OIL AND GAS LAW UPDATE: COLOMBIA

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development, and Investment
(Apr 2011)
CHAPTER 24E
OIL AND GAS LAW UPDATE: COLOMBIA
Luis Gabriel Perez
Brigard Urrutia Abogados
Bogota, Colombia

LUIS GABRIEL PÉREZ is a Partner with Brigard & Urrutia Abogados in Bogota, Colombia. He has significant experience in natural resources and environmental matters, corporate law, commercial law, real estate, mergers and acquisitions, private equity funds and immigration. Mr. Perez's practice has been concentrated in providing advice in the aforementioned fields to domestic and foreign companies. He obtained his law degree from Universidad Javeriana Law School in Bogotá and his Master in Comparative Jurisprudence from New York University School of Law. He was an attorney with Paul Weiss, Rifkind, Wharton & Garrison in New York from 1997 - 1998. He is a member of the Institute for Energy Law of the Center of American and International Law, the AIPN, and is a member of the Board of Directors of the Colegio de Abogados de Minas y Petróleo

PERSPECTIVES OF THE HYDROCARBON INDUSTRY IN COLOMBIA 2011

BRIGARD & URRUTIA

Table of Contents

I. Legal aspects

II. Colombian hydrocarbon potential

III. Open Round Colombia 2010

IV. Why to invest in Colombia

I. Legal aspects

Historical Background of the Exploration and Exploitation of Hydrocarbons in Colombia.

Title over the subsoil:

• As of the enactment of the Federal Fiscal Code of 1873 the State's ownership over the subsoil and the natural non-renewable resources has been recognized.

• Private property over the subsoil and the non-renewable resources may only be demonstrated, if the private party meets all of the following conditions: (i) title over the subsoil granted before the issuance of the Federal Fiscal Code of 1873., (ii) ruling issued by the the Supreme Court of Justice, before 1969, representing the title of the private party over a specific portion of the subsoil., (iii) registry of the ruling issued by the Supreme Court of Justice before the Ministry of Mines and Energy., (iii) hydrocarbon discovery before December 22, 1969 as a consequence of drilling activities carried out in the specific area.

Development of the hydrocarbon industry in Colombia:

• By the beginning of the twentieth century exploration and exploitation activities were carried out by private parties through concession agreements executed with the State.

• On 1951 Ecopetrol, Colombia's NOC, was incorporated.

• Decree 2310 of 1974 granted Ecopetrol the administration of all the hydrocarbon resources, as well as the exclusive right to carry out exploration and production activities over said resources.

• Exploration and production activities were conducted by Ecopetrol through the execution of association agreements with private parties, as well as sole risk contracts and incremental production agreements.

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Association agreements:

• Pursuant to the provisions of the association agreements, exploration activities are jointly developed between Ecopetrol and the contractor, however all the expenses are charged to the contractor.

• After the Declaration of the Commerciality of the field, the development and production expenses are distributed between both parties in accordance with the terms of the association agreement.

• Each association agreement sets forth the specific percentage of participation over the net production between Ecopetrol and the contactor.

• The term of the association agreements ranges between 20 and 30 years.

• The termination of the association agreements triggers the reversion of all the assets and equipment directly related with the production activities to Ecopetrol.

New hydrocarbon regime:

• Upon the issuance of Decree 1760 of 2003, the Agencia Nacional de Hidrocarburos (ANH) was created as a special administrative unit depending of the Ministry of Mines and Energy assuming the administration of the hydrocarbons resources. Thus, the ANH is currently the governmental authority entitled to administer the hydrocarbons by recognizing exploration and production rights by means of E&P agreements (E&P) and Technical Evaluation Agreements (TEA) executed with private entities.

• On the other hand, Ecopetrol is currently a public corporation in which the State is the major shareholder and is carrying out E&P activities under conditions equal to those of other private companies. However, all agreements executed by Ecopetrol before the issuance of Decree 1760 are still in force. Moreover, at the moment of such issuance, Ecopetrol identified certain areas and held the right to operate them without entering into E&P agreements with the ANH. These areas are known as Direct Operation Areas (Areas de Operación Directa).

