Petroleum Free Zones

The petroleum free zone concept is inherent to Panama's historical condition as an international commercial, maritime and trade center due to its strategic geographical position

Introduction

The petroleum free zone concept is inherent to Panama's historical condition as an international commercial, maritime and trade center due to its strategic geographical position. The free zone is mainly an area within which all transactions are tax free. As a consequence, Panama developed the Colon Free Trade Zone, the second biggest in the world after Hong Kong, and now is pursuing the Petroleum Free Zones.

Panama has the potential to become a major oil and downstream products redistribution center for two main reasons: one is the existence of the Panama Canal creating a strategic transhipment point, and the other is the fact of being the narrowest isthmus between the Atlantic and Pacific oceans to pipeline oil from South America to the Far East. Companies already doing business in 10 petroleum free zones include Exxon/Mobil, Shell, Total, BP, Eni, Repsol, Chevron/Texaco, Gencor and others.

  • The Panama Canal expansion is complete and opened on June 26, 2016.
  • The U.S. trade lane most affected by the expansion is the East Coast U.S.-Asia trade lane because it represents the highest percentage of total cargo tonnage passing through the Canal.
  • The expansion program was designed to increase the Canal's capacity and allow for the transit of larger vessels. The expansion will allow the Canal to accommodate a higher percentage of the world's liquefied natural gas fleet, greatly shortening the distance U.S. LNG exports must travel and thereby making them more competitive in the Asian market.
  • Approximately 132,000 barrels per day (b/d) of crude oil and 882,000 b/d of other petroleum production were transported through the Canal in 2015.
  • As the shale revolution swept across the United States over the last decade and an abundance of oil and natural gas wealth built, the Canal’s expansion held great hope to again provide a critical East-West point of passage, this time for natural gas supplies – Liquefied Natural Gas (LNG) aimed at Pacific markets.
  • The Panama Canal can also play a role in the global shipping industry’s transition from fuel oil and diesel to natural gas. Canal authorities are studying the possibility of building an LNG receiving terminal both for local power generation and with the aim of bunkering to provide LNG for ship borne propulsion. The move would further entrench Panama’s role in the new LNG market, both in the region and the world.
  • The expansion of the Canal has been long-awaited by many in the LNG industry. The new lock system opened access to a transportation shortcut that practically the entire global fleet of LNG tankers can utilize. The expanded Canal dramatically shaves time and money off key transit routes and voyages from the US Gulf to Asia when compared to alternate routes such as through the Suez Canal or around Africa’s Cape of Good Hope. But it also has important upside for LNG traders from Trinidad & Tobago as well as Peru. Lastly, in the post-Paris Accord world of emphasis on emissions reduction, the expanded Canal also can play an important role in the global shipping industry’s transition from fuel oil and diesel to natural gas and the latter’s rising demand as a maritime transport fuel.
  • The Trans-Panama Pipeline (TPP) or Trans-Isthmian Pipeline, which is situated near the Costa Rican border, is another oil transit route that reduces transportation times and costs between the Atlantic and Pacific basins. Tanker data suggests that roughly 200,000 b/d of crude oil, most of which is of Colombian and, to a lesser extent, Angolan origin, flowed through the pipeline in 2015, double the amount compared with the previous year.

Panama has recently amended its Petroleum Free Trade Zone legislation, including an increase in the period covered by a permit from one to five years.

Other changes include:

  • Abolition of the need to present evidence of 50% financing by a financial institution has been eliminated;
  • Distributors for sales in the domestic market are now exempted from some prevention and security requirements;
  • Permit holders are obliged to operate at their maximum capacity;
  • A 45 day deadline is given for the Crude Oil and By-Products Office to grant permits to operate or extensions to these permits;
  • Companies operating on a Petroleum Free Trade Zone will now have to maintain strategic reserves equivalent to 7-day sales, as opposed to the previous 10-day sales period;
  • The “precio de paridad” or benchmark price for Gas and related items is now considered a “suggested price” as opposed to the previous text considering it a “maximum price”;
  • The Crude Oil and By-Products Office can now determine the “precio de paridad”or benchmark price for Gas and Related Products on a weekly basis, as opposed to the previous biweekly basis;
  • The executive branch can now, through the Crude Oil and By-Products Office, import all crude oil by-products to supply the local market in cases of national emergency, provided that the strategic reserve of the country is affected, or at risk.

No existing tax incentives are affected by the changes. Petroleum Free Zones were created under Decree No. 29 of July 14, 1992 for foreign or domestic companies and individuals involved in importing, refining, marketing or distributing petroleum or derivative products. Investors are required to contract with the Ministry of Commerce and deposit an amount equal to 1% of their investment up to a maximum of USD 250,000. Investors also are expected to employ Panamanians except for skilled technicians and managers and maintain a minimum environmental liability insurance policy for USD 1,000,000. Local products must be used if available at competitive prices.

Qualified investors can engage in the following activities: Lease or acquire property and construct port facilities, including docks for loading and unloading petroleum shipments; Build, install and operate refineries and pumping facilities, construct storage tanks, pipe lines and other equipment for processing petroleum or preventing fire or spillage; and Import, store or handle petroleum for export or marketing and distribution within Panama.

Petroleum imported into the Zone is exempt from import duty or taxes and is exempt from sales tax if sold within the Zone: Enterprises operating in a Zone are eligible for the incentives under Investment Promotion Law 3 of 1986.

