hydrocarbons. Operation contracts may include all the activities mentioned in the preceding paragraph or only some of them, in accordance with the provisions of this law.

Any legal person, national or foreign, may conduct the operations provided for in this law by executing the corresponding operation contract, provided that it demonstrates financial capacity, technical knowledge, experience, and suitability to conduct such operations.

The State does not guarantee the existence, quality, or quantity of hydrocarbons, nor does it commit to any indemnification on these grounds. The contractor, for its part, shall assume all risk, cost, and responsibility before the State and third parties, arising from the activities subject of the contract, and shall provide the capital, machinery, equipment, materials, personnel, and technology necessary for such activities.

In operation contracts, the following may be agreed upon as special advantages for the State, among others:

• 1)

  participations for the contractor less than those provided for in article 52 of this law;

• 2)

  acquisition of State bonds; and,

• 3)

  refining in the country of all or the greater part of the petroleum.

The selected companies shall certify that they are authorized to legally conduct commerce in Honduras and that they are registered in the Commercial Registry. If the company is foreign, its legal representative shall exhibit the power of attorney duly registered in such registry, and if the representative is foreign, shall prove its legal residence in the country. When foreign governments control half or more of the shares of the selected company, it shall be considered a private company for all legal purposes.

The contractor shall be subject to the laws, regulations, resolutions, instructions, circulars, and any other norms and provisions issued by the competent authority relating to the activities of the hydrocarbon industry and commerce. It shall also be obligated to comply with the legal norms for conservation and protection of natural resources and the environment, and those applicable in matters of safety and health.

The contractor shall provide in the form established by regulation a bond or guarantee in favor of the State to respond for the performance of obligations arising from the contract, including responsibility for damages and losses caused to the State or to private parties in their respective property.

(Amended by Decree No. 94-85, Gazette No. 24656 of 28/June/1985). The contractor may cede or transfer the contract with prior written approval from the Secretary of Natural Resources. The cedent shall be jointly and severally responsible with the assignee for pending obligations, except in the case of a total transfer, in which case the assignee shall be the sole responsible for those obligations. The contractor may also subcontract certain operations while retaining control and full responsibility over them, subject to prior notification to the Secretary of Natural Resources. The assignee and subcontractor referred to in this article shall comply with the requirements established in this law for holders of operation contracts.

The arrangements or agreements that, not being transfers or subcontracts, are entered into by contractors among themselves for the execution of their operations shall be previously notified to the Secretary of Natural Resources.

The contractor and sub-contractors may hire, with prior authorization from the competent authorities, foreign technical personnel that may be necessary for their operations, provided that qualified personnel is not available in the country. The contractor shall contribute to the execution of training programs, instruction, and scholarships for the formation of Honduran personnel.

The contractor and sub-contractors may acquire goods, materials and equipment, and contract services abroad, provided that they are not available in the country or that existing ones do not meet the normal specifications required.

The contractor may produce and utilize steam and electrical energy in its operations and supply them to other contractors. It may also utilize surface or underground water, following prior compliance with legal requirements, without prejudice to supplies for populations or agricultural or livestock operations. Contractors, with prior permission from the competent authorities, may supply electrical energy or water to other persons or to institutions, companies, and populations.

During the term of the contracts, contractors shall enjoy, in accordance with the laws and under the supervision and control of the competent authorities, the right to construct and operate aqueducts, tanks, reservoirs, warehouses, pipelines, gas pipelines, multipurpose pipelines, private works, office buildings or houses and residences, hospitals, camps, pumping and compression stations, landing fields, railroad tracks, and telephone lines that unite their establishments with each other or with the centers to which hydrocarbons are transported, and in general, to construct the works and carry out the activities necessary for their operations derived from the contract.

