The regulatory regime in Colombia underwent a significant change with the formation of the ANH, which developed the new Exploration Contract that took effect in mid 2004. This contract has changed the way the industry views Colombia and has significantly increased the amount of new exploration in the country. In place of the earlier association contracts from which the government (Ecopetrol) had an immediate right to back-in to production, the ANH Exploration Contract provides full risk/reward benefits for the Contractor. Under the terms of the ANH Exploration Contract, the successful operator retains the rights to all reserves, production and income from any new exploration block, subject to existing royalty and income tax regulations, including a high price participation payment provision for larger fields.
Previously, the ANH dealt with exploration acreage proposals on a “first-come, first-served” basis, but has since adopted a system of competitive bidding rounds, whereby the ANH allows any company that meets specified criteria to submit a bid for a block of land. Current bids are evaluated on two criteria: additional government participation (“X Factor” or “additional royalty”) and additional work program (investment). Depending on where the block of land subject to a bid is located, a minimum work program is required that typically includes technical studies, reprocessing or shooting new seismic and/or drilling wells. The ANH contract term consists of three phases:
(i) Initial Exploration Phase. The initial exploration phase lasts six years and can be extended for up to an additional four years provided that the Contractor presents an additional exploration program and relinquishes 50 percent of the area. Depending on the length of time requested, this period is also divided into two phases as the Contractor proposes.
(ii) Evaluation Phase. Upon a declared discovery, and at the Contractor’s request, the evaluation phase commences and lasts up to two years, depending on the size and scope of the evaluation plan proposed. If the evaluation plan relates to a gas or heavy oil field, two additional years may be granted because of the complex planning and marketing required. All discoveries must be reported to the ANH, while the Colombian Ministry of Mines and Energy defines the extent of the discovery.
(iii) Exploitation or Production Phase. Once the evaluation phase is complete and the Contractor declares commerciality, the exploitation phase begins. The duration of the exploitation period of each producing field is 24 years. The Contractor may obtain an extension of the exploitation period beyond the 24 years for a payment equal to five percent (for gas and heavy oil) or 10 percent (for oil) of the remaining reserves value.
Requirements to relinquish part or all of a contracted area depends on the phase of operations. Under normal circumstances, the Contractor must relinquish 50 percent of the area (excluding area’s under evaluation and/or production) at the end of the six-year exploration period if the Contractor continues to explore and there is an evaluation program or a discovery. If not, the Contractor must relinquish 100 percent of the area excluding areas under evaluation and/or production. Another 25 percent must be relinquished after the two-year evaluation phase expires. The Contractor and the ANH may also agree on the relinquishment of certain parts of a license area during the initial six-year exploration period as part of the contract and on a block by block basis, depending on the scope of the exploration work program and the size of the area. The Contractor also has the option to relinquish all or part of the area after each exploration phase.
Blocks acquired from the 2010 Bid Round that exceed 50,000 hectares must relinquish 50% of the acreage after the first exploration phase.