Investment Opportunities

The energy market in Panama is rising, especially in the Petroleum Free Zone of Bahia Las Minas Colon. Multi-million dollar projects are brewing in the area and the market is waiting.

The hydrocarbon sector, kept making important changes in its facilities as well as the granting of a contract for the operation and management of a new Fuel Free Zone, located in Isla Melons, increasing by 7 percent storage capacity product in the country. On the updates there are 10 Free Zones Fuel nationwide. The approximate investments made during 2013 were the following:

New Fuel Free Zones:

  • Melones Oil Terminal Inc. (MOTI), Isla Melones, investments for the amount of USD 65 million, storage capacity of 2 million barrels. Improvement of Free Fuel Zones.
  • Decal Panama, SA, Isla Taboguilla, investments for the amount of USD 10 million, increased storage capacity by 1.3 million barrels.
  • Colon Oil & Services, Inc. (COASSA), Coco Solo - Cristobal, investments for the amount of USD 6 million, increased storage capacity to 450 000 barrels for handling Bunker C and marine diesel.
  • Petroport SA Telfers Island, investments for the amount of USD 16 million, increased storage capacity at 505 thousand barrels, for handling Bunker C and marine diesel.
  • Petroamérica Terminal, SA (PATSA), Vasco Nunez de Balboa - Rodman, investments for the amount of USD16.5 million, increased capacity storage barrels 352, for handling ethanol marine fuels and other derivatives.
  • Assign Panama, SA Tocumen International Airport, investments for the amount of t USD 4.6 million, increased storage capacity 15 000 barrels for handling aviation fuel Jet - Av.
  • Petroterminal de Panama , SA , Charco Azul and Chiriqui Grande, investments for the amount of USD 470 million , increased storage capacity 8.9 million barrels for storage of different hydrocarbons.

Other investment opportunities

  • We have a few hydroelectric and solar projects for sale.
  • New opportunities for hydro and wind power.
  • Brand new opportunities in bunker tank farms.
  • Possible LNG terminal

Benefits

Contractors are granted the following benefits:

  • Total exemption from income taxes on profits derived from such activities, during the first five years of production or until the initial investment is recovered; whichever comes first. From then on, the contractor shall pay, as income taxes, 25% of the profits from the production of hydrocarbons.
  • Total exemption from import duties on machinery, equipment, parts, and any other items, necessary for the execution of the activities under the contract.
  • Special carry-over provisions for income tax purposes.
  • Special depreciation schedules for machinery and equipment.

Within any Petroleum Free Zone, individuals or corporations, national or foreign, may perform multiple operations under a special tax regime, as follows:

  • Introduce, storage, refine, transform, manufacture, mix, purify, bottle, market, transport, transfer, pump, sell for the domestic market, export, reexport, and, in general, manage and supply crude oil, semi processed or any of its by-products; Petroleum Free Zone Users Type B are only permitted to introduce, storage, dry, mix, export and reexport crude petroleum, semi processed or any of its by-products in or from a Petroleum Free Zone.
  • Build, install and operate petroleum refineries and other transformation or processing means of crude oil or semi-processed, storage tanks, oil pipelines, gas pipelines and poly-pipelines, pumping installations and pipes, buildings for offices, warehouses, or workshops and any other installations; introduce machinery, equipment, spare parts, containers, bottles, vehicles, furniture, equipment for fire or spill prevention, construct buildings for offices, warehouses, workshops for the use of the beneficiaries of the contracts to operate in the Petroleum Free Zones in any of the activities mentioned in subsection (a) hereinbefore;
  • Lease, acquire or in any other manner use lands, easements, right of way and other real or personal rights in regard to bona mobilia located in the areas designated as Petroleum Free Zones;
  • Establish water services, electrical power, gas, energy, heat, refrigeration or any other kind of services, upon previous coordination and approval with the respective public entities;
  • Build ports, piers, dry docks, shipping and unloading places for ship and airplanes, railroad stations for loading and unloading on land or granting contracts for the construction and exploitation of such works
  • In general, all kinds of operations or activities proper or incidental to the establishment and operation of the Petroleum Free Zones for the introduction, storage, pumping, transference, distribution, marketing and/or crude refining and petroleum by products.

Incentives:

There are 10 petroleum free zones. Contractors in these zones are granted the following benefits:

  • Total exemption from income taxes on profits derived from such activities, during the first five years of production or until the initial investment is recovered; whichever comes first. From then on, the contractor pays income tax of 25%.
  • Total exemption from import duties on machinery, equipment, parts, and any other items, necessary for the execution of the activities under the contract.
  • Special carry-over provisions for income tax purposes.
  • Special depreciation schedules for machinery and equipment.
  • There are ten free fuel zones nationwide.

In case of interest, other investment opportunities that can be explored are:

  • We have a few hydroelectric projects for sale.
  • New opportunities for hydro and wind power.
  • Brand new opportunities for bunker tank farms.
  • Possible large refinery.

If you want to Set up a Business or Acquire existing Petroleum projects, the BusinessPanama Group together with Pardini & Asociados, an international law firm with 35 years of experience,  provide you our well-known One Stop Shop services to assist you on all your business needs.

We can help you with:Setting up the company, branch or llc

  • Legal services for setting up all operations, contracts, permits, etc.
  • Accessing special tax incentives
  • Applying for visas, work and residence permits
  • Locating office and living premises for the company and its executives
  • Relocation services
  • Other services required

For more information, please contact us.

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