Colombia: Update on the Oil and Gas Sector

Last Updated: 29 August 2001
Article by Helen M Panero
Colombia is expected to lose its self-sufficiency in oil within the next 3 to 5 years, depending on whose figures are being used. In the year 2001, oil production in Colombia is forecast to drop to 631,700 barrels per day, from an average of 687,100 in the year 2000, and a high of 815,300 in 1999. This will be the lowest production level in the last 6 years. Much of the decrease is due to the expected natural decline in production of the Cusiana field. Due to the drop in volume, less export earnings are expected: in the year 2000, export earnings reached 4.5 billion pesos, and this year will only reach 3.5 billion pesos.

Due to this situation of declining oil production, Ecopetrol, the state-owned oil company, is seeking short-term increases in production, as well as stimulating oil exploration in the country. Its goal is to reach a daily production of 1 million barrels by the year 2010. In an effort to interest more foreign investment in the oil sector, the association contract was made more attractive and the royalty law was reformed from a flat 20% of all production, to a varying percentage per field depending on the average daily production.

Based on Monthly Average of Daily Production

Less than or equal to 5 KBPD

5%

Greater than 5 KBPD and less than 125 KBPD

Straight line from 5-20%

Greater than 125 KBPD + less than 400 KBPD

20%

Greater than 400 KBPD + less than 600 KBPD

Straight line from 20-25%

Equal to or greater than 600 KBPD

25%

For royalty calculation of gaseous hydrocarbons, 5700 cubic feet of gas are equivalent to 1 barrel of oil.

(Chart taken from Ecopetrol web page)

Ecopetrol is also focusing on the heavy oil reserves in proven fields such as Castilla, where it is planning to develop 200 million barrels in the next 20 years, and Nare Norte, where it is planning to develop 22 million barrels of heavy crude through the drilling of 103 wells and an initial investment of US$59 million.

Colombia has 18 sedimentary basins with hydrocarbon potential, amounting to more than a million square kilometers, 81% on the continent, and 19% offshore. The majority of exploration activities has been carried out in 7 of the 18 sedimentary basins, which only represents 37% of the potential oil area of the country. Regions which according to Ecopetrol hold great potential are the Lower Magdalena Valley and the Guajira, specially for oil, gas and condensate, and the basins of the Middle and Upper Magdalena Valley, which are however characterized as areas of complicated public order.

The potential hydrocarbon reserves of the country are 37 billion barrels, of which 70% are oil, and 30% gas. Proven reserves of oil are on the order of 1.97 billion barrels, and probable reserves are 789 million barrels. With respect to natural gas, proven reserves are on the order of 7.19 trillion cubic feet, of which 4.539 trillion are commercially viable at this time.

Exploration and production of oil resources can be contracted with Ecopetrol-Empresa Colombiana de Petroleos, the state-owned oil company. All mineral and hydrocarbon reserves belong to the nation of Colombia, and Ecopetrol is the government entity charged with managing the hydrocarbon reserves. Interested companies can approach Ecopetrol directly with respect to specific areas or blocks. Another form of contracting is through public offerings of blocks: last year, Ecopetrol awarded 13 contracts in the Ronda 2000 offering. Of the 13 projects, 5 are for exploration, and 8 are for incremental production.

Due to the changes in the association contract model and the Ronda 2000 results, 32 contracts were awarded last year, the highest yearly number in the history of Ecopetrol. However, the high amount of contracts of 2000 made up for the single contract signed in 1999: in effect, many interested companies delayed signing contracts until the association model and the royalty changes were made official. This year, eleven new contracts have been signed, three of which were awarded in the Ronda 2000.

In the Colombian oil industry, the historical cost of finding oil is about US$1 per barrel. Development costs for building production infrastructure are in the range of US$1.10-2.50/barrel. Production costs for operation and maintenance are on the order of US$1.30-2.50 per barrel, and transportation costs (pipeline tariffs) are on the order of US$1.60-3.20 per barrel.

Ecopetrol is very accessible to interested parties in the oil industry. Information on available areas can be consulted at Ecopetrol in its Data Room. There is also a fair amount of information in English available on the company's website, www.ecopetrol.com.co.

Ecopetrol is looking outside the borders of the country to exploration and production possibilities in the rest of the world. It has made an agreement with Petrobras (the Brazilian national oil company) to seek investments together. Recently Ecopetrol signed a similar Strategic Alliance agreement with ENAP (the Chilean national oil company), to seek joint oil exploration activities as well as refining, petrochemical and marketing activities.

In conclusion, there are many opportunities in the oil and gas sector at this time, and foreign as well as Colombian investment in the sector is being encouraged by Ecopetrol.

This report was prepared and is copyrighted in 2001 by PARRA, RODRÍGUEZ & CAVELIER, a law firm with offices in Bogotá, Colombia. The general information herein contained does not constitute legal advice. Transcriptions and quotes are permitted citing the source.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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