Published on Wednesday, 1 May 2013 and last verified on Monday, 29 April 2013
What is the legislation applicable to oil and gas activities in your country? Is it federal or state legislation, or both?
Colombia does not have a federal regime. It is a unitary republic with national, departmental and municipal de-centralisation of government.
Colombian legislation for oil & gas activities is mainly set forth in the Colombian Constitution, National Laws and the administrative regulations issued by the Colombian Ministry of Mines and Energy (MME) and the Colombian National Hydrocarbons Agency (ANH).
Under articles 332 and 360 of the Colombian Constitution, the sub-soil and non-renewable natural resources (including hydrocarbons) located within Colombian territory are property of the Colombian State. However, private parties may explore for and produce hydrocarbons, subject to the payment of royalties and certain other economic benefits to the State. The royalties, payable for the production of hydrocarbons, are determined by Law 141 of 1994, Law 756 of 2002 and Decree-Law 4923 of 2011 (for unconventional resources). Other economic payments are established in the relevant contract executed between the investor and the Colombian State.
The faculties, responsibilities and duties of the ANH, as the governmental entity in charge of managing the country’s oil & gas resources, are set forth in Decree Law 1760 of 2003, as complemented and amended by Decree 2288 of 2004 and Decree 4137 of 2011.
The terms and conditions to award hydrocarbons exploration and production areas are mainly set forth in Agreement 004 of 2012 issued by the Board of Directors of the ANH, which superseded Agreement 008 of 2004 of the same body.
Oil and gas activities are also regulated in the Colombian Petroleum Code set forth in Decree 1056 of 1953 (as amended).
Technical regulations and definitions are set forth in Ministry of Mines Resolutions 1814195 of 2009 for conventional resources and 180742 of 2012 for unconventional resources.
Environmental legislation to explore and exploit hydrocarbons is mainly set forth in Law 99 of 1993, Decree 2820 of 2010 and in the terms and conditions set forth in each environmental licence granted by the Colombian Ministry of Environment and Sustainable Development (MADS) to explore or exploit hydrocarbons.
Are oil and gas activities carried out by the state or a state-owned agency or national oil company (NOC)?
No. Subject to applicable regulations, any qualified local or foreign company may explore for and exploit hydrocarbons in Colombia independently, without having to partner with the NOC (Ecopetrol S.A. or “Ecopetrol”) or any other entity of the Colombian state to undertake such operations.
Colombian laws and regulations set forth the principle of equal treatment of foreign and local investment, and both have the same legal rights to explore and exploit hydrocarbons in Colombia.
Until 2003, Ecopetrol acted in the double role of resource administrator and partner in contracts for the exploration and production of hydrocarbons in the Colombian territory. Any private party wishing to explore or produce hydrocarbons had to enter into one of several forms of joint venture contracts with Ecopetrol.
Pursuant to Decree 1760 of 2003, the role of resource administrator and regulator was spun-off to the ANH. Since the spin-off, Ecopetrol is treated as any other operator under the law, and is required to bid like any other oil & gas company in order to acquire areas to explore and exploit hydrocarbons. However, it was allowed to keep certain areas and assets it directly operated before the spin-off, and all its interests in contracts entered into and other assets acquired before the spin-off (ie, pipelines and refineries).
Is oil and gas a regulated business that can only be carried out by companies that are licensed or that receive government concessions to operate?
Yes. As explained in the answer to question 1 above, the hydrocarbons located within Colombian territory are property of the Colombian state.
Thus, to explore for and produce those hydrocarbons, a company needs to obtain such rights from the Colombian state. Since 2004, these rights are awarded by ANH through two main types of contracts, which are: (i) Exploration and Production (E&P) Contracts and (ii) Technical Evaluation Agreements.
The ANH and Ecopetrol require companies wishing to enter into new contracts or to be assigned interests in existing contracts for the exploration and production of hydrocarbons (including contracts signed by Ecopetrol prior to 2004) to evidence certain minimum financial, technical and operational capacities.
What are the regulatory agencies charged with regulating oil and gas activities?
The ANH manages Colombia’s hydrocarbon resources and is charged with ensuring that their production benefits the country.
The MME is responsible for the overall regulation of the energy sector, including the adoption of the Colombian government’s policies on hydrocarbon exploration and production, and the technical regulation and oversight of upstream activities such as the drilling of exploration wells and inspecting the payment of royalties (which are based on production). However, some of the Ministry’s oversight functions may be transferred to the ANH in the short term.
The MADS is responsible for granting environmental licences for certain exploration and production activities, as well as for monitoring compliance with such licences and applicable environmental regulations.
