Volume 6, Number 15, Page 1

New Incentives for Boosting Oil Exploration In Colombia

By Jean-Pierre Lenaerts and German Villamil

In an attempt to stimulate oil exploration, the Colombian government has adopted new incentive measures that should take effect by the year 2000.

The current profitability of oil investments in Colombia is around 17/19 percent with the average return normally 30/35 percent. Accordingly, foreign investors have not been keen to invest in the country. Also, the average exploratory risk in Colombia amounts to 80 percent. If we add the fact that, absent any additional significant oil discoveries, Colombia may become dependent on outside sources to meet its own energy needs by 2004, the need to increase exploration becomes urgently apparent.

The proposed measures include three incentives as well as a drastic simplification of the process for obtaining of environmental permits.

The first incentive provided by the National Development Plan of the Pastrana Government is a modification of the royalties regulation applicable to the production of crude oil. Under the current regulation, all royalty payments are subject to a 20 percent flat rate. This rate is applicable regardless of the production of the well. Under the new regulation, which will only apply to new oil discoveries, the applicable rate on royalty payments will depend upon the volume of production, as follows:

Daily Production of Barrels	Applicable Royalty Rate
Below 5,000	5 percent
Between 5,000 and 125,000	5 percent - 20 percent
Between 125,000 and 400,000	20 percent
Between 400,000 and 600,000	20 percent - 25 percent
Above 600,000	25 percent

The second measure provides for a modification of the level of participation of the state-owned company Ecopetrol (Empresa Colombiana de Petróleos) in the new Association Agreements to be entered into with private operating companies. There are currently 12 pending Association Agreements that should benefit from the new system. Under the current regulation, Ecopetrol maintains an ownership of at least 50 percent in all Agreements. Under the new regulation, approved at its Board of Directors meeting held on July 2, 1999, Ecopetrol´s participation will vary upon the volume of the productive well and the profitability factor (Factor de Rentabilidad or R Factor). As a result, for wells producing more than 60,000 b/d, the participation of Ecopetrol will be 30 percent if the R Factor ranges between 1 and 1.5; If the R Factor is superior, then the participation rate will increase progressively up to 65 percent when the R Factor is equal or superior to 2.5. If the production from the field is less than 60,000 b/d then the participation of Ecopetrol will be 30 percent.

Association Contract Schemes

 

The last incentive adopted in December 1998 as part of the last Tax Reform consists of an amendment to the amortization system for intangible assets. Under the previous regulation, the associated company had to apply the Unit of Operation Method amortizing the exploration and operating rights it had acquired (based upon the duration of the Association Agreement with Ecopetrol). Under the new regulation, the investor will be entitled to amortize using the Straight Line Method over a minimum term of five years.

Besides the introduction of the incentives described above, the Colombian government has also adopted measures in the environmental area. Of particular importance, Colombia has decided to facilitate the issuance of environmental permits required for oil projects via a 50 percent reduction in the time required to begin the exploration, drilling and operating phases. As a result, it will now be possible to obtain an environmental license in 120 to 180 days whereas previously a one year waiting period was mandatory.

The above measures are only applicable to new projects, and will not have any impact before the year 2000. Ecopetrol is expected to open new bids for exploration projects that should start by the end of the present year.

Jean-Pierre Lenaerts is a Belgian attorney and, international tax consultant with Gómez Pinzón & Asociados in Colombia. German Villamil is a partner and Director of the firm’s oil and gas department.