Balance of the year 2015 and perspectives of the oil industry in regulatory matters

By Dagoberto Ospina, Associate of Norton Rose Fulbright Colombia
The fall in oil prices has impacted the development of exploration in Colombia, generating concern about the scope of reserves and a decrease in production in the country. The oil industry faces the end of 2015 in a state of uncertainty that requires structural measures.

Among the main problems affecting the oil sector are: the unfavorable tax regime; delays in environmental licensing; the absence of clear rules regarding prior consultation; social difficulties due to de facto pathways in the local environment; the lack of infrastructure and the emergence of other competitors at the regional level with attractive conditions for investment, among others. This denotes a series of problems that reflect the loss of competitiveness in the country and reveals that regulatory adjustments have been necessary for some time, regardless of the price scenario.

So far, the impact of the current crisis has been partially cushioned by the issuance of relief measures by the National Hydrocarbons Agency (ANH). However, the oil industry requires measures that allow it to adapt to the new price scenario and recover lost competitiveness, as well as reposition the country as an important player, in a situation in which the Oil & Gas sector is reinventing itself globally .

Balance of regulatory measures during 2015
The year 2015 was marked by the stoppage of exploratory activity in the country. Until the end of October, nineteen exploratory wells were drilled, far from the 92 drilled until the same month in 2014 and even more than the 126 wells initially planned for this year. On the other hand, the seismic activity on land registered 1,200 km which represents an approximate decrease of 90% compared to the previous year.

It is estimated that the exploration deficit will cause a decline in current production at the end of 2016, which would lead to an average daily production level of 750,000 barrels in three years and 300,000 barrels in ten years. Now, if current production levels are preserved, the impact on the number of reserves will not be long in coming.

In view of the above, the Government reacted by promoting relief measures in the National Development Plan, from which the ANH Agreements 2, 3 and 4 of 2015 were issued, which include the following measures: (i) The extension of contractual terms for periods of 9 months, extendable for another 6 months; (ii) The transfer of the planned investments in the exploration program to other areas; (iii) The equalization of the periods of contracts on offshore areas concluded before 2014 with those provided for in the contracts signed on the occasion of the Colombia Round 2014; (iv) The possibility of reducing and issuing new compliance guarantees; and (v) The accreditation of additional exploratory activities carried out in the TEAs to fulfill commitments in the first phase of the E&P contracts.

All these measures have allowed companies to temporarily relieve their contractual burdens, in fact, the breach in the drilling of approximately thirty exploratory wells was avoided. The foregoing, lends a hand to the oil companies because it avoids the execution of guarantees against them and the activation of mechanisms for the early termination of contracts.

However, these measures do not solve the structural problems identified. Moreover, the extension of phase deadlines of the exploration periods prolongs a scenario of reduction of the exploratory activity that, sooner rather than later, will take its toll on the production and reserve index of the country.

Regulatory perspectives for 2016

The recovery of the country’s competitiveness to attract investment cannot be an exclusive concern of the Ministry of Mines and Energy (MME), and the ANH, but, as noted by the Vice President of the Republic, Germán Vargas Lleras, in the last Congress of the Colombian Petroleum Association (ACP), this must be a national purpose. The relevance of the sector demands it, because it is worth remembering that 20% of current income, 50% exports, 30% of foreign investment and 50% of resources allocated to investment in all sectors are originate in the oil sector.

Therefore, the alignment of interests of the different Government portfolios, particularly those of the Treasury and the Environment, with the objectives set by the MME is required. Otherwise, the goals of the Productivity Boost Plan and the Petroleum Competitiveness Plan, through which it is intended to reach investment levels close to US $ 20,000 million and a production of 1.3 million barrels per day (MMbde) by 2030, they cannot be reached.

Tax adjustments
The OECD, in an economic study from the beginning of 2015, pointed out that the Colombian economy has had an excellent performance in recent years, but requires a comprehensive tax reform that encourages investment. This reform should aim to end the constant change in the rules of the game in fiscal matters, as this trend affects the business climate and puts at risk one of the main assets of the country to attract investment: legal certainty. Since 2009, Colombia has had six tax reforms, through which withholding at the source for oil exports was increased, the wealth tax (formerly equity) was reactivated, and the Business Equity Contribution (CREE) was created, and its surcharge, among others.