Are all hydrocarbons in your country deemed to be originally owned by the state? If so, when does ownership transfer to the extractor or buyer of the hydrocarbon?
Yes. As explained above, under article 332 of the constitution, the state is the owner of the subsoil and all non-renewable natural resources.
Title to property over hydrocarbons is transferred to the concessionaire, according to the entitlement volume agreed in the relevant granting instrument, as soon as the hydrocarbon is lifted and available at the wellhead, subject to the payment of applicable royalties.
The transfer of property mentioned above has not been an obstacle for companies to certify reserves and secure reserve based loans in connection with Colombian E&P assets. The Colombian government allows companies to book reserves based on their rights under the relevant granted instruments, and in fact, companies with production must file reserve reports prepared under international standards with the ANH on a yearly basis.
How are oil and gas exploration rights or concessions granted? Is there more than one method for granting such rights (ie, concession and joint exploration agreements) or co-existing regimes applicable to different exploration or exploitation areas?
Colombian laws empower the ANH to award areas for the exploration and production of hydrocarbons.
Agreement 004 of 2012, issued by the Board of Directors of the ANH introduced significant changes to the process to award such areas which had been in force with only minor adjustments since the creation of the ANH in 2004.
The most significant changes introduced by Agreement 004 of 2012 are: (i) that areas will generally be awarded through competitive bidding processes (which may be open or closed, as explained below) and only exceptionally by direct award; and (ii) the establishment of minimum requirements for companies wishing to qualify for the award of areas.
Open Competitive Bidding Processes
Under this modality, areas are awarded through open and public competitive bidding processes (usually called “Rounds”) where ANH selects the highest bids presented by companies that have been previously qualified based on specific capacity requirements set out in the Terms of Reference of the relevant bidding process. The selection criteria vary for each process, but in past rounds areas have been awarded on the basis of an additional percentage share in production after royalties bid by the company to the ANH or on the basis of additional investments in exploration activities (in excess of a minimum exploration commitment established by the ANH for particular areas).
Closed Competitive Bidding Processes
Under this modality the ANH invites a determined number of bidders that meet certain pre-established capacity requirements in order to select the most favourable proposal or proposals.
Direct Contracting Processes
Exceptionally, ANH may, with the prior authorisation of its Board of Directors, directly award an area especially selected for such purpose, based one or more of the following criteria:
• its special nature and geographic location;
• its particular geological characteristics, according to technical studies made by ANH for such purposes;
• the lack of technical information about the subsoil and the exploratory coverage required;
• because of the existence of social or environmental restrictions affecting the area;
• for reasons of public interest, national security or public order; and
• due to special economic or energy policy considerations.
An area will be directly and exceptionally awarded to a bidder that meets all capacity qualifications set forth in Agreement 004 of 2012, subject to the negotiation of exploration programmes, investments, economic rights and other benefits based on the minimums established by the law, the relevant contractual models and applicable regulations.
Such exploration programmes, investments, economic rights and other benefits must be more favourable to the ANH than those obtained in competitive selection processes undertaken within the two previous years, considering the characteristics of the area or areas concerned.
Is there a public bidding or similar process for oil and gas exploration licences? If so, is it open to foreign investors?
As indicated above, there are at least two modalities of public bidding processes for oil and gas exploration licences. The most recent open competitive bidding process was the 2012 Colombia Round, which was completed in December 2012. This process resulted in the award of 49 blocks, of which 41 were E&P contracts and eight were TEAs.
Are there any minimum local content requirements related to international bidding processes?
Are there any restrictions on foreign participation in such rights or concessions or in companies holding any such rights?
No. As mentioned above, Colombian laws set forth an equal treatment principle for foreign and local investment.
Companies incorporated abroad must establish a branch in Colombia to undertake permanent activities, such as the exploration and production of hydrocarbons.
Are there any restrictions on the participation in such rights or concessions by local national oil companies?
Are companies or consortia that are awarded exploration rights given priority to operate and exploit the fields? How is priority structured and documented?
Under TEAs, the contractor has the right to conduct a technical evaluation of the awarded block (which includes the right to shoot seismic and conduct other studies but not to drill exploration wells) and may convert the TEA into an E&P Contract covering all or part of the area. However, under some older TEAs, third parties may offer to enter into an E&P Contract over all or part of the block subject to the TEA and the holder of the TEA has the contractual right to match the exploration program offered by the third party and in such case will be preferred to enter into an E&P Contract.
