COLOMBIA: EXPLORATION AND PRODUCTION CONTRACTS IN COLOMBIA: 2003 - 2013
| Jurisdiction | Derecho Internacional |
(Apr 2013)
COLOMBIA: EXPLORATION AND PRODUCTION CONTRACTS IN COLOMBIA: 2003 - 2013
Associate, Norton Rose
Bogotá
MARIANA SÁNCHEZ is a Senior Associate at the firm of Norton Rose in Bogotá. She obtained her law degree from Universidad Colegio Mayor de Nuestra Señora del Rosario in 1999 and a specialization degree in Business Law from Universidad de los Andes in 2002. Mariana has 15 years' experience in the mining and energy sectors. Prior to joining Norton Rose Group in 2012 as a senior associate, between the years 2004 and 2011 she had a distinguished career at three well-respected Colombian law firms: from 2004 to 2007 as partner in charge of the oil, gas and mining business of a boutique firm; from 2007 to 2011 as head of the mining and petroleum practice of a specialist law firm in the energy sector; and between 2011 and 2012 as senior associate in charge of the mining and petroleum practices of another well-known local firm. Between 1997 and 2004 she was legal director in charge of all legal activities of a Colombian oil and gas services company. Mariana has managed legal and commercial matters for foreign and Colombian oil and mining companies, both operators and service providers. She has advised foreign companies on their entry into the Colombian market, particularly in regulatory issues and investment planning and contract negotiations. At Norton Rose she supports the M&A and finance practices in oil and mining projects, asset and equity acquisitions, both on and offshore. She has taught at the Universidad Javeniana (teacher of the module Structure and Regulation of the Hydrocarbons Industry in Colombia, Bogotá, March 2012); Universidad de los Andes, International Business Management for the Oil and Gas Sector IESA, teacher of the module Structure and Regulation of the Hydrocarbons Industry in Colombia, Bogotá, years 2007, 2008, 2009 and 2010; and Universidad de los Andes, Co-creator and professor of the course Structuring Oil Projects for Non-Oil Companies, Bogota, August 2006 to November 2006. Her publications include The Capitalization of ECOPETROL - The Journey is Just About to Begin, Portafolio, November 16, 2006; Oil Industry Trends, Business Opportunities, Portafolio, December 15, 2005; and Oil Contract Models, The Challenge of Attracting Investment, International Oil Magazine, October / November 2004. Mariana has been recognized in Energy and Natural Resources by Chambers & Partners Latin America: Associate to Watch, 2010, 2011 and 2012. She is a Member of the Board of Directors of the School of Mines and Petroleum Lawyers.
I. Introduction
There have been substantial changes in the petroleum industry in Colombia over the last ten (10) years. The 2003 policy which allowed "smaller investors" to enter into the upstream business in Colombia has not only generated a considerable amount of activity in the country and in the production of hydrocarbons but has also led the NATIONAL HYDROCARBONS AGENCY (Agenda Nacional de Hidrocarburos - "ANH") to take certain measures based on (i) the different experiences it has had with small- and medium-sized operators, in certain cases inexperienced, and (ii) the considerable success it has had with the measures taken since 2003.
The results of the 2012 Round (Ronda) have been the least promising when compared to previous bidding rounds that were much more accessible and attractive to smaller and mid-size players interested in investing in Colombia. Even though 115 blocks were opened to bidding in the 2012 Round, only 49 received offers from a combination of 37 national and international oil and gas companies. 72 offers were made for so-called Type 1 areas, 18 for Type 2 areas and 15 for Type 3 Areas. 3 companies showed interest in 5 areas offered for 'unconventional' hydrocarbons, while 6 offshore areas caught the attention of 7 major players.
The above results are due to several factors, among them the increase in the minimum participation requirements which raised the minimum standards in terms of financial and operational conditions, as well as the apparent uncertainty regarding the regulations and conditions that would govern the exploration and exploitation of unconventionals. Even though unconventional hydrocarbons do exist as a resource in Colombia, they are considered a new item in the local market which does not have the regulations and conditions that can be found in other parts of the world.