The Committee of Experts that will present a tax reform proposal has published that the country is between 7% and 16% above the Latin American average. For its part, the Colombian Chamber of Petroleum Goods and Services (Campetrol) has indicated that the tax burden on income in Colombia was the third highest in the world with 34% (25% income tax and 9% of CREE ), and this year it ranks as the first with the addition of the CREE surcharge. The above, supposes that by 2018 companies could face a 48% tax burden, this, without adding the percentage corresponding to the wealth tax.

Despite these regressive measures, the incentives for the development of offshore projects and unconventional hydrocarbons should be highlighted. As for offshore projects, the free zones created by decree 2682 of 2014 and the increase in the high price threshold allow the government take to fall from a range between 70% and 80% to one between 40% and 50% For its part, the differential scheme in the payment of royalties for unconventional hydrocarbons allows the government take to be reduced from approximately 70% to just under 50%. However, the risks and high investments demanded by these projects require greater incentives that allow their viability.

Taking into account that the increase in the recovery factor of undeveloped uncovered deposits is one of the ANH’s strategies to increase short-term reserves, these measures should be referents for their development. Similarly, experts have pointed to the need to migrate towards a flexible royalty scheme, through which the price of oil is taken into account as a variable and is not limited to the quantities produced. In other words, a royalty scheme is proposed that corresponds to the price cycles that impact the Industry.

Finally, the assessment of risky activities must be evaluated by the Committee of Experts, so that the initiative presented to the Ministry of Finance takes into account the needs of the sector and incorporates them into the debate.

Area Assignment Scheme
The ANH has announced that through Agreement 5, a permanent allocation system will be migrated through targeted promotion and the promotion of private initiatives that will leave behind the biannual rounds. Likewise, it is intended to provide more information to oil companies during the selection processes (e.g. environmental, social, state and facilities for access to infrastructure and security conditions, among others), and to carry out a process of award during the first quarter of 2016.

Regarding the promotion of private initiatives, the Public Private Partnerships (PPP) scheme, of a private initiative established in Law 1508 of 2012, constitutes the main frame of reference. This scheme would allow companies to present initiatives for the development of projects, which, in turn, would be published for other companies to participate in a competitive process.

If expressions of interest are received from third parties for the execution of the project, an abbreviated selection procedure would be advanced; otherwise, it would be contracted directly with the originator of the proposal. The impulse of the ANH to this scheme will be key, considering that the approval of private initiatives took time to take off in the infrastructure sector.

Other challenges
The oil industry shares concerns with other sectors such as infrastructure and mines, also of strategic interest to the country, which are mentioned below.

As for the environment, the process of environmental licensing before the National Environmental Licensing Authority (Anla), and the obtaining of the permits required by the Regional Autonomous Corporations (CAR), can take up to two years. This situation has led to the recommended implementation of a single licensing system that covers all required authorizations. However, it is highly unlikely that the Government will undertake a profound institutional change to promote this measure.

On the other hand, social issues are mainly limited to: (i) the absence of a statutory law that regulates the right to prior consultation, and (ii) the de facto pathways incurred by communities. Difficulties in prior consultation make the procedures that must be met in Phases 0 of the contracts endless and also result in communities coming to the guardianship as a mechanism to enforce their rights or to be included in the areas of influence of the projects, even when they are not, which affects the paralysis of the projects.

Despite the difficulties, Colombia remains an attractive country for project development, with a particular potential offshore and unconventional hydrocarbons. The price scenario showed other factors that were attenuated by the high prices of recent years. However, to the extent that companies adapt their budgets and improve their practices, and that the Government does the same in terms of its regulation and effective implementation, it is possible to move forward jointly in generating opportunities and repositioning the industry in terms of competitiveness and investment attraction. However, the current situation is an opportunity to rethink the national oil industry in the medium and long term.

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