More recently, blocks awarded in bidding rounds have been awarded under “Special TEAs” where the holder of the TEA has an exclusive conversion right. After the holder of the TEA has exercised this right up to the maximum acreage permitted by applicable regulations or the terms of reference of the relevant bid round, any remaining areas would be released to be awarded by the ANH under any of the modalities described above.
Under an E&P Contract, parties have an exclusive contractual right to explore the area for a period of 6 years in the case of conventional resources, and up to 9 years in the case of unconventional resources. Following a discovery, the holder has the right to propose an evaluation plan and declare commerciality of the relevant field. Once this declaration has been made, the particular field will enter into production for a period of up to 24 years for conventional E&P contracts and up to 30 years for unconventionals.
What rights does the holder of an exploration licence have to the hydrocarbons discovered during exploration?
Traditionally, the holder of an E&P Contract had the right to exploit any hydrocarbons discovered within the Contract area, subject to the payment of royalties and other economic rights to the government.
However: (i) since late 2006, E&P Contracts exclude the possibility of exploiting coal bed methane; and (ii) since 2010, E&P Contracts may exclude the right to develop unconventional resources altogether, restrict such right to companies meeting certain qualifications and/or make it subject to special contractual terms and conditions.
Because both the scope of the rights to unconventional resources and the definition of the term itself have changed over time, it is advisable to review the contract in detail to determine if unconventional resources are covered or not.
In the case of 2012 Round E&P Contracts, Contractor is entitled to explore for and produce any hydrocarbons discovered in the area (excluding coal bed methane), if it meets the qualifications established by the ANH in the bid round. In case it is qualified and decides to develop both conventional and unconventional resources, the Contractor is required to keep each activity separate so that the obligations and other terms and conditions of the contract will apply separately to the conventional and unconventional activities.
However, if the Contractor is qualified but decides not to develop the unconventional resources or if it is not qualified to do so, the ANH will have the right to award the development of such resources to a third party.
In each of the above cases the holder of the contract will own the hydrocarbons lifted from the subsoil, subject to the payment of royalties and other economic benefits to the government.
Who has title to assets imported to develop and produce hydrocarbons?
Under Colombian law, assets imported by any private party are the property of such party. However, pursuant to the terms of the ANH’s E&P Contract, upon termination of the contract the contractor’s assets that are permanently allocated to production operations will revert to the ANH at no cost, provided that the contract has been in the production phase for at least 18 years. A similar provision is set forth in Association Contracts entered into with Ecopetrol.
The contractor may freely dispose of its assets that are located before the point of delivery of crude to the ANH and are not essential for production. However, after the contract has been in production for 18 years or 80 per cent of the blocks’ proven reserves have been produced (whatever happens first), the contractor may not dispose of such assets without the ANH’s consent.
How are federal, state and local governments recompensed for granting companies rights or concessions to conduct oil and gas exploration and production?
During the exploration period, the ANH collects a “subsurface fee” which currently varies between US$0.88 and US$5.24 per hectare depending on the size of the area under exploration and the duration of the relevant exploration phase.
During the production period, the ANH collects a royalty which varies between 8 per cent and 25 per cent of production. If the area has produced more than 5 million barrels and the WTI price exceeds a reference price set out in the contract and updated every year, ANH receives an additional payment. The ANH may also receive an additional royalty if bid by the contractor in a competitive process.
The royalties are shared with non-producing regions and in 2012, Congress enacted a law to “spread the jam”, amending the Constitution in order to share an increased share of the royalties with them and to exercise greater control over the spending of such royalties.
Local governments also directly benefit from the Industry and Commerce Tax levied on services provided within their territory, and which usually amounts to 1.5 per cent of the services, or lower if the tax base is calculated according to a lower base provided by law (such as civil constructions and drilling services).
May companies or consortia that hold oil and gas exploration rights compulsorily acquire property or rights of way to carry out exploration or production activities? Are these compulsory acquisitions governed by special judicial or administrative proceedings?
Yes. Law 1274 of 2009 establishes an expeditious procedure for the judicial determination of the compensation to be paid by E&P companies for the easements and rights of way necessary to explore, exploit, transport or manage hydrocarbons. A prior attempt to negotiate with owners or occupiers is required under the mentioned law.
Are natural gas exploration and production activities regulated separately or subject to the same regulation applicable to oil exploration and production? Are there different royalties or other government charges payable by companies that conduct natural gas production activities?
The exploration and exploitation of natural gas is, in most terms, subject to the same regulation applicable to oil exploration and production. However, the following differences exist.