Main characteristics of the E&P's:

• Legal Nature: The E&P is a special contract, with its own regulation which is established by the ANH. The Directive Council of the ANH dictates the terms and conditions of the agreement. This Council is formed by the Director of the ANH, the Ministry of Finance, the Ministry of Mines and Energy, the Director of National Planning and two representatives appointed directly by the President of the Republic.

• Purpose: The purpose of the E&P is to give to the contractor the exclusive right to undertake exploration and exploitation activities in a specific area.

• Performance of the agreement: The contractor is sole responsible for directing the operations. It assumes the risks and costs of the activities. The terms and conditions of the agreement give the contractor great flexibility in aspects such as subcontracting and designing of the budget, among others. Nevertheless, the ANH is entitled to follow up the activities and operations carried out by the contractor. The autonomy of the contractor is limited by the good oil practices.

• Liability: The contractor is solely liable for any damages that may arise from the operations and activities under the contract including those caused by subcontractors. ANH assumes no direct, joint and several liabilities. Consequently, the contractor is obliged to obtain all the required licenses, permits and authorizations, and assumes the risks and costs associated to them.

• Phases: The contractor undertakes the activities in different phases:

✓ Exploration Phase: The exploration phase is divided into several segments. During this phase, the contractor performs studies to determine the existence and location of hydrocarbons in the subsurface (e.g. geophysical, geological, and cartographic, among others). The contractor must prepare a work program indicating its obligations. The program may be modified for each segment depending on the results of the preceding segment. This phase may last for as long as 6 years and might be extended by the ANH, under certain special circumstances, for up to 4 more years.

✓ Evaluation Phase: During this phase, the contractor performs all the operations and activities in order to evaluate the discovery and determine whether the well is commercial or not. Also, the contractor points out the area of the reservoirs and determines the viability of extracting the hydrocarbons and the social, environmental and economical impact of the production. All these aspects must be included in the work program that the contractor must submit to the ANH. This phase may last up to 2 years. Under certain circumstances ANH may extend such period for up to 2 more years.

Once the results of the evaluation program have been approved by the ANH, the contractor may declare the commerciality of the contracted area, and, therefore, begin the production phase.

✓ Production Phase: During this phase, the contractor undertakes the activities of drilling completion and equipping development well, the design, construction, installation and maintenance of equipment, pipe, transfer lines, transport systems, among others. As in the other periods, the contractor must submit to the ANH a work plan including the calculation of hydrocarbons reserves, a program for abandonment, the production work programs for the calendar year, and the transportations of hydrocarbons, among other aspects. The contractor must notify the ANH any material changes to the plan. This phase lasts up to 24 years and may be extended by additional terms of 10 years each until the economic limit of the field.

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• Insurance and Guarantees: Both the contractors and the subcontractors must take all the insurance required by Colombian law. In addition, the contractor must take a labor claim insurance policy guaranteeing the payment of salaries, benefits, and indemnities and other labor obligations.

Additionally, pursuant to E&P agreement, contractor shall establish, at its own cost, one or more stand by letters of credit which shall be unconditional, irrevocable and payable at sight, issued by a bank or financial institution legally established in Colombia. The amount of such stand by letter will be ten percent (10%) of the amount of the budget of the phase of the minimum exploratory program or subsequent exploration program expressed in US Dollars and payable in Colombian Pesos.

• Surveillance of the contracted areas: The ANH is entitled to visit the contracted areas in order to follow up and examine the activities performed by the contractor and the subcontractors.

• Environmental aspects: The contractor must apply for licenses, authorizations or permits prior to the performance of the exploration, production, transportation, distribution and storage of oil. The procedure to obtain the environmental licenses, authorizations and permits is regulated by the Ministry of Environment. The contractor may not commence activities without approval of...