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COLOMBIA ENERGY POLICY Roger Tissot

This article provides a comprehensive overview of the recent history of oil in Colombia, including the early days of the industry, the transition from nationalism to deregulation, and the current state of the oil sector. It discusses the economic importance of oil in Colombia, the legacy of past oil booms, and the urgent need for pragmatic policies to ensure a sustainable future. The article also highlights the new structure of the oil sector, the government's clear signals to attract investment, and the ambitious objectives of increasing oil reserves and reducing the risk of imports.

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COLOMBIA ENERGY POLICY Roger Tissot

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  1. COLOMBIA ENERGY POLICY Roger Tissot

  2. A Recent History of Oil The hard lessons of obsolescing barging Cusiana New petroleum policy Cano Limon Association Contract, R factor, War tax Oil Importer www.gasenergy.com.br

  3. A Recent History of Oil Change has been the norm… • Colombian oil industry early days=> 1918-1970’s • Concession model, attractive terms • Foreign Companies control industry, enclave model • Large discoveries (200 MMBO) Total of 5 MMB discovered • Ecopetrol created 1951 • Industrialization and move toward “soft” resource nationalism • From Nationalism to Deregulation=>1970’s-1994’s • Colombia net oil importer (1970’s) • Association Contract 50/50, Ecopetrol shares the risk • Large discoveries (Cano Limon, Cusiana) 500 MMBO oil fields. Approx 5.1 MMB oil reserves added • Terms tighten R factor=>Collapse oil exploration • Deterioration of security condition (war tax), Colombia “failed state”? • De-regulation and competition 1994-2008 • Rapid decline in reserves, risk of becoming a net oil importer • Significant improvement of fiscal terms, End of Association contract • Creation of ANH • Exploration Boom • Modest discoveries 631 MBO, average 50 MBO www.gasenergy.com.br

  4. A Recent History of Oil And the easy oil has already be discovered Source: Oil in Colombia, History, Regulation and Macroeconomic Impact. CEDE March 2009 www.gasenergy.com.br

  5. THE ECONOMICS OF OIL A significant variable to Colombian economy • Oil sector accounts for 3.5% of GDP • But it is also one of the main source of exports . www.gasenergy.com.br

  6. THE ECONOMICS OF OIL And an essential source of government revenue • Oil contribution to the Government: • Ecopetrol divided payments • Royalty and taxes paid by Oil Companies • Transfer Oil Petroleum Fund (FAEP) • In 2008 76% of increase of government revenues were due to oil rents • In the last decade oil rents transferred to the government accounted for 2% of GDP • Royalties represent 80% of income from oil producing departments . www.gasenergy.com.br

  7. LEGACY OF THE PAST OIL BOOM Dutch disease, oil curse Despite large surpluses from oil exports, Colombia incurred in significant fiscal Imbalances during the 1990’s www.gasenergy.com.br

  8. LEGACY OF PAST OIL BOOMS Economic recession, chronic fiscal vulnerability Colombia GDP per capita % change Y-O-Y During the 1990’s Colombia experiencing a significant capital inflow from privatizations, drug related activities but also from oil revenues These increase in revenues lead to a relaxation to Colombia’s long held tradition of fiscal discipline 1991 Constitution seeking increasing decentralization and democratization of regions also straightjacket government spending Crisis of 1990-91 caused severe fiscal imbalances that are still impacting government ability to manage fiscal policy www.gasenergy.com.br

  9. THE URGENCY OF PRAGMATISM Breaking from the past • Facing the strong probability of becoming a net oil importer the government adopted a radical shift of policy in 2004 • Losing export status would have cause severe trade balance difficulties • Under the “old model” Ecopetrol retained all the technical expertise, • And was a “forced bride” to IOC’s • It was also a player and a referee • The Ministry was a weak policy making institution • The NOC lacked the incentives to be efficient or competitive, its success was dependent on IOC’s success • Since governments were reluctant to allocate large sum on high risk exploration programs • Political risk, low oil prices, and high government take made Colombia unattractive to private investors • The NOC was also unable to invest=>subject to budget pressures www.gasenergy.com.br

  10. NEW STRUCTURE Different Roles for different stakeholders www.gasenergy.com.br

  11. SENDING A CLEAR SIGNAL Lower government take www.gasenergy.com.br

  12. SENDING A CLEAR SIGNAL By offering very attractive terms www.gasenergy.com.br

  13. SENDING A CLEAR SIGNAL By ignoring resource nationalism www.gasenergy.com.br

  14. SENDING A CLEAR SIGNAL And security was a central to the strategy • Colombian armed forces have created special units mandated to protect energy infrastructure • These are highly mobile units able to respond rapidly to attacks to infrastructure • But according to media reports, fighting against FARC continues in Arauca • And Putumayo has recently seen a spike on security problems, caused by the fall out of the DMS Ponzy scheme Helicopters for the newly created Special battalion Energy No 12 www.gasenergy.com.br

