Colombia steps forward with new O&G rules

Aug. 14, 2017
However, opposition to the extractive industries is growing in much of Latin America

However, opposition to the extractive industries is growing in much of Latin America


OVER THE LAST YEAR, downward trending oil prices as well as increased government take structures, environmental regulations, and complex forms of social license to operate have impacted the potential of Latin American countries to increase their exploration and production capabilities in oil and gas. Governments in countries such as Mexico, Colombia, and Peru have made steady efforts to strengthen their position to attract oil and gas operators that can undertake not only technical evaluations and assessments of the oil and gas potential, but also advance the energy needs of these countries.

Opposition to the extractive industries is growing in much of Latin America. Governments, in many instances, fail to communicate clearly and directly as to the importance that this sector has for many of these countries. While it is clear that dependency on oil and gas is not the objective and alternative sources of income are essential to development, it is no less true that failure to promote sustainable development of the oil and gas industry runs counter to the best interest of many in Latin America. Failure of governments to responsibly address urgent needs of citizens in basic public services, health, education, peace, security and capacity building of democracies shall eventually result in liability for leaders omitting their constitutional duties to such constituents to the extent the oil and gas industry has been an important source of revenues and royalties.

Bogotá, Colombia's capital and largest city © Andrey Shchekalev | Dreamstime

In the above context, and although timing and needs should have favored a swifter and sooner modification, the Colombian National Hydrocarbon Agency (ANH) recently published its new regulations for the award of oil and gas blocks or areas, as well as criteria for entering into exploration and production contracts for hydrocarbons. The month of May so-called Acuerdo No. 2 of 2017 of the ANH - the "Acuerdo" was a much waited advance for Colombia. The Acuerdo repeals prior regulation Acuerdo No. 4 of 2012 and its modifications. The Acuerdo develops upon the need to reflect new market conditions and what the government of Colombia views as a strategic hydrocarbons sector, the competitive context of producing countries, the evolution of the social and environmental context, and the need to increase the investment of qualified companies for the optimal and sustainable use of reserves and applicable resources. Note should also be made that Colombia had issued prior to the Acuerdo President Juan Manuel Santos' National Development Plan or Law 1753 of 2015, which clearly sets forth that the ANH has the powers to adopt general rules applicable to exploration and production contracts in an effort to mitigate negative economic effects with respect to public finances.

The Acuerdo includes various positive advances for the oil and gas industry, although investors were clearly expecting much more. Colombia's production has steadily been declining and the need to identify new reserves is essential. The offshore potential is urgent for the country, but any offshore development takes time and involves significant investments. Unconventional resources can help mitigate the downfall in production, but government will also have to support and explain to communities the use of exploration and production techniques that trigger concerns.

Highlights of the Acuerdo include new selection processes for award of blocks or areas for technical evaluation, new terms and conditions for exploration and production of hydrocarbons, important contracting principles seeking to ensure that the rule of law is respected and contractors are offered due process vis-à-vis government, classification and definition of areas for contracting, and creation of a system of interested parties that can be qualified at any time to enter into these contractual arrangements. Traditional parent company guarantees, required in many countries, now include specific indication that the government has the duty to attempt recovery of damages or losses directly with the local entity before activating claims against the guarantor abroad. Capacity requirements allow for a broader range of participants into Colombia.

Legal capacity, economic or financial capacity, technical and operational capacity, environmental capacity and social capacities are adjusted to better reflect market conditions and the particular concern that many interested investors had expressed as to being able to enter the local contract market by using the capacities of their affiliates or in lieu thereof having financial capacity that could at least partially offset their lack of operational and technical prior experience. Joint ventures, temporary unions and, in general, non-incorporated forms of entry allow for sharing of risk and benefits. Exceptions for major oil and gas players for certain thresholds are also accepted and certain guarantees limited to the realities of the international competitive scenario.

As to operational conditions, while the rules could have been clearer, ANH made an important effort to recognize and avoid "locking in" work programs to specific currency amounts. In the past, investors where stuck to the dollar amount of their work programs and commitments, regardless varying international prices in services and equipment and despite any efficiencies that operators could attain. With the new Acuerdo, a points work system is set in place in an effort to allow both for swapping of obligations and avoiding the dollar amount differentials.

Operator and non-operator rights are clearly limited and non-operator conditions for participation are less stringent. Exploration and production contract timelines, conditions and duties are much more clearly set forth. Particular differences are made with respect to on-shore and off-shore interests, as well as with respect to the nature of plays (conventional and unconventional). As a result thereof and on such basis, economic rights of the state are clarified and improved, albeit limitedly. Simultaneously, measure to address the fall in international oil prices and their effect on oil income are addressed. This latter strategic approach includes, as had been the case in prior modifications to Acuerdo No. 4 of 2012, extensions to contract terms, transfers of duties to other blocks and adjustments to guarantees.

Despite all its benefits, apprehensions are still evident. This is particularly so in penalties structure, insurance policies requirements, excessive guarantee demands, and the inclusion of so-called clauses applicable to administrative contracts under the traditional state protection and nationalistic approach, which together limit a more forward-looking view to sustainable development. Similarly, concerns continue with respect to abandonment conditions or reversion of assets to the state.

While the Acuerdo could have undoubtedly been much more aggressive in promoting the oil and gas industry for Colombia, it is clearly a step forward in this sector in Latin America. Colombia can now boast to have one of the better legislations in this front. Hopefully the delays in issuing this more advanced rule of law and some of the more unfortunate attempts to restrict more than to promote will be offset by the benefits it introduces. It is now up to the Colombian government to actively speak out on the benefits and interest in the industry and ensure that rules are respected, de facto changes avoided and the message that Colombia wants a strong oil and gas industry clearly stated by government officials and representatives.

The window has been closing and the rules of the Acuerdo may help maintain them open for the benefit of a country in dire need of income for its peace programs and its sustainable development. The bet that Colombia's ANH has made is noteworthy and should be accompanied by stronger efforts to evidence that the rule of law is absolutely respected. Courts and government have a critical role on this latter front. As to the Acuerdo, there is no doubt then that other countries in Latin America should follow suit.


José Zapata is a partner in Holland & Knight's Bogotá office with more than 20 years' experience in the natural resources sector. He focuses his practice on corporate and commercial matters with an emphasis in environmental, energy and natural resources regulatory and contractual issues, as well as in corporate compliance and liability cases, including FCPA. Zapata primarily represents electric, oil, gas, mining, agrochemical, and industrial companies. He has represented clients in many of the largest transactions undertaken in Colombia relating to mining and oil and gas, in addition to assisting in obtaining mining and oil and gas concessions. He regularly advises clients in the structuring of foreign investment transactions, corporate reorganizations, and mergers and acquisitions, as well as matters of environmental liability and judicial proceedings such as class-action lawsuits.