Industry: Colombias new E&P terms 'inadequate'

Colombia has proposed changes to its policies on oil and gas investment.

Government energy officials and state owned petroleum company Empresa Colombiana de Petroleos (Ecopetrol) claim the changes are designed to attract more foreign investment to the countrys oil and gas sector. However, international companies working in Colombia criticized the proposed changes as inadequate.

Colombias oil and gas investment policies have come under fire from international companies in recent years. The chief complaints are a high government take that crimps profits and discourages investment and a preferential role for Ecopetrol in upstream agreements.

Policy changes

Local media reported Colombian Minister of Mines & Energy Rodrigo Villamizar Alvargonzalez said the policy changes were intended to broaden participation by foreign investors in Colombian exploration and production.

The changes were designed to give Ecopetrol more flexibility to offer more attractive terms to private companies, he said.

At the same time, Ecopetrols role in up front E&P investment will be reduced.

A key reform is that foreign companies and private domestic companies will be allowed to explore all areas previously reserved exclusively for Ecopetrol.

In particular, the government will offer other oil and gas companies the opportunity to participate in joint venture (JV), shared risk E&P projects with Ecopetrol in the Piedemonte Llanero region. Thats where a British Petroleum Co. plc group is developing the supergiant Cusiana-Cupiagua oil and gas complex amid heightened interest by explorationists.

Under the shared risk program, foreign and private domestic companies would put up 50% of exploration costs, and JV participants would be chosen based on the biggest share offered Ecopetrol during the production phase.

Under current policy, Ecopetrol automatically receives a fixed 50% stake after a field has been declared commercial. That also compels Ecopetrol to put up 50% of costs related to development drilling and production facilities. Now, Ecopetrols share of costs could be reduced to as little as 25%.

In another key policy change, Ecopetrol will be allowed to renegotiate expiring association contracts to allow a partners continued participation. An association contract partner will be required to begin negotiating an extension to the typical 28 year contract at least 5 years before it is scheduled to expire. In some instances, the new rules would allow Ecopetrol to assume operatorship of the association contract.

While Ecopetrols share of up front costs drops to as little as 25%, its take from production could range from 25% for marginal projects to 50% or more, local newspapers reported.

Another change calls for increased foreign participation in marginal oil fields. That generally covers fields that produce less than 2,000 b/d or have reserves of less than 10 million bbl. Such fields account for 90% of all Colombian oil fields.

Ecopetrol will sell its current 50% stake in marginal fields to companies that offer the highest level of participation in later production revenues to the state company. This presumably would encourage smaller companies to invest in Colombian E&P while raising more funds for Ecopetrol.

Separately, there is an effort under way in Colombias congress to phase out the countrys $1.10/bbl war tax on crude production by 2000. This measure was implemented to help defray the governments costs for providing security for oil and gas operations in areas plagued by guerrilla activity. For years, guerrillas have attacked industry operations in Colombia, bombing the countrys main crude oil export pipeline dozens of times each year.

International firms respond

Officials of the Colombian Petroleum Association (ACP) criticized the proposed policy changes as inadequate, doing little to improve prospects for private companies return on investment.

Although the changes offer private companies more options for investment in Colombian oil and gas E&P, they dont necessarily provide more incentives to do so, ACP said.

There is not a single important incentive to reactivate exploration and attract risk capital, the association said. It contends the changes are intended mainly to benefit Ecopetrol by making it easier for the state company to finance its projects.

ACP Pres. Alejandro Martinez Villegas told OPEC News Agency (Opecna) the changes are not enough to make the country attractive to investors.

Companies will not invest more just because the government allows them to do so, he told Opecna. The issue would be to offer them better conditions, as is being done around the world.

Martinez contends the only genuine beneficiary of the changes is Ecopetrol, which he contends is scrambling for capital in an overly anxious manner. Ecopetrol faces huge outlays for its share of Cusiana/Cupiagua development costs and a much needed expansion of the countrys refining capacity.

Martinez blasted the governments lack of incentives to bolster private oil and gas investors returns.

With proposed policy changes falling short of that goal, he said, they only confirm previous ACP studies of Colombias sustained loss of competitiveness in the international arena.

Martinez also told Opecna he expects a continuation of reduced levels of E&P seen in recent years. Despite earlier efforts to offer incentives to foreign E&P investors, Colombias first competitive international petroleum licensing round, begun in 1994, proved a disappointment (OGJ, May 30, 1994, p. 32). Bidders at the time balked, citing lack of fiscal incentives.

As for the shared risk JVs, Martinez said ACP companies interest would depend on geological attractiveness and terms of each tender.

Besides, this particular mechanism has often been used by oil companies precisely to share the high risks involved in exploration, Martinez told Opecna. We saw no innovation there.

He also criticized the marginal fields initiative. Martinez contends this measure would benefit only Ecopetrol because its partners would be required to make all future outlays while still reserving a share of revenues for Ecopetrol.

In addition, Martinez voiced concern that repeal of the war tax might lead to congress approving an even costlier tax package aimed at the petroleum industry. Copyright 1995 Oil & Gas Journal. All Rights Reserved.