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The Bicentenario,one of Colombia's most important pipelines, was paralyzed after an attack by leftist rebels last week. (Photo: Bicentenario)
Wednesday, July 16, 2014
Perspectives

Colombia Oil: Attractive Terms, Security Concern


Colombia’s security environment remains a concern for business, especially in the energy sector.

LATINVEX SPECIAL
Control Risks

Colombia is poised to remain one of the most attractive destinations for oil and gas investments in South America. Following a series of reforms progressively enacted since the early 2000s, the oil and gas sector has attracted significant investments from players of all sizes, boosting production and growing reserves.

In the context of policy continuity following June’s presidential elections, as well as the prospect of peace agreements with the Revolutionary Armed Forces of Colombia (FARC) and National Liberation Army (ELN) guerrilla groups, the upcoming oil bidding round Ronda Colombia 2014 cements the country’s appeal as an oil investment destination. However, new operational hurdles have emerged and Colombia’s security environment remains a concern for business operations, especially in the energy sector.

MORE THAN 100 BLOCKS

The Ronda Colombia 2014 will auction a total of 101 blocks of conventional and unconventional oil, totaling approximately 22m hectares in 15 of Colombia’s 32 departments. The July 23 auction includes both onshore and offshore opportunities in eight of the 23 sedimentary basins in Colombia.

The National Hydrocarbons Agency (ANH) has classified the offered blocks into three categories. Type-one areas offer onshore and offshore exploration, and production opportunities in mature sedimentary areas with conventional resources where deposits have already been discovered. Type-two areas offer exploration and production contracts in non-conventional continental blocks in emerging basins, as well as areas with coal-bed methane potential. Type-three areas offer technical exploration agreements in frontier basins with conventional onshore and offshore blocks. Type-three blocks are located in the departments of Caquetá, Casanare, Choco, Nariño and Putumayo.

Similar to the bidding round in 2012, the contract terms for the 2014 round are attractive. However, this year the government has added new incentives for exploration and production of offshore and non-conventional blocks. For off-shore blocks, the threshold above which royalties are paid will be increased from the current $45 to $82 per barrel for deep-water. For ultra-deep-water, the threshold will be $100. Off-shore blocks will have a nine-year exploration program, with 30 years of production under exploration and production contracts. The same exploration program and production years will apply to non-conventional awarded blocks. The government expects this year’s bidding round to yield similar results to the Ronda Colombia 2012, when 43 percent of the 115 offered blocks were awarded to 37 companies.

The government aims to attract the needed investment to boost reserves with the added incentives for off-shore blocks. Shifting Ecopetrol’s responsibilities from regulator and producer to producer only in the early 2000s, alongside creating the independent regulator National Hydrocarbons Agency (ANH) in 2003, and revising Colombia’s fiscal take and implementing a sliding scale royalty framework all helped to increase FDI in the oil and gas sector. As a result, FDI grew from 16 percent in 2003 to 34 percent in 2013.However, despite this progress, reserves have not grown on par with demand. While the ANH estimates that reserves have increased 75 percent since 2007, current reserves will only last 6.4 years at current levels of production.

OLD AND NEW THREATS

Despite Colombia’s overall attractiveness as an investment destination, investors bidding for the Ronda Colombia 2014 blocks are likely to face a series of old and new operational hurdles.

While Colombia’s internal armed conflict has reduced in intensity over the past decade, and the likelihood of large scale terrorist attacks and kidnappings have decreased, there has been an uptick in attacks on oil infrastructure. For example, 104 attacks were reported in 2005, the year with the highest number of recorded attacks between 2005 and 2009. In 2013, there were 259 attacks, a 71 percent year-on-year increase and more than double the number recorded in 2005. Pipeline attacks are concentrated in ten municipalities, mainly in the departments straddling the borders with Ecuador and Venezuela. It is fundamental that investors in these areas ensure the implementation of a proper framework for cooperation with the armed forces, as well as mapping and engaging with local stakeholders to reduce the risk of attacks.

Along with the old security threat, increased concerns about the impact of the oil and gas sector, and the extractives industry in general, have led to new time-consuming and costly licensing processes. While the National Authority for Environmental Licenses (ANLA) was created in 2011 to serve as a licensing one-stop shop, two and sometimes three other agencies are involved in the granting of exploration and production environmental licenses. The industry association Colombian Petroleum Association (ACP) estimated that in 2012 it took on average 13.9 months to obtain an environmental license for an on-shore site.

In addition, infrastructure bottlenecks and corruption are likely to continue to be a concern. Pipeline bottlenecks, due to the aforementioned attacks, among other reasons, have forced producers to resort to tanker trucks to transport daily production. This is not only more costly, but also contributes to tensions with communities affected by the considerable uptick in road traffic and damage to public infrastructure. Community unrest is also frequent surrounding local employment creation, underlining the need for identifying and engaging the right stakeholders for local hiring.

Although governance of the oil and gas sector is relatively robust in Colombia compared to regional standards, corruption persists; in particular it is fairly routine for companies to receive demands from lower-level officials to pay a fee to expedite bureaucratic processes. The misappropriation of royalties paid to the state also happens frequently, though a 2012 reform and the introduction of a new General Royalties System (SGR) has led to some headway in tackling this issue. However, the new centralized royalties distribution system has also led to increased tensions with communities in oil and gas producing regions, who have had to stomach considerable decreases in the availability of royalty monies for public spending.

ELECTIONS AND PEACE OUTLOOK

The Ronda Colombia 2014 is taking place against the backdrop of the peace negotiations with the FARC and a recent presidential election. However, while relevant to the overall long-term stability of the country, the bidding round’s timeline is unlikely to be significantly impacted by these two events.

As expected, President Juan Manuel Santos secured reelection in the 15 June run-off vote, where he competed against the right-wing candidate former finance minister Oscár Iván Zuluaga. The political outlook following the elections is mostly positive for the oil sector. Santos’ re-election means continuity in government policy, especially in terms of the government’s broadly positive outlook on foreign investment and investor protection. The expansion and improvement of the country’s infrastructure, which has been a central pillar of the first Santos government, is likely to remain a top priority for his next administration.

At the same time, continuity – to some extent – also implies stagnation; for example key reforms that could improve issues such as delays with licensing and other issues, are likely to remain elusive during Santos’ second term. There is additional pressure on the President to make concessions to the political left as part of the peace process, and to repay the left’s support for his re-election campaign. Among others, such concessions could include a stricter approach to environmental and social regulation.

Santos’ re-election has also increased the likelihood of a continuation of the peace negotiations with the FARC and their successful outcome, as well as the commencement of formal talks with the ELN. In the short-term, the negotiations with the FARC have seen a deterioration in the security environment, as the group has tried to improve its bargaining position at the negotiating table through military pressure. While such attacks are likely to continue in the short-term, they are posed to subside in the longer term because of the likely signature of a peace deal and the subsequent demobilization of the FARC. However, the expected reduction in the size of the military following an end to the armed conflict, will see companies in the sector having to take full responsibility for the burden of protecting their industry assets.

A successful outcome to the peace negotiations is likely to have additional operational implications, for example through shifting dynamics in community relations. The outcome of the talks will serve to empower local communities and facilitate the projection of community concerns onto the national political stage. For example, controversies over company-community prior consultations will likely attract more attention from national politicians and the media. Furthermore, the demobilization of FARC members is likely to boost the position of center-left politics, which in turn will increase pressure on the government to advocate in favor of communities when arbitrating disputes. This situation will be heightened in areas where the FARC have had political influence for decades.

Republished with permission from Control Risks. 

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