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COLOMBIA'S ENERGY INDUSTRY: RECENT DEVELOPMENTS
AND NEW OPPORTUNITIES
The Colombian Energy Market
Colombia is one of six Latin American countries with significant oil reserves, estimated to be 2.6 billion barrels. Oil is the country’s largest foreign exchange earner. The industry has attracted foreign investment from leading multinational energy companies including Mobil, Esso, Texaco, Oxy, Shell, BP and others, operating under association of concession modes in the country. The industry in Colombia includes production companies, oil services, advisory companies and a supporting manufacturing sector with equipment, plants and materials.
Colombia’s long history of oil and gas exploration and discovery has attracted investors from around the world, developing cultivating a large base of experienced and skilled oil industry professionals. But Colombia remains a relatively unexplored country, with enormous potential in its frontier areas. More than 80% of the country’s territory remains unexplored.
Colombia became a net oil exporter in the 1980s following important discoveries in Caño Limon, Cusiana and Cupiagua reservoirs. The country’s oil production grew from 126,000 bpd in 1980 to 580,000 bpd in 2002. Oil exports peaked at $4.5 billion in 2000.
Today, 27% of the Colombia’s total exports are related to the international commercialization of hydrocarbons. This exceeds all other Colombian export products, including coffee. The United States is the largest destination for Colombia’s hydrocarbon exports. However, existing oil and gas fields are currently reaching their maturity levels and by 2008 the country could face a virtual shortage of hydrocarbon supply if new discoveries are not made.
Colombia was identified in the Bush Administration’s 2001 National Energy Policy as “becoming an important supplier of oil to the United States.”
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Policy Reforms
To boost exploration activities, increase its hydrocarbon reserves and attract investors, the Uribe government has begun implementing a series of oil policy reforms, which have led to the reactivation of exploration activity in the country. Colombia is today actively seeking new business partners to invest in the exploration and production of hydrocarbons.
Colombia’s recent policy reforms benefit the investor by creating a new, more favorable environment for discovery, exploration and production by making contract concessions more attractive for foreign investors. The two major reforms include a clearer role for the State in the oil industry and improved association contract conditions.
New Administration
Ecopetrol, S.A., which once served dual roles as the administrator of hydrocarbon resources and a for-profit oil and gas company, has become two independent entities. Both entities are now fully operative with their respective new roles:
- Ecopetrol S.A. today operates asa state-owned stock corporation with a single role as entrepreneur, such as any other integrated oil and gas company. Investors can partner with Ecopetrol for its skills and local knowledge. The company retained its staff, assets, rights to production and joint venture agreements; and,
- A new National Hydrocarbons Agency (ANH) was created to administer the Nation’s hydrocarbon resources.
New Association Contract Model
Ecopetrol has abolished its 30-year-old Association Contract Model for joint ventures with operators. Instead, ANH has developed a new form of E&P contract, which is now offered to award new blocks to oil and gas companies.
The new contract incorporates several changes that significantly benefit the contractor. Some of its features are:
- The switch to a Royalty / Tax System (R/T). R/T is more attractive than the former production sharing system (PSC) because the contractor does not have to commit a proportion of the production in advance in order to recover the cost. This offers investors a more favorable rate of return and profit potential. The R/T system also gives the contractor more autonomy to develop and operate facilities.
- Extended exploration, evaluation and production periods. More time is now allowed for each of three separate phases – exploration, evaluation and production. In many cases, the duration is longer than the industry standard. New contracts allow for the extension of exploration and production periods, subject to pre-established conditions. In addition, the evaluation period serves as a grace period to allow the contractor to evaluate the feasibility of any discovery. The possibility of extending each phase makes this contract highly competitive because it allows enough time to explore the area contracted, evaluate any discovery and maximize production.
- The contractor defines the work programs and plans. Previously all work exploitation programs and plans were reviewed and approved by an Executive Committee with the consent of Ecopetrol. Now, the contractor defines the work programs and plans. The role of ANH is to monitor and ensure the work’s execution.
