ARTICLE
22 September 2023

Progress And Pitfalls In Lithium Regulation—An Investor's Guide To Navigating The Changes

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Urzua Abogados

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Urzua Abogados is a niche law firm, based in Santiago, Chile, that specializes in Mining (including services and technologies for the mining industry), Engineering, Construction, and Project Development, and within it, its controversies (arbitration, litigation and claims).
Chile not only possesses the world's largest lithium reserves but also has unique advantages that should position it as a global leader in lithium production.
Chile Energy and Natural Resources

Chile not only possesses the world's largest lithium reserves but also has unique advantages that should position it as a global leader in lithium production. Yet, due to a restrictive legal framework, the nation's lithium sector remains largely underdeveloped. As we progress through 2023, however, a palpable shift in policy and legal initiatives promises to unlock enormous potential for both the state and private companies.

I. Current Regulation of Lithium in Chile

  1. An Archaic Legal Framework: The existing regulation, rooted in the 1979 Decree Law 2,886, is both outdated and unduly restrictive. Initially established due to fears of lithium's potential nuclear applications, the law has failed to adapt to the element's current, predominantly non-military, uses such as renewable energy and electric vehicles.
  2. Restricted Private Sector Involvement: Current legislation imposes severe limitations on private sector engagement. Companies can only participate under two conditions:
    • Through an administrative concession or a Special Operation Lithium Contract (CEOL), governed by a Presidential Supreme Decree; or
    • If they held a mining concession prior to the 1979 Decree Law.
  3. The Current State of Affairs: As it stands, only two private companies are actively engaged in lithium extraction, although many others are in the exploration phase, hoping to secure a CEOL. And this year, there has been a surge in interested investors, attracted by the changes promised by the government.

II. New National Lithium Strategy: Promising Opportunities

  1. Public-Private Partnerships: The recently introduced National Lithium Strategy (NLS) marks a potential turning point. Contrary to some narratives, there is no intention to nationalize lithium companies. The focus is on building strong public-private partnerships for sustainable lithium exploitation.
  2. Market Diversification: The NLS aims to welcome a broader range of actors, including smaller enterprises and those offering disruptive technologies.
  3. Control and Management: Private companies may take control in public-private associations for lithium exploitation in non-strategic salt flats. It has also been hinted that in certain cases, private companies won't even be required to partner with the state to be granted a CEOL.
  4. State's Role in Strategic Salt Flats: For strategic salt flats, state-run companies like Codelco and Enami will maintain a controlling stake in the partnerships that will be formed with private companies. .
  5. Technological Support: Financial and technological support for lithium-related projects are in the pipeline, expected to stimulate industry growth.
  6. Competitive Tender Process: The government has committed to a transparent, competitive process for awarding CEOLs, starting in H1 2024.
  7. Extraction Technologies: The NLS emphasizes the importance of new extraction methods, such as direct extraction with brine reinjection, and commits to their development and testing. Moreover, it has been indicated that these methods will become mandatory in the near future.

III. Pending Definitions and Ambiguities

The NLS, although a critical first step, requires further clarification on key issues:

  1. Strategic Designations: Criteria for designating a salt flat as 'strategic' remain undefined, causing uncertainty in potential partnerships and control mechanisms. However, it is likely that the vast majority of salt flats will be classified as non-strategic.
  2. Environmental Protection: The NLS states that 30% of ecosystems will be protected but lacks details on what this means for lithium extraction activities.

IV. Legislative Momentum

  1. Proposed Bills: Apart from the NLS, a bill proposing to make lithium a grantable mineral has recently been introduced and received significant political backing.
  2. Constitutional Inclusion: The ongoing drafting of a new constitution—to be voted on in a December referendum—could also enshrine lithium as a grantable substance, completely altering the landscape of lithium mining in Chile.

V. Conclusion

The year 2023 could be a watershed moment for Chile's lithium industry. Amid evolving policies and legal frameworks, private companies—especially international ones—are eyeing Chile as a promising lithium frontier. To fully realize this potential, the government must act swiftly to provide necessary clarifications and implement the NLS. Failure to do so could result in missed opportunities amounting to billions in unrealized revenues and untapped resources.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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