Colombia today is one of the most promising exploration and production (E&P) investment markets in the world. As the fourth-largest crude oil producer in Latin America after Venezuela, Brazil and Mexico, Colombia accounted for two billion barrels of proven crude oil reserves in 2012, equivalent to almost seven years of output.
Colombia’s oil production has increased since 2008 due to increasing exploration and development. In 2011, 34 different operators were conducting oil exploration in Colombia. The exploration area within the country rose to more than 100 million hectares in 2011, compared with just 12.5 million hectares in 2003.
To promote additional crude oil exploration, the Colombian government held an auction of oil exploration rights – the Open Round Colombia 2012 – launched by the Colombian National Agency of Hydrocarbonates last February.
In this Round 2012, 115 oil blocks were offered of which 31 included unconventional oil and gas material such as shale, tight-gas and coal bed methane. Exxon Mobil Corp., Royal Dutch Shell PLC and Texas-based Anadarko Petroleum Corp. were among the winners. During the auction, the winners were assigned 49 of the 115 conventional oil blocks offered and five of the 31 unconventional blocks.
The real catalyst for Colombia’s oil boom has been the oil and gas reforms within the institutions that control the industry, the contract terms available to oil and gas companies, and the financial rewards. Specifically, Colombia´s new oil and gas legal framework allows foreign investors to own 100 per cent of participations in oil projects. In years past, oil contracts in Colombia required an equal partnership with Ecopetrol, Colombia’s national oil company.
Today, Ecopetrol is no longer in control of exploration and production of hydrocarbons, enabling foreign investors to own 100 per cent of the contract. As a result, Ecopetrol now operates more like a traditional oil and gas operator in competition with private companies.
Additionally, foreign investors have the same rights and benefits as any national investor, resulting in more exploration licenses being granted. The government has also established a lower sliding-scale royalty rate on oil projects. Royalties were cut from a flat 20 percent to a sliding scale of 8 to 25 percent, depending on production levels. Overall, the state’s share of revenue through royalties and taxes has been reduced to 50 percent from a previous 70 percent. Royalties now go to the central government.
The oil and gas E&P industry in Colombia also benefits from a special currency regulation, allowing oil and gas companies to make and receive payments in foreign currency between themselves within the country.
The only requirement is that the foreign currency proceeds from Colombia’s resources be obtained from those in-country operations. In addition, they have no obligation to reimburse to the exchange market the foreign currency from their sales in foreign currency.
During the last 10 years, under the leadership of President Alvaro Uribe, the Colombian armed forces have increased the political stability, safety and economic growth in most urban areas of the country. Now, under President Juan Manuel Santos, the Colombian government has gone a step further and began peace negotiations with the Fuerzas Revolucionarias de Colombia (“FARC”) in October 2012. Most Colombians support these negotiations, which are well underway at this time.
Undoubtedly, the peace process will increase the economic hopes for the oil industry, which has been a traditional target of FARC, and result in additional E&P opportunities in the future.