NEW OIL AND GAS CONTRACT IN COLOMBIA

The Colombian government has implemented two fundamental changes in the upstream oil and gas industry: Ecopetrol’s role is now as sole entrepreneur and the National Hydrocarbons Agency –ANH- was created to administer the hydrocarbons resource. The oil and gas contract model was changed by the ANH to a royalty / tax system. The contractor explores and produces with autonomy at its own risk and cost. The contractor has all the production rights, after a sliding scale royalty, and only makes an eventual payment of to share the surplus income in case of high crude prices. Natural gas and heavy crude have special incentives.
The new royalty / tax model offered by the ANH has significant better terms that the previous association or joint venture model in all subjects, such as: Duration, operational flexibility and autonomy, materiality, production rights, reward to risk and profitability. The new model is one of the simplest and most competitive in the international arena, with the stake take being reduced from more than 70% to around 50%. The business environment for the oil and gas industry in Colombia is facing a turnaround. All indicators for the country’s socio-economic parameters are improving rapidly. This is the time to invest in Colombia and in particular in its oil and gas industry.

INTRODUCTION

With the aim of enhancing and clarifying the performance of the state in the oil industry and in order to increase the exploration and production activity, the Government of Colombia has made two fundamental changes in the upstream oil and gas business, as follows:




First, the combined roles of the State Oil Company – ECOPETROL – as both entrepreneur and regulator were separated. ECOPETROL S.A. was incorporated as a public held company (compañía por acciones) owned by the State with the sole role as entrepreneur, such as any other oil and gas integrated ompany. The company retained its staff, assets, production rights and joint venture agreements. The National Hydrocarbons Agency –ANH– was created to administer the hydrocarbon resources of the Nation. Both entities are now fully operative with their respective new roles.
Second, the thirty years-old previous association contract model of ECOPETROL to joint venture with the oil companies was abolished, and the ANH developed a new E&P contract model which will now be offered to award new blocks to oil and gas companies. This new contract is based on a royalty / tax system with undamental differences and improvements from the previous association contract. This document presents the main elements of the new contract offered by the ANH. It covers the following subjects: type of contract, duration, work programs, operations, economic terms, and some contract administration issues. The main characteristics of the contract are summarised in Figure 2.

1. TYPE OF CONTRACT

• Type of contract. The new Colombian contract model is a royalty / tax system. The contractor defines the work program, builds and owns the facilities, and operates with autonomy and responsibility at its own risk and cost. The contractor owns all the production rights, after royalties, and makes an eventual payment to the ANH of the surplus income when an international reference crude price exceeds a trigger level. The contractor pays income taxes as per the law.
  
• Contract regime. This is a special state contract governed by its own regime, which is established by the ANH

2. DURATION, MAJOR EVENTS AND RELINQUISHMENT

• Exploration. The duration of the exploration period is six (6) years. The contractor may continue exploration works for up to four (4) additional years, subject to an additional exploration program and partial area relinquishment. The exploration period is divided into phases, which are proposed by the contractor.
  
• Evaluation. After a discovery is made, the contractor defines an evaluation program for execution during one (1) to two (2) years, depending on the scope of the program, with an eventual extension if justified. There is potential of two (2) additional years for natural gas and heavy oil discoveries, in order to allow complex project planning and market development.
  
• Exploitation. Once the evaluation program is completed and presented to the ANH, the contractor decides whether to declare commerciality or not. In the first case, this defines the beginning of the exploitation period. The duration of the exploitation period of each individual exploitation area is twenty four (24) years. The contractor has the right to extend the exploitation period beyond the 24 years, subject to fulfilment of three basic pre-established requirements: regular production, an active project of EOR or infill drilling and a payment of 5% (gas) to 10% (oil) of the production.
  
• Discovery. Any discovery must be notified to the ANH. The Ministry of Mines and Energy defines the extension of the discovery.
  
• Commerciality. The contractor declares the commerciality to enter into the exploitation period, once the results of the evaluation program are presented to the ANH.
  