- The new contract gives no share in production to Ecopetrol or ANH. The contractor now has 100% of the working interest and the product, with the right to dispose of it after payment of the royalties. The possible additional payment to ANH is contingent on high prices, and only for light crude oil. Thus the State shares windfall income, in excess of tax, only when prices are really high and in a fixed and fair proportion of 30/70, which can be treated as a cost for tax purposes.
- The Government take is decreased. Using IHS Energy Group indicates that the Government take for the previous association contract was above 70% (with 30% WI back-in of Ecopetrol). ANH calculations using this model indicate that with the new contract, the Government’s take is reduced to around 50%. A Government take of about 50% is well below the world average of 67%, and below the average of R/T systems of 59%. The contractor’s profitability has also been increased.
- New royalty laws benefit the small and medium-sized projects, the initial and mature stages of large projects, and natural gas, offshore production, and heavy oil. Royalty has been changed from a fixed rate of 20% of production to a sliding scale based on production, and it applies per field.
- No bonus payments: There are no bonus payments for signature or discovery. ANH prefers this money be invested in exploration or evaluation works. The subsurface fee is common to many countries and the actual values used here are the average for other countries.
- Continued outstanding reputation for honoring the O&G contracts: Colombia and its State oil institutions have a reputation for honoring O&G contracts and respecting the law. The new contract and ANH continue with this tradition. Under the former contract, and in actual practice, all conflicts between Ecopetrol and its associates have been resolved in an amicable way and within the contractual agreement. The new contract and ANH will maintain this sound business practice and make use of it in the new contractual agreement.
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Six Reasons to Invest in Colombia
- Enormous potential for discovery: Colombia calculates it has the potential to discover 47 billion barrels of petroleum and a large part of the nation’s territory has not yet been explored. The potential for important discoveries exists in locations such as Cuisana, Cupiagua, Caño Limon, La Cira-Infantas, and Chuchupa-Ballena.
- Recognized economic stability: Colombia offers investors a solid business environment and an open legal system. Examples include equality for national and foreign investors; free entrance of foreign capital without the need for previous authorization; and the existence of several free zones.
- Access to technical information: After the first evaluation, interested investors have access to the consultation and review of the technical information of prospective areas without cost.
- Excellent geographic location: Located near the Atlantic and Pacific coasts, Colombia has economic access to the Gulf of Mexico and the west coast of North America, and East Asian markets.
- Openness to investment: Colombia facilitates private investments through a direct negotiation process on a first come, first serve basis.
- Expanded transportation infrastructure: Colombia also offers an expanded transportation network for hydrocarbons and its components. This process of expansion is occurring throughout the country.
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Opportunities to Invest in Ecopetrol
Ecopetrol is seeking to form joint ventures in Colombia, South America and the Gulf of Mexico with global and regional companies and key players with competitive niches according to capacity, particular business model or geographic area.
- The Exploration Fund (“Fundo”) – For companies wishing to invest in smaller opportunities (projects less than 20 million barrels), Colombia is promoting The Exploration Fund (“Fundo”). This Fund is a financial vehicle for investment in hydrocarbon exploration and production. The Fund is an independent resource comprised of investors, which would serve as trustees. Ecopetrol will be the main investor.
- Crude oil discovery – Ecopeterol is an operating company with recognized experience in upstream and downstream projects involving heavy crude oil. The state-run company has the financial and technological capacity to develop a strategy for exploration, exploitation, processing, and commercialization of heavy crude oil. The project includes land Ecopetrol currently operates in which has estimated tested reserves of 284 million barrels, untested reserves of 370 to 520 million barrels and an additional potential in evaluation of 100 to 260 million barrels.
- Cartagena’s Master Plan – The Master Plan of Development in Cartagena seeks to increase its refinement capacity with an investment of more than $800 million. Investors are desired to assist in that capacity building.
- Theft of fuel – Ecopetrol is looking for strategies (technology, organizational, security, intelligence, etc.) used by other companies to control theft. It is also interested in independent companies (without ties to providers) who can help with a strategy to control theft.
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