The purpose of this document is to analyze the contractual changes that I consider to be most relevant carried out by the ANH in its capacity as administrator of the sector, which I will summarize as follows:
• Changes in the ANH's participation in the results of the production;
• Sanctions of the contract;
• Social obligations and
• Increase in restrictions against assignment and changes of control of the concessionaire.
A. History
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It was not until 2003 that Colombia decided that it was necessary to modify the current administration of hydrocarbons in the country. Not only was Empresa Colombiana de Petroleos (hereinafter "Ecopetrol"), the State-owned commercial and industrial oil and gas company, dedicated to the exploration and exploitation of hydrocarbons and related activities, but it also had administrative responsibilities, including the complete and integral administration of the natural resources, the contracting of all activities related to the exploration and exploitation of reserves and the general supply of the country's demand.
Prior to 2003, Ecopetrol was in charge of the exploration and exploitation of hydrocarbons in Colombia and had the power and autonomy to define the terms and conditions of the contracts to be entered into with third parties, as well as the awarding procedures that would be followed to grant companies rights over the hydrocarbons areas. For this purpose, Ecopetrol could enter into association agreements, operating agreements and service contracts, the first of which brought a significant amount of foreign investment and which were based on the legal figure of a joint venture. In these contracts, the contractor assumed all the risks and costs during the exploration phase and then jointly shared the risks with Ecopetrol during the exploitation period. As can be imagined, the investment under this regime came from large companies with the experience and capacity needed for Ecopetrol to freely contract and jointly work with them in the exploration of hydrocarbons in the country.
B. Decree 1760 of 2003 - Creation of the ANH
Law 790 of December 2002 granted the President certain faculties to reassign the functions and powers of the public administration. Consequently, the President issued Decree 1760 of 2003 (the "Decree") which gave birth to the ANH, conceived as the governmental agency that would now act as the general administrator of hydrocarbons in the country and therefore left Ecopetrol as an oil and gas exploration and production company. The ANH as administrator, was now in charge of awarding the exploration and exploitation areas, designing, promoting and executing the new hydrocarbons contracts and managing royalties and the state-take.
The internal administration of the ANH would be carried out by its President, appointed by the President of the Republic, and by its Board of Directors, consisting of seven (7) members, including the: (i) Minister of Mines; (ii) Minister of the Treasury; (iii) Director of the National Planning Department; (iv) Director of the Colombian Geological Service; (v) Director of the Mining and Energy Planning Unit; and (vi) two representatives of the President of the Republic of Colombia. The functions of the ANH were also defined in the Decree, which included among many others: (i) defining the criteria needed for the administration and assignment of the hydrocarbons areas for their exploration and administration; and (ii) the approval of the contacting policies of the ANH, including the drafting of the exploration and exploitation contracts and establishing the rules and criteria for administering such contracts.
II. Current Contracting Regulations
A. Exploration and Production Agreement ("E&P")
By virtue of the provisions set forth in the Decree (as amended later by Decree 4137 of 2011), the ANH drafted the document that would become the main hydrocarbons contracting instrument in Colombia, the E&P Contract.
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An E&P contract grants the contractor the exclusive right to explore and produce hydrocarbons in a determined area and entirely assume the risks involved in the hydrocarbons activities. The contractor have the production rights in exchange for the right given to carry out the hydrocarbons project, but had to comply with (i) an agreed exploration program and (ii) payment of royalties and other economic rights in favor of the State which are further explained below.
The E&P contract has a duration of 30 years, 6 of which are dedicated to the exploration phase and 24 of which are for the production period. Prior to the initiation of the exploration period, the contractor must confirm the presence/absence of indigenous communities and ethnic minorities within the area of the E&P Contract to the ANH. If there are ethnic communities within the contractual area, the contractor has one year to confirm if these communities are affected by the project and if that is the case, it must conduct a previous consultation process. This procedure is a prerequisite for obtaining the mandatory environmental license.
B. Acuerdo 008 - Contracting with the ANH
Once the E&P model was drafted in 2003, the ANH immediately started contracting without taking the necessary precautions. At that point, the ANH did not require that the contractor demonstrate its technical, financial or legal capacity, allowing inexperienced companies and...
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