For gas fields on land or located off-shore at depths equal or less than 1,000 feet, the royalties applicable are equivalent to 80 per cent of the royalties applied to onshore light and semi-light crude fields. If the gas field is located off-shore at depths greater than 1000 feet, the royalties applicable are equivalent to 60 per cent of the royalties applied to onshore light and semi-light oil fields. In this case, one barrel of oil is equivalent to 5,700 cubic feet of gas.
Unconventional Hydrocarbons, such as shale gas, pay royalties equivalent to 60 per cent of the royalties applied to onshore light and semi-light crude fields.
E&P Contracts and other Granting Instruments set forth less stringent terms to retain areas to undertake the evaluation of gas discoveries, a greater production volume of BOE of Gas to trigger the high prices additional take, and less additional take in case of extension of E&P Contract.
It is worth noting that Decree 4923 of 2011, which sets forth a 40 per cent discount for royalties applicable to unconventional hydrocarbons, classifies the following as such:
• coal bed methane;
• shale gas;
• oil shales;
• tar sands; and
• tight sands.
Coal bed methane is explicitly excluded from most E&P Contracts.
Do foreign ownership restrictions apply to the oil and gas sector in your country?
Are there any minimum domestic participation rules or any labour law rules relating to domestic and foreign workers?
Are there any limitations on vertical integration in the oil and gas industry?
Pursuant to general antitrust laws and regulations (among others, Law 1340 of 2009) the Superintendence of Industry and Commerce (SIC) must authorise horizontal and vertical integrations in the oil and gas industry.
If the integration is below certain asset and revenue thresholds, or the integrated entity will hold less than 20 per cent of the relevant market, authorisation of the SIC will not be required and prior notice is sufficient.
Are oil and gas activities carried out through incorporated entities with limited liability or by consortia or other types of unincorporated joint ventures? Are joint venture partners jointly and severally liable for the obligations undertaking?
Oil and gas activities may be carried out through incorporated entities with limited liability (corporations, LLCs, etc), and by unincorporated joint ventures such as consortiums and Temporary Unions.
E&P Contracts set forth that members of joint ventures are jointly and severally liable vis-à-vis the ANH, third parties and the Colombian Government, for damages or liabilities arising from operations and for the compliance of the relevant E&P Contract.
However, members of a joint venture may allocate responsibilities and liabilities vis-à-vis among themselves freely (ie, in a Joint Operating Agreement). If such allocation is set forth in an agreement under Colombian law, the parties cannot waive (condone) their right to future remedies or indemnity arising from the other party’s gross negligence or wilful misconduct.
May oil and gas be pledged or encumbered to secure the repayment of debt? How?
Yes. The “entitlement” or rights of a party to a share of production under E&P Contracts may be encumbered to secure loans.
Security for Reserve Based Loans is usually structured through: (i) the pledge to the shares of the entity owning the contractual interest in the E&P Contract or other relevant Granting Instrument; and (ii) the encumbrance of the “entitlement” or economic rights already vested or to be vested upon a party pursuant to operations under an E&P Contract.
Can oil and gas rights that are subject to a lien be sold or transferred freely by the secured creditor?
This depends on the type of lien agreed and whether or not it provides restrictions to the transfer of the property subject to the lien. In principle, encumbered property may be transferred under Colombian law, unless provided otherwise by law or the relevant agreement.
Is oil and gas output freely exportable in your country? Are there any limits or quotas applicable to oil and gas production? Is there access to export pipelines? What licences are required for oil and gas exports? Are duties applicable?
Oil and gas may be freely exported subject to certain contractual and regulatory limitations. Firstly, pursuant to the Petroleum Code and subsequent regulations, E&P companies may be required to sell their production in Colombia to supply the domestic refining demand. In this case, the crude shall be paid at international with prices as established by Resolution 18-1709 of 2003 of the MME.
According to Decree 2100 of 2011, gas may be freely exported. However, exports (including new export agreements) may be limited if the gas is needed to satisfy domestic supply. In such case, producers will be paid the opportunity cost by those agents who are not able to meet their commitments or did not contract sufficient firm capacity.
Are prices for oil and gas set or fixed by the government?
The parties may freely determine oil prices.
Prices of gas produced in the Guajira and Opon fields and sold domestically are capped by regulations issued by the Regulatory Commission for Energy and Gas (CREG). However, the government has announced plans to eliminate these price caps from 1 January 2014.
Prices of gas produced in new fields and sold domestically can be freely determined although the sale of gas under firm contracts must be made by public auction pursuant to CREG resolution 118 of 2011. The prices of gas for export are freely established.
Are oil and gas exports taxed under the general income tax