For the execution of its operations, the contractor shall enjoy the rights of establishing easements, temporary occupation, and expropriation of property belonging to private individuals, assuming the corresponding indemnification. Easements that are established on public lands belonging to the State shall be established at no cost. Such rights shall be exercised following a request that, meeting the requirements established by the Regulation, shall be presented to the Secretary of Natural Resources, who shall resolve on what is appropriate.

The contractor shall keep in Honduras the accounting records relative to its operations in the form required by administrative and fiscal provisions.

Upon termination of the operating contract for any reason, the contractor shall deliver in ownership to the State, through the Secretary of Natural Resources, at no cost, the lands, works, installations, accessories, and equipment of a permanent nature acquired for the purpose of the contract. Such property shall be conserved and maintained in good condition by the contractor, and its transfer or disposition during the term of the contract, in cases qualified by the regulation, shall be previously authorized by the Secretary of Natural Resources if there is just cause.

Operating contracts shall be executed by the Attorney General of the Republic in representation of the State. Once executed, they shall be submitted to the National Congress for approval, and they shall not have legal effect until such approval. Chapter IV Exploration and Exploitation. First Section Exploration

The contractor shall execute during the exploration period the minimum exploratory program that shall be stipulated in the contract. This program shall be carried out in accordance with the current practices and techniques of the petroleum industry and shall comprise, in addition to cost estimation and according to the geological characteristics of the block, all or some of the following work:

• 1)

  magnetometry;

• 2)

  gravimetry;

• 3)

  seismic refraction and reflection surveys;

• 4)

  drilling of exploratory wells; and,

• 5)

  other prospection methods.

The exploration area on land and internal waters shall consist of a block with a maximum area of one hundred thousand hectares. At sea, the block shall have a maximum area of two hundred thousand hectares. In duly justified cases, and by way of exception, the Secretary of Natural Resources may approve larger extensions, following a duly reasoned resolution. Blocks shall be divided into lots no greater than ten (10) percent of their area and with sides oriented north-south and east-west. A contractor may contract a maximum of three (3) blocks, except in cases of exception duly qualified by the Secretary.

The duration of the exploration period shall be four (4) years, from the date of publication of the operating contract in the official gazette "La Gaceta". If at the end of the four (4) years commercial production has not been determined, notwithstanding compliance with the minimum exploratory program, the State, at the request of the contractor, may extend the exploration period for up to two (2) additional years. To request the extension, the contractor shall present for consideration to the Secretary of Natural Resources an additional minimum exploratory program.

If at the end of the exploration period the contractor has not fully executed the Minimum Exploratory Program or the Additional Minimum Exploratory Program, as the case may be, it shall pay to the State the amount necessary to complete it based on the budget that has been approved for such purpose, which shall be adjusted according to the actual costs of the work already carried out. This payment shall proceed independently of whether or not the contractor has determined commercial production.

During the exploration period the contractor is obligated to:

• 1)

  Initiate the minimum exploratory program within six (6) months following the date of the contract and execute it in an uninterrupted manner. The suspension of field operations during a reasonable period, at the discretion of the Secretary of Natural Resources, to conduct data processing and interpretation or studies shall not be considered an interruption. The time elapsed for obtaining permits or authorizations by the competent authorities in relation to operations shall also not be considered an interruption, nor shall the time due to acts of God or force majeure or other exceptional cases provided for in the regulation;

• 2)

  present to the Secretary of Natural Resources semiannual reports of its activities and provide copies of the reports, data, and interpretations related to the execution of the minimum or additional exploratory program. This information shall be confidential during the exploration period, unless the contractor authorizes its disclosure;

• 3)

  supply to the Secretary of Natural Resources any additional information it possesses, related to activities during the exploration period; and,

• 4)

  notify in writing to the Secretary of Natural Resources the determination of whether or not commercial production has been found within thirty (30) days following the end of the exploration period.

(Amended by decree no. 94-85, gazette no. 24656 of June 28, 1985). During the exploratory period, the contractor may expand the Minimum Exploratory Program or the additional program for better geological understanding of the contracted block. This expansion of the programs must be previously notified to the Secretary of Natural Resources. Second Section Exploitation.

