The collapse of oil prices has taken a toll on foreign direct investment (FDI), export revenue and government revenues in Colombia, forcing action to be taken to relieve budgetary pressure and maintain natural gas self-sufficiency.
Production and reserves growth has stalled under pressure from persistent low prices, and reserve replacement from new discoveries has slowed as international investment in new exploration has been cut back. The government’s reaction has been forthcoming and several measures have been introduced over recent years in an attempt to prevent the decline of the Colombian oil and gas industry. Improvements already made to the royalty framework will benefit licenses currently held in the exploration phase, which may provide some stimulus in the short to medium term, and more flexible licensing procedures are likely to lead to greater uptake of available exploration acreage. However, based on recent lifecycles from exploration to production any newly awarded areas over the next two years will be unlikely to add significant production before 2025.
Initially, the government acted quickly and relaxed the terms of exploration agreements by allowing individual three-year exploration phases to be extended by nine months when prices are low, the transfer of investment across different exploration periods, and reducing the amount of guarantee required to allow smaller companies to more easily participate. Additionally, the 2014 - 2018 National Development Plan has applied a sliding scale royalty mechanism to all fields contributing to incremental production, not simply for new fields. The Agencia Nacional de Hidrocarburos (ANH), Colombia’s oil and gas regulatory agency, has prioritised increasing Colombia’s reserves in its proven onshore basins as well as exploring new basins, which led to the creation of a more flexible licensing system implemented in Accord 2 of 2017, published in May. Recent licensing in Colombia has been through organised rounds for defined blocks made available by the ANH, whereas the agency is now able to create open licensing zones where potential licensees are able to make offers for areas they are interested in. The ANH intends for this process to allow more regular licensing in the hope of increasing investment in exploration. Qualification criteria and biddable royalties have also been made responsive to oil and gas prices so smaller companies can remain eligible to bid and producers receive relief in price downturns. These changes are in addition to a broader set of tax reforms which have led to the removal of the CREE surtax by 2019, reducing the general tax rate, though the rate offered to offshore fields in free trade zones has been increased from 15 to 20%.
The fiscal environment in the Colombian onshore grants a similar government share as a number of regimes in the region for oil developments and it compares favourably for gas developments, even as it represents a significantly larger onshore production base. With the inclusion of heavy oil incentives, which is a significant component of the total Colombian onshore production, the regime is further improved as royalties and the high price participation are reduced. The ANH is reported to be starting licensing under the new format in July/August 2017, opening onshore areas in the North and Northwest of the country in the Sinú-San Jacinto, Llanos Orientales and Medio Valle del Magdalena basins on an open basis and adding areas in the Caguan-Putamayo basin in 2018. This would enable companies to assess and apply for areas for as long as the areas are kept open. In total, up to 20 areas will initially be available, but it is reported that up to 40 may be opened for bidding by the end of the year with additional areas opened in 2018. For offshore development, Colombia represents one of the most competitive regimes in the region. Interest in the Caribbean has been growing over recent years and the fiscal regime is currently geared to foster investment with a regionally and internationally low fiscal take. The government is reportedly planning to include areas in the Caribbean Sea as part of the open areas to be made available in 2018, and a recent large gas discovery in the area by Anadarko highlights the potential of this underexplored region.
Recently, however, the risk of disruption to activities has arisen with the emergence of public opposition to oil and gas drilling in onshore areas around the country. A recent referendum in the Cumaral municipality ended with a substantial majority in favour of a ban on production, potentially undermining investor confidence in other onshore regions, especially other areas where public consultations initiatives are in progress; according to the Colombian Petroleum Association (ACP) another 20 are scheduled which may affect the petroleum industry. Although the result is non-binding and licenses are protected, this may weigh on the positive impact of the recent changes and could cause disruptions to projects if a broader popular movement against the industry arises.
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