CHAPTER 24 NEW OIL CONTRACTING TRENDS IN COLOMBIA1 (ENGLISH AND SPANISH)

• Jurisdiction: Derecho Internacional

Mining and Oil and Gas Law, Development, and Investment - Book 2
(Apr 2007)
CHAPTER 24
NEW OIL CONTRACTING TRENDS IN COLOMBIA1 (ENGLISH AND SPANISH)
Luis Gabriel Pérez de Brigard
Carlos Urrutia Valenzuela
Attorneys
Brigard & Urrutia Abogados
Bogota, Colombia

LUIS G. PÉREZ DE BRIGARD

Luis Gabriel Perez de Brigard es socio de Brigard & Urrutia desde 2006 y ha estado vinculado a la firma por más de 10 años. El doctor Pérez es abogado de la Universidad Javeriana de Bogotá Colombia, admitido a la práctica en Colombia desde 1994. En el año 1997 obtuvo un master en derecho comparado (MCJ) en New York University luego de lo cual trabajó por espacio de un año como asociado extranjero en la firma Paul, Weiss, Rifkind, Wharton & Garrison en New York. En la actualidad el doctor Pérez codirige la práctica de Recursos Naturales y Medio Ambiente en la Firma. Su experiencia se concentra en todo tipo de operaciones relacionadas con el campo, incluyendo aspectos regulatorios, fusiones, adquisiciones, inversión extranjera y contratos comerciales. En la actualidad el doctor Pérez es miembro del Institute for Energy Law- Center for American and Internacional Law y del AIPN. Igualmente, es miembro del Colegio de Abogados de Minas y Petróleos de Colombia. Además del Español, el Dr. Pérez domina el Inglés.

CARLOS URRUTIA VALENZUELA

Carlos Urrutia-Valenzuela es Socio Gerente de Brigard & Urrutia, la firma de abogados de mayor trayectoria y una de las más grandes y más prestigios en el campo del Derecho de los Negocios en Colombia. El Dr. Urrutia realizó estudios en la Universidad Johns Hopkins University durante dos años, luego de lo cual hizo una transferencia a la Universidad de los Andes, en Bogotá, Colombia para adelantar estudios de Derecho. Obtuvo su grado como Doctor en Derecho en el año 1974. En 1975 el Dr. Urrutia fue designado Secretario General de la Gobernación de Cundinamarca, y posteriormente se desempeñó como Secretario de Hacienda. En 1977, el Dr. Urrutia inició su práctica como abogado en Brigard & Urrutia. Durante sus 30 años de carrera en la firma, el Dr. Urrutia ha asesorado clientes en una amplia diversidad de asuntos que se concentran en derecho comercial, derecho energético (incluyendo minas y petróleos), transacciones financieras internacionales, fusiones y adquisiciones, litigios y arbitramento, particularmente asesorando contratistas en relación con reclamaciones complejas. En materia de Derecho Energético, el Dr. Urrutia asesora clientes en el desarrollo de las estructuras para los proyectos, da apoyo en el planteamiento de aspectos legales y reglamentarios ante las autoridades gubernamentales, participa en negociaciones relacionadas con los términos y condiciones de los contratos vinculados a los proyectos y dirige la labor de redactar los acuerdos correspondientes. El Dr. Urrutia ha asesorado inversionistas, desarrolladores de proyectos, compañías mineras y petroleras, así como bancos y asesores financieros. Entre sus clientes se encuentran empresas líderes en las áreas de minería, petróleos, compañías energéticas e instituciones financieras internacionales con intereses en Colombia. Además del Español, el Dr. Urrutia domina los idiomas Inglés y Francés.

1. Introduction

The Purpose of this document is to analyze the contracting regime for the exploration and production of hydrocarbons in Colombia, within the framework of the new oil policy structure in Colombia which resulted from the decision by the government in 2003 to divide the Empresa Colombiana de Petróleos (Ecopetrol) and to create an independent entity responsible for managing oil resources. This entity was named Agencia Nacional de Hidrocarburos (ANH) (National Hydrocarbons Agency).

As a result of the creation of ANH, two new contracts were developed which went on to replace the association contracts that were being subscribed in Colombia between investors and Ecopetrol. These new contracts are the hydrocarbons exploration and production agreement (E&P) and the technical evaluation agreement (TEA).