The exploration and exploitation contractor that determines commercial production at the end of the exploration period, or within ninety (90) days following its termination, or within the additional period provided in this article, may select for exploitation up to fifty percent (50%) of the contracted block in indivisible and contiguous lots along one of their sides. Such selection must be made within fifteen days following the date on which it notified the Secretary of the existence of commercial production. The remaining area of the block shall revert to the State, in accordance with the survey that the contractor shall prepare to determine with the greatest accuracy the area retained and the area returned. When the discovery of hydrocarbons made by the contractor is not sufficient to demonstrate the commercial viability of exploitation, the contractor may request from the Secretary of Natural Resources an additional period of up to two (2) years to complete the work required for such verification. With this request, the contractor shall present the program it proposes to carry out. During the exploitation period, the contractor may make reductions of the area it has selected, provided that on each occasion the reduction comprises the entirety of one of the lots.

The Contractor may commence exploitation in advance if during the exploration period it determines commercial production in any of the blocks that comprise the field, for which purpose it shall notify the selection of that block. The Contractor shall continue the minimum exploratory program established for the entire field.

If the Contractor completed the Minimum Exploratory Program and determined commercial production before the expiration of the exploitation period, it may proceed with the selection indicated in Article 44 of this law.

The exploitation period shall be up to twenty (20) years, commencing from the date on which the Contractor made the selection provided for in Articles 44, 45, and 46 of this law. The exploitation period may be extended for up to five (5) years. The conditions of this extension shall be negotiated between the parties.

Commercial production shall be determined by the State and the Contractor, in accordance with the present value method or any other technical method that serves that purpose. The discount rate to be applied shall be agreed upon between the State and the Contractor.

During the exploitation period, the Contractor is obligated to:

• 1)

  Commence drilling of the first development well within the term stipulated in the contract;

• 2)

  submit the first development program to the approval of the Secretariat of Natural Resources within sixty (60) days following the date of commencement of the exploitation period. Successive annual development programs shall be submitted to such approval, with ninety (90) days prior notice to contract termination. These programs shall be executed in the most economical and efficient manner, in accordance with updated practices and techniques of the petroleum industry, and shall include among other elements the budget and the level of annual production, the latter determined taking into account the remaining reserves approved by the Secretariat of Natural Resources, the characteristics of the reservoirs, applicable conservation standards, the capacity of production facilities, and market conditions;

• 3)

  present to the Secretariat of Natural Resources an annual report of its activities and supply it with copies of the reports, data, and interpretations related to the execution of the development program. It shall also present semi-annual reports on proved hydrocarbon reserves and daily production reports;

• 4)

  Supply to the Secretariat of Natural Resources any additional information it possesses related to activities carried out during the exploitation period; and,

• 5)

  for the production of the reservoirs, the Contractor shall be subject to the conservation regulations approved by the Secretariat of Natural Resources and to the maximum efficiency standards applied by the petroleum industry.

When two or more operating contracts cover the same reservoir and for the achievement of greater economy, efficiency, and conservation, the Secretariat of Natural Resources shall require the contractors to enter into a unified exploitation agreement, which shall be submitted previously to its approval. If there is no agreement within one year following the date of the requirement, the Secretariat of Natural Resources shall establish the standards for unified exploitation.

The exploration and exploitation Contractor shall have the right to transform or refine; transport through pipelines, product pipelines, and gas pipelines; store and commercialize the hydrocarbons corresponding to it, in accordance with this Law and other applicable legal or regulatory provisions. Section Three Financial Terms.