  15. SENDING A CLEAR SIGNAL and new opportunities were included www.gasenergy.com.br

  16. AMBITIOUS OBJECTIVES Removing the risk of oil imports ANH goal is to Increase by 4 MMB Colombia’s oil reserves by 2020 www.gasenergy.com.br

  17. AMBITIOUS OBJECTIVES Requiring significant investments Investment requirement Base Case Scenario Approx US$2.5 b/year Approx US$2.6 b/year Approx US$2. b/year Approx US$1.2 b/year www.gasenergy.com.br

  18. ANH is investing in reducing the cost of doing business in Colombia by increasing geological knowledge in areas with limited information Colombia has also focused on developing its heavy crude oil potential ANH suggest Colombia heavy crude oil potential could be as high as 20 Billion barrels In 2007 ANH launched the heavy crude oil bidding Round The government also included new regulation encouraging private participation Shell and Ecopetrol have formed a JV to explore the existing Crudo Castilla field (60,000 b/d Talisman from Canada was also awarded a block in JV with Ecopetrol According to PetroRubiales, Colombia could replace Venezuela as the main supplier of heavy crude oil to the US WHERE IS THE OIL? The Importance of Heavy Crude Oil www.gasenergy.com.br

  19. Ecopetrol was given a new role It was forced to compete But also some of the traditional ills of NOC were addressed: Financial independence Geographic independence Operational and strategic independence The IPO of Ecopetrol also has raised Colombia’s “popular capitalism” And the company results is closely followed by the population NEW POLICY, NEW NOC Ecopetrol redefined role From sleepy bureaucratic company To gutsy mover following the steps of Petrobras www.gasenergy.com.br

  20. THE NEW ECOPETROL Production up www.gasenergy.com.br

  21. THE NEW ECOPETROL New geographic areas www.gasenergy.com.br

  22. THE NEW ECOPETROL Financial independence… www.gasenergy.com.br

  23. THE NEW ECOPETROL A One million b/d company? www.gasenergy.com.br

  24. MARKET RESPONDED From the minnows to the big boys… • The new policies attracted initially a large number of smaller oil companies • Colombia was the preferred destination from Junior “Oil Companies” which benefitted from • Liquid markets looking for yields and opportunities in mature markets • Increasing oil prices • Deteriorating fiscal terms in mature markets (Alberta) • And resource nationalism in more prolific emerging ones (Ecuador, Bolivia, Venezuela) • Early successes attracted large companies and eventually super majors returned to Colombia • Exxon=> offshore Colombia • Shell=> Heavy Crude oil www.gasenergy.com.br

  25. MARKET RESPONDED Ecopetrol is still the biggest player Despite the entry of numerous oil companies most of the operations are concentrated in the hands of Ecopetrol. Oxy and BP are also significant producer.However the small companies are becoming the “big players” in Colombia With declining prices and tight financial markets some of these companies will face difficulties continuing their investment programs One should expect a period of consolidation in the Colombian oil industry www.gasenergy.com.br

  26. Market Responded An Investment and Exploration Boom Units To date no significant discoveries have been made, but if history repeat itself, efforts should show some results in the next couple of years • Not since the period of large discoveries Colombia has seen such a level of exploration activity • Bidding rounds and Technical Evaluations (ANH) • 38 million ha offered on concession in 2009 • Significant increase seismic data www.gasenergy.com.br

  27. FINAL COMMENTS Colombia, A success story? • Colombia’s petroleum policy has been successful at attractive investments and production postponing its oil self-sufficiency • And there is potential for significant windfall revenues if heavy crude oil and other exploration activity materializes, coinciding with a new oil price spike • Past shows Colombia mismanaged oil (and coffee) bonanzas, current fiscal discipline is positive but social risk are high (unemployment) • Local Private capital participation in the industry is still too modest • The industry, despite large number of participants is concentrated in the hands of Ecopetrol and few large players • Ecopetrol IPO should help to educate Colombians with oil investments • But the country should work further in the development of a local market for Junior oil companies • Attention must also be given to social and environmental grievances which tend to attract less attention since no “big brand” names from large corporations invested in Colombia www.gasenergy.com.br

  28. FINAL COMMENTS Colombia, A success story? • The View from the operators • Positive • Appropriate fiscal terms; • Transparent efficient acreage award process; • Good regulatory environmental environment; • Contract stability; • Room for Improvement • Improve (shorten) environmental permit award process for seismic and drilling • Improve security along border regions; • Improve pipeline integrity; • Increase social development (education, infrastructure and employment) in rural regions. www.gasenergy.com.br

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