Among other factors, ANH contracts have turned the country into an attractive investing destination in the hydrocarbons sector, with very positive results in the development of the sector in the last three years.

2. Background

The regulation of hydrocarbons in Colombia started with the issuance of the Código de Petróleos (Oil Law) (Special Decree 1056 of 1953), which compiled the most important regulations governing these activities at the time.

Later on, and as a result of the issuance of Decree 2310 of 1974 (which announced regulations regarding the abolishment of the concession system as far as oil is concerned) the Empresa Colombiana de Petróleos ("ECOPETROL") was assigned the task of administering the exploration and production of hydrocarbons owned by the State. This decree authorized Ecopetrol to develop the activities directly or through association contracts, operation agreements, service agreements or agreements of any other nature, other than concession agreements.² In addition, being resources owned by the State, these contracts had to be previously approved through resolution by the Ministerio de Minas y Energía (Mining and Energy Department).³

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In the previous system, besides receiving revenues from royalties, taxes and a series of economic charges, the State participated in the profits of Association contracts.⁴

Additionally, the Board of Directors of Ecopetrol, headed by the Secretary of the Mining and Energy Department, was responsible for assigning the areas to be jointly explored and exploited and for deciding which areas would be reserved by Ecopetrol for its direct exploration and/or production. Likewise, the Board of Directors had the authority to decide the contents of contracts and their administration. Thus, not only did Ecopetrol have the authority to determine policy with regard to assignment of areas and contracting but the investor had to, additionally, go into partnership with Ecopetrol to carry out activities in Colombia.

However, the system in which the State was, with regard to hydrocarbons, both judge and party, began to show its weaknesses and resulted in decreased investment in the sector. This resulted in developing countries which had adopted this system beginning to compete against government takes.⁵ Well known Colombian authors have stated that: "In Colombia, where the situation is worsened due to internal conflict, recent statistics show a rapid decrease in the activity and the resulting reduction in production with the fear of loss of self-sufficiency".⁶

2.1. The Association Contract under the control of Ecopetrol

Ecopetrol was responsible for the exploration and production of hydrocarbons in Colombia and was able to carry out these activities either directly or through agreements with private individuals. Therefore, investors could acquire the right to explore and produce oil and gas through a contract which they had to subscribe with Ecopetrol. The most significant agreement implemented by Ecopetrol was the Association contract.

The Association contract was a contract of standard conditions to carry out activities of exploration and production of hydrocarbons which included an area defined in the Association contract. In it, a private company (either foreign or domestic) acted as "associate party" and was the operator of the contract.⁷ The basic principle of the Association contract was that risk was exclusively assigned to the associate party during the production phase and Ecopetrol would begin to share the risk only once the production phase had begun. Therefore, all exploration costs were assumed by the associate party, and later on, if the oilfield was declared to be a commercial one, would Ecopetrol reimburse a portion of such costs in accordance with the terms of the contract. "In these nearly thirty years of validity, ECOPETROL developed the so-called Association contract with significant success. In very general terms, the contract agreed that all exploration activities would be exclusively at the expense and risk of the private investor with ECOPETROL having the right to begin participating

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in the risks and costs of development in the production phase, upon acceptance of its commercial nature, with the association being generated, strictly speaking, at that time."⁸

The most relevant aspects of the Association contract were:

— Term of Duration: The term of the contract was 28 years, including an exploration period a six years and a production period of 22 years. There was the possibility to extend the contract after the expiration of the exploration period. However, in accordance with Decree 2288 of 2004, the Executive Committee of the Agencia Nacional de Hidrocarburos is the competent authority which decides with respect to the advisability of the extension, pending prior study of the technical and economic conditions submitted by Ecopetrol.

— Distribution of production: Ecopetrol had the right to receive a percentage of the production of hydrocarbons.

— Operator: The associate party.

— Sole Risk: If Ecopetrol were not to be in agreement about declaring the commercial nature of a specific area, the associate party could decide to continue by itself with the necessary activities for the exploitation of the area in question. All production expenses would be assumed by the associate party, whom would be entitled to reimbursement of 200% of the value of such expenses.

Likewise, if either of the parties had an interest in drilling an oil well which had not been approved by the Executive Committee, the interested party could drill the oil well under the same conditions which were previously explained.

— Settlement of Disputes: Any dispute with regard to matters of law in connection with the contract, which could not be amicably settled by the parties, would be subject to the jurisdiction of Colombian courts and judges.

On the...