• Relinquishment. In general 50% of the area at the end of the 6 years exploration period if the contractor continues exploring, and there is an evaluation program or a discovery. Further 25% after 2 years of the extension. There maybe agreed partial area relinquishment during the 6 years as agreed contractually on a block by block basis, depending on the scope of the exploration work program and area size. The contractor has the option of total or partial relinquishment of the area after each exploration phase.

3. WORK PROGRAMS AND E&P PLANS

• Exploration. An initial minimum work program for the exploration period is agreed at the signature of the contract. It can be adjusted before the beginning of each exploration depending on the exploration results of the phase finalising. There shall be a posterior exploration program if area is to be retained after the six years of the exploration period.
  
• Evaluation. Thecontractor defines the work program for the evaluation of a discovery. The contractor shall present the program and its results on completion. Up to two appraisal wells can be accepted as compliance of the exploration commitments.
  
• Exploitation. An exploitation plan shall be presented at the beginning of the exploitation period. The contractor defines the production and processing methods, facilities design and other development matters. The ANH accepts the plan as long as it meets the terms of the formal presentation requirements and follows the best practices of the oil industry. The ANH shall be updated of material modifications of the plan. Annual exploitation work programs shall be presented to the ANH. The exploitation plan with its updates shall include the abandonment plan.

4. OPERATIONS

• Operations. The contractor is autonomous and responsible for conducting the operations, at its own risk and cost. There is ample flexibility for all operational matters such as subcontractor selection, budget, schedule, staffing, and so. The legal requirements and good practices of the oil industry must be followed for all work programs and operations, including abandonment.
  
• Follow up. The contractor shall inform regularly the ANH about the operations performance and the plan and execution of the exploration, evaluation and exploitation work programs and about the exploitation plan. This includes environmental, safety, community matters, and Colombian content. The ANH can inspect and audit to verify that the contractor complies with the obligations
  
• Information. The contractor shall delivery timely all the geology and petroleum engineering information as per a manual.
  
• Abandonment. Obligation to follow the legal norms and the good practices of the international oil industry. The obligation is warranted by a sinking fund or a guarantee.
  
• Transfer of Technology. The contractor shall do transfer of technology in kind such as training, scholarships, education, sponsored research and similar.

5. ECONOMIC TERMS

• Production. All the production rights are for the contractor and can be disposed after paying a royalty at the point where the hydrocarbons are on minimum specifications for transport or use.
  
• Royalty. The ANH collects the royalty that the contractor shall pay. According to the law, the royalty is a proportion of the daily gross production based on monthly average and it is computed per field, as shown in the Figure 4:
  
  

• Payment to ANH. For light crude oil there is an eventual monthly payment to the ANH when the cumulative production is above 5 MMBBLs and when an international reference price of crude is above a trigger level. The ayment is 30% of the actual surplus income of the contractor. The surplus income is a proportion the gross income in the same proportion as the international reference price exceeds the trigger level to the full international reference price. The actual income of the contractor is the value of its production at the delivery point. The formula to compute the payment is the following:
  

The reference marker crude to the international price is the West Texas Intermediate -WTI- and the trigger level depends on the actual quality of the hydrocarbon produced measured with the gravity API, as follows:

Note that this payment does not apply to natural gas and heavy oil. The trigger levels are periodically adjusted upward as to consider oil industry evolution.

• Subsurface fee. The contractor shall pay a fee for the right to use the subsurface, for each phase of the exploration period after the first phase, on average US$ 0.75/hectare, depending on the phase, the size and location of the area contracted, and US$0.10/bbl (liquids) or US$ 0.01/mscf (gas) during the exploitation period.
  
• Assets. All the assets belong to the contractor. There is a transfer of the essential assets including environmental and abandonment funds /guarantees to the ANH in the event of contract termination before the reservoir is depleted.

6. SOME ADMINISTRATIVE MATTERS

• Conflict resolution. Mechanism for direct resolution of conflicts between the parties and legal arbitration in Colombia if not resolved by the parties directly
• Applicable law. Colombian law and subjection to the Colombian courts except as for conflict resolution
• Final Remark. The minute of the contract may have minor differences to this document.