A Changing Colombia

The political and investment landscape has been changing rapidly in Colombia. In 2002, the election of President Alvaro Uribe marked a turning point for the country’s economy, and its past reputation as a hotbed of narco-terrorism. A second factor was the negotiation of a free trade agreement with the United States, which reaffirmed the government’s commitment to open market policies. Colombia is now considered by many to be an oasis in a desert of Latin American uncertainty.

Under President Uribe, the government began to pro-actively pressure extremist groups involved in narco-trafficking to disband and lay down their weapons or risk armed intervention by the State. This has led to significant declines in violence in general, and a significant reduction in attacks against government facilities, including oil and gas infrastructure. The turnaround is being seen in the economy and foreign investment. In early 2006, Standard & Poor’s upgraded the country’s sovereign credit rating to BB positive from BB stable citing, “growth prospects are largely a result of significant and sustained improvement in domestic security that … [has] led to renewed domestic confidence and double-digit growth in private investment.”

Colombia has experienced the longest period of uninterrupted foreign direct investment in Latin America, which is expected to reach approximately US$6.0 billion in 2006. The largest investments have been in the mining industry (46 percent) and the oil and gas sector (34 percent).

The Oil Landscape

Colombia is one of the largest oil producers in Latin America, and it still has vast and largely under-explored hydrocarbon resources. Crude oil accounts for approximately 10 percent of the country’s revenues and nearly 30 percent of exports, primarily to the U.S. However, Colombia’s crude oil output had been declining due to a lack of investment through the end of the 1990s, and the country was on the road to becoming a net importer of oil. Domestic production peaked at 800,000 bopd in 1999 and had fallen to 526,000 bopd by 2005. To reverse that trend, the Colombian government introduced new and attractive fiscal terms to encourage foreign investment by exploration and production companies.

Industry Being Rejuvenated

In 2004, the government took the first step to foster re-investment in the petroleum industry with the creation of the Agencia Nacional de Hidrocarburos (ANH), the national hydrocarbon agency with the mandate to administer new exploration lands and encourage foreign investment. Then the ANH introduced a new land tenure system.

The results speak for themselves. Today, there are over 70 oil and gas companies operating in Colombia, and ANH predicts a 50 percent increase in exploration spending over last year to US$750 million. Since the ANH was formed, over 130 land contracts have been signed and, in 2006 alone, almost 26,500 km of 2-D seismic was acquired. By comparison, from 1995 to 2000, the annual average was only 11 land contracts and approximately 1,300 km of 2-D seismic. This year about 85 new field wildcats will be drilled, up from 42 in 2005 and 56 in 2006.

Attractive Land Tenure

The new fiscal regime is structured around exploration and production (E&P) contracts and Technical Evaluation Agreements (TEAs) entered into directly with the ANH and without any participation by Ecopetrol.

TEAs allow companies to conduct preliminary evaluation of large areas prior to committing to full-scale exploration. TEAs are typically large land blocks and entail minimal initial work commitments, such as reevaluating existing data with a view to defining prospects and ultimately committing to an E&P contract.

With E&P contracts the initial contract period typically runs for six years of exploratory activity, with the possibility of a four-year extension, and includes a reasonable exploration work plan. There are no initial land costs and inexpensive annual land rentals. Companies obtain access to all available geological and geophysical data, and first phase work commitments usually involve shooting new seismic. The contracts can typically be held by simply drilling one well per year after the first phase, or can be relinquished at any time at the Company’s option.

Once commerciality of a field is declared, the development phase lasts an additional 25 years, which can be extended in certain circumstances for another 10 years, or for the life of the reserves. These new terms provide a company with the right to all reserves and production from newly discovered fields, subject to an attractive sliding scale royalty, which is initially fixed at eight percent. In addition, corporate income taxes are scheduled to decline to 33 percent by 2008, from 38.5 percent.