Historically, all oil production was undertaken by Ecopetrol in contracts of association with foreign companies. Association Contracts, which governed oil and gas, provided for the potential participation in production by Ecopetrol.
Ecopetrol is the majority state-owned company responsible for the exploration, extraction, production, transportation and marketing of oil for export.
In 2004, the Colombian government updated its hydrocarbons administration by establishing a new agency, the Agencia Nacional de Hidrocarbos (the “ANH”) and by allowing a new form of royalty-based concession contract that eliminated the potential for production participation of the Colombian government. The ANH has the responsibility of regulating the Colombian oil industry, requiring Ecopetrol to compete directly with foreign and domestic companies. Ecopetrol was formerly a wholly-owned state oil company and became a publicly-held company in 2004.
ANH Exploration & Production Contracts
An E&P Contract is the principal contract used by the ANH to grant exploration and production rights. Under the terms of an E&P Contract, an exploration and production company retains the exclusive:
(i) rights from the ANH to explore and produce conventional hydrocarbons;
(ii) rights to the income from any new exploration block, subject to royalties to be paid to the ANH; and
(iii) contractual rights for the use of subsoil. E&P Contracts also include a provision for a high price share if a cumulative production of 5 million bbls is reached on a particular field or block. Under a specific contract area, an E&P Contract is a long term contract divided into the following stages: Exploration Period, Evaluation Period and Production Period as described below.
Exploration Period
This stage has a six-year term divided into several (typically one year) exploration phases. Each phase may be extended for two additional months if the contracting party complies with the conditions contained in the E&P Contract to obtain such extensions.
At the start of each exploration phase, a bank guarantee for a percentage of the value of the work program will be established. This amount may vary in the special bid rounds according to its terms of reference. During this period, the exploration and production company has to carry out a minimum exploration program to determine if a commercial prospect exists. During the first phase, this commitment typically involves completing a new seismic program and/or the drilling of an exploratory well.
At any time during the exploration period, the contracting party may relinquish part of the contracted area by demonstrating that, despite the relinquishment, it will be able to comply with its obligations under the E&P Contract for the remaining part of the contracted area. If there is a discovery, a written declaration to such effect must be submitted to the ANH by the contracting party.
Evaluation Period
This stage is designed to allow the contracting party to determine the commercial viability of a discovery by conducting an evaluation program for a maximum of two years, depending on the activities to be performed. This period may be extended for an additional year subject to the conditions established in the E&P Contract and for two additional years if the evaluation plan relates to heavy oil or gas. Once the evaluation program is completed, the contracting party must submit written notice to the ANH of its unconditional decision to commercially exploit the discovery or not.
According to an E&P Contract, if an exploration and production company considers that the evaluated area has no commercial potential it must relinquish such area to the ANH.
Production Period
The production period has a duration of twenty-four years per productive field and can be extended until the end of the economic life of the field subject to certain requirements established in the E&P Contract, including:
(i) continuous production in the field during the preceding four years;
(ii) demonstration by the contracting party that during the previous four years it has drilled one exploratory well each calendar year; and
(iii) payment of 5% to 10% of the value of the remaining reserves to the ANH, depending on whether such payments relate to oil (10%), gas (5%) or heavy oil (5%).
Royalties
Historically, for new field production commencing prior to 25 July 2002, a flat 20 percent royalty applied. For new field production commencing after 25 July 2002, royalties are calculated on a per field basis using a sliding scale that ranges from 8 percent (for production up to 5,000 bbl/d) up to a maximum of 25 percent (for production above 600,000 bbl/d), illustrated as follows:
| Field Production (bbls/d) |
Royalty Rate* |
| 0 – 5,000 |
8% |
| 5,001 – 125,000 |
8% – 20% |
| 125,001 – 400,000 |
20% |
| 400,001 – 600,000 plus |
20% – 25% |
* For new discoveries of heavy oil, classified as those with an API equal to or less than 15°, the royalties are 75% of the royalty rates for light and medium oils as presented above.
High Price Participation
Prior to 2008, E&P Contracts included a high price sharing formula (the “Original HPS Formula”) which fixed the government’s participation percentage at 30%. In 2008, the formula was amended so that the government’s participation percentage increases as oil prices increase (the “Amended HPS Formula”). The Amended HPS Formula only applies to E&P Contracts signed in 2008 or later.
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