(Amended by Decree No. 94-85, Official Gazette No. 24656 of 28/June/1985). During the exploitation period the State shall deliver to the Contractor, as compensation for the execution of operations, the following percentages of the hydrocarbons produced: 1) Up to eighty-five percent (85%) of net production, while the amortization term of the entire investment made before the commencement of production is running. This term shall be that which results when commercial production has been determined, in accordance with the provisions of Article 48. The Contractor shall exclusively devote this participation to the recovery of its investment. The percentage shall be fixed in the contract; and, 2) up to fifty percent (50%) of net production as from the recovery of the entirety of the aforementioned investment. However, this percentage may be increased in favor of the Contractor, when justified technical and economic reasons exist; such increase shall be agreed upon by the President of the Republic in Council of Ministers and approved by the National Congress. For the purposes of this article, the investment made, its amortization, and the volume of production shall be verified by the Secretariat of Natural Resources.

For the calculation of net production, the following shall be excluded: 1) hydrocarbons produced and used by the Contractor in exploitation operations in the contracted block; and, 2) hydrocarbons that are reinjected in the reservoirs by the Contractor for the purpose of obtaining additional recovery. From the production derived from well tests performed during the exploration period, the Contractor shall be entitled to up to 85% as established in the contract. This participation shall also be credited against the recovery of its investment.

The Contractor shall acquire at the point of measurement and delivery the ownership of the hydrocarbons it receives from the State and shall undertake to place them in international markets, without prejudice to their transformation and refining in the country. The price of hydrocarbons shall be that resulting from the application of the procedure established in Article 56 of this law.

The difference between net production and the volume of hydrocarbons delivered to the Contractor shall correspond to the State. The State may decide that all or part of the hydrocarbons corresponding to it be sold to the Contractor, and the latter shall be obligated to purchase it at the price resulting from the procedure provided for in Article 56 of this Law.

The price of Honduran hydrocarbons shall be determined taking into account the FOB value at which the contractors are selling them competitively in the international market, and the price levels existing in such market for hydrocarbons with similar characteristics, taking into account the corresponding adjustments for quality, freight, and transportation costs. In the event that there are no exports of Honduran hydrocarbons, the price shall be established based on the price levels existing in the international market for hydrocarbons with similar characteristics, taking into account the corresponding differentials for quality and geographical position.

To satisfy the requirements of internal consumption, the State may purchase from the contractors up to fifty (50) percent of the hydrocarbons corresponding to them and these shall be obligated to sell them to it. This sale shall be made at the point of measurement and delivery at the FOB price at Honduras export port, minus the costs of transportation and handling from the point of measurement and delivery to the loading port. If the hydrocarbons present different characteristics, the volume that pursuant to this provision the contractor would sell to the State shall be constituted proportionally by such types of hydrocarbons.

(Amended by Decree No. 94-85, Official Gazette No. 24656 of 28/June/1985). The State may use at cost the installations of the Contractor to store, transport, and ship the hydrocarbons corresponding to it. The volume of hydrocarbons belonging to the State, derived from exploitation during a calendar month, shall be kept in storage by the Contractor for up to (2) months maximum. Upon expiration of this term, the Contractor's obligation to keep it stored shall cease and it shall be understood that the State sells it to the Contractor at the price resulting from the application of the procedure established in Article 56 of this law. The Contractor shall be responsible for these hydrocarbons during the storage period. Section Four Natural Gas

The State may enter into special agreements with the Contractor or with third parties for the utilization of free or associated gas corresponding to it, granting preferential consideration to the Contractor, provided that the terms and conditions offered are not inferior to those of other offers received.

Associated gas not utilized by the State or by the Contractor shall be reinjected into the reservoir, burned in appropriate flares, or released to the atmosphere by the Contractor, as may be technically advisable.

Condensate reservoirs for exploitation by the Contractor shall be subjected to recirculation.

The exploration and exploitation Contractor who intends to carry out transportation or refining activities shall present to the Secretariat of Natural Resources for its approval, the project, descriptive report, and corresponding plans. If within the three (3) months following presentation no objections are made, they shall be considered approved. When technical objections are substantiated, the contractor shall modify the project or plans as the case may be.

The exploration and exploitation Contractor may transfer its transformation and refining rights to another company, with prior authorization of the Secretariat of Natural Resources. It may also transform or refine hydrocarbons of other contractors or those it imports when those produced in the country are not sufficient.

Any person who is not an exploration and exploitation contractor and wishes to establish a plant to transform or refine hydrocarbons shall submit its application to the Secretariat of Natural Resources accompanied by the project, descriptive report, and respective plans, and shall indicate the period within which it will begin and complete its work. If the application is accepted, the Executive Power through the Secretariat of Natural Resources may resolve it favorably or convene a competitive bidding process in accordance with the corresponding technical and economic evaluations. This contract shall have a duration of up to twenty (20) years renewable for up to ten (10) years, and shall not prevent the execution of similar contracts with other parties. For the execution of these contracts, preference shall be given to transformation and refining projects that entail greater development of high value-added products.

In order to improve the quality of hydrocarbons to meet the requirements of international markets, the State may execute special agreements with contractors, in which appropriate incentives shall be established for the installation of sulfur extraction plants, nickel, vanadium, and other substances.

Exploration and exploitation contractors and transformation or refining contractors have the right to construct and operate appropriate means of transportation to convey to consumption centers, export ports, or other convenient points, extracted hydrocarbons and products derived from their transformation or refining. They likewise have the right to construct and operate corresponding storage facilities. The interested party wishing to exercise these rights shall submit to the Secretariat of Natural Resources for its approval, the project, descriptive report, and corresponding plans for the works it proposes to carry out. This request shall be processed in accordance with the provisions of Article 62 of this law. The contractors referred to in this article may exercise the transportation and storage rights themselves or transfer them to another company, with prior authorization of the Secretariat of Natural Resources.

Any person who is not an exploration and exploitation contractor or transformation and refining contractor and seeks a pipeline, polyduc, gasduc, or other means of transportation contract that requires the construction of permanent works, shall submit its application to the Secretariat of Natural Resources, accompanied by the project, descriptive report, and respective plans, including those of storage facilities, and shall indicate the period within which it will begin and complete the work. If the application is accepted, the Executive Power through the Secretariat of Natural Resources may resolve it favorably or convene a competitive bidding process in accordance with the corresponding technical and economic evaluations. This contract shall have a duration of up to twenty (20) years renewable for up to ten (10) additional years and shall not prevent the execution of similar contracts with other parties.

In pipelines, polyducs, gasducs, and other means of transportation constructed on the sea, lakes, navigable rivers, and beaches, the necessary precautions shall be taken so that navigation suffers no interruption or damage.

The operation of transportation and storage constitutes a public service, and as such, contractors performing it are obligated to transport and store, when their facilities have the capacity to do so, hydrocarbons extracted, transformed, or refined by other contractors, without any discrimination and at the prices and conditions approved by the Secretariat of Natural Resources, by common agreement with the Secretariat of Economy and Commerce, and in accordance with the procedures established by regulation. This obligation does not include collection lines and their annexes used by contractors in their exploitation operations nor delivery or reception outside their own stations.

During the exploitation period, the contractor shall pay, both on land and in inland waters and at sea, an annual surface fee of ten (10) lempiras per hectare, and twenty (20) lempiras per hectare during the extension of said period. The President of the Republic by decree issued in Council of Ministers may increase or decrease this fee according to prevailing market conditions. If the Contractor initiates anticipated exploitation in any of the lots comprising the block, it shall pay in relation to the lot or lots selected the surface exploitation fee. All these payments shall be made by the contractor during the first quarter of each year.

(Amended by decree no. 94-85, gazette no. 24656 of 28/June/1985). The contractor performing transformation or refining operations using hydrocarbons produced in the country shall pay on the transformed or refined products, sold or used for the domestic market, fifty (50) percent of the import duties that such products would have caused if they had been imported. This tax shall not apply to transformed or refined products that the Contractor uses in its operations. In no case may the destination of products for domestic consumption be changed.

Transportation and storage contractors shall pay for the services they provide to third parties a tax of five (5) percent of the amounts they receive in payment for said services.

For the purposes of liquidating the taxes fixed in Articles 71 and 72, transformation or refining contractors and transportation or storage contractors shall present to the Secretariat of Natural Resources and to the Secretariat of Treasury and Public Credit, within the first twenty (20) days of each month, a report, as the case may be, of: 1) the products transformed or refined, sold or used for the domestic market during the preceding month; and 2) the amounts they have received for transportation and storage services to third parties also during the preceding month. Payments shall be made within ten (10) days following the Contractor's receipt of the corresponding invoices. Delay in these payments shall not give rise to fines but shall incur the application of respective penalty interest.

In addition to the fees and taxes established previously, contractors shall pay Income Tax, and all general taxes, whatever their nature, as well as fees, contributions, and legal retributions for services provided to them. Contractors shall not be subject to paying licenses nor other taxes that specially burden their enterprises or the products thereof.

In accordance with what is stipulated in the contract, the Secretariat of Finance and Public Credit, at the request of the Secretariat of Natural Resources, shall grant partial or total exemptions from import duties on materials, machinery, useful instruments, and other goods that the Contractor needs to bring into the country provided they have a direct relationship with its operations. The Contractor may dispose of the goods it has imported with exemption from import duties, prior to the payment thereof, without prejudice to what is provided in

of this Law. The Contractor wishing to destroy or abandon the goods referred to in this article shall notify the Secretariat of Natural Resources and it shall decide on their subsequent disposition. Chapter IX Inspection, Supervision and Oversight.

The Secretariat of Natural Resources shall inspect and supervise the Contractor's operations, without interfering in the normal development of its activities. The Contractor shall provide the inspection and supervision personnel all facilities for the proper performance of their duties. Oversight for tax purposes shall be exercised by the Secretariat of Finance and Public Credit. Chapter X Grounds for Termination of Operating Contracts.

The State may terminate the operating contracts in the following cases:

• 1)

  When the Contractor has not initiated the Minimum Exploratory Program within the time period set forth in article 42, or has interrupted it for more than sixty (60) consecutive days, except in cases provided for in said article; -- In these cases, the Contractor shall pay to the State as compensation the amount of investments necessary to execute or complete the Program in accordance with what is provided in article 41 of this Law;

• 2)

  When the Contractor considers that the subsurface conditions in the block do not permit a reasonable opportunity to discover petroleum accumulations in commercial quantities. In this case, the Contractor may interrupt the minimum or additional exploratory program, with prior approval of the Secretariat of Natural Resources and payment to the State of fifty (50) percent of the investments planned to complete it;

• 3)

  If the Contractor has not determined commercial production during the exploration period or within ninety (90) days following its expiration or within the additional period provided for in article 44. If the Contractor has not fully executed the Minimum or additional Exploratory Program during the exploration period, the provisions of article 41 of this Law shall apply;

• 4)

  If the time period stipulated in the corresponding contract has elapsed without the Contractor having initiated the drilling of the first development well;

• 5)

  If, once the required facilities have been constructed, the Contractor does not begin production or substantially reduces it to levels inconsistent with the approved development program, except in duly justified cases;

• 6)

  If the Contractor transfers total or partially the contract without prior approval of the Secretariat of Natural Resources; and,

• 7)

  When the Contractor fails to fulfill obligations established in this Law, in its regulations, or in the operating contract, except as provided in Article 80 of this Law.

If the Secretariat of Natural Resources considers that one of the grounds for termination contemplated in items 1), 3), 4), 5), 6), and 7) of the preceding article has been incurred, it shall notify the Contractor in writing of the non-compliance so that the Contractor may remedy it within ninety (90) days following receipt of the notification, if it is susceptible of being remedied. If within this period the Contractor does not remedy it, the Secretariat shall terminate the contract and shall claim the damages and losses that such non-compliance may have caused.

During the exploitation period, the Contractor may terminate the operating contract by written notification to the Secretariat of Natural Resources, with at least ninety (90) days prior to the contract termination, provided that the Contractor is in compliance with the fulfillment of its tax obligations and complies with the obligations of the corresponding annual development program. If it has not executed said program, the Contractor shall pay to the State the amount necessary to complete it, based on the budget that shall have been approved for that purpose, which shall be adjusted according to the actual costs of works already performed. Chapter XI Fines

In less serious cases of non-compliance, the Secretariat of Natural Resources shall impose on the Contractor a fine of ten thousand (10,000) to forty thousand (40,000) lempiras, without prejudice to the fulfillment of the obligation by the Contractor. In determining the amount of the fine, consideration shall be given to the nature of the non-compliance or recurrence in the same.

The provisions of this Chapter shall be applied without prejudice to the sanctions established by other legal or regulatory provisions, and to the civil, criminal, or tax actions that the non-compliance may originate. Chapter XII Appeals.

Against decisions on termination of operating contracts, resolutions imposing fines, and other measures that affect the Contractor's interest, the Contractor may file the appeals provided for in the Administrative Procedure Code. Chapter XIII Invalidity and Adaptation of Concessions Granted in Accordance with Prior Laws.

The invalidity of concessions granted in accordance with prior laws is declared, whose holders have incurred in any of the grounds, duly accredited, of extinction, expiration, or nullity provided for in said laws.

(Amended by Decree 94-85, Official Gazette No. 24656 of June 28, 1985. Interpreted by Decree 131-90, Official Gazette No. 26297 of November 24, 1990). The concessions granted under prior laws that are not in the situation of invalidity referred to in article 83 shall continue in effect, but may be adapted to the operating contract regime established in the present Law, within a period of six (6) months, counted from its publication in the official newspaper "La Gaceta". During the adaptation period the concessionaire shall continue with its operations.

When it is a matter of exploration and exploitation concessions, the concessionaire shall present to the Secretariat of Natural Resources a request accompanied by all information, including the geophysical and geological interpretation that they may have obtained as a result of their activities and the Minimum Exploratory Program that it proposes to perform. If the information presented is satisfactory, the operating contract shall be executed with the holder of the concession.

REPEALED by DECREE 94-85 If, after the six (6) month period set forth in article 84 has elapsed, the concessionaire has not requested adaptation, the concession shall be extinguished. Chapter XIV Jurisdiction of Honduras Courts and Application of Its Laws.

The doubts and controversies that arise as a result of the execution of the contracts or agreements referred to in this Law, or of permits for geophysical and geological exploration and that do not have special solution procedures, shall be decided by the competent Courts of Honduras, in accordance with its laws, without any reason or cause being able to give rise to foreign claims. Chapter XV Final Provisions.

The Executive Branch through the Secretariat of Natural Resources shall promulgate the regulations for this Law.

All concession requests that were in process as of the date of promulgation of this Law are hereby declared null and void.

The Petroleum Law of the twenty-fifth of October of nineteen hundred sixty-two, Decree 457 of the eleventh of May of nineteen hundred seventy-seven, and Decree 503 of the fifth of August of nineteen hundred seventy-seven are hereby repealed.

This Law shall enter into force on the day of its publication in the Official Journal "la Gaceta". Given in the city of Tegucigalpa, Central District, in the Session Hall of the National Congress, on the twenty-fifth day of the month of October of nineteen hundred eighty-four. Jose Efraín bu Girón President Mario Enrique Prieto Alvarado Secretary Juan pablo Urrutia Raudales Secretary to the Executive Power. Therefore: Let it be executed. Tegucigalpa, D.C., 31 October 1984. Roberto suazo Córdova President miguel bonilla, the Secretary of State in the Ministry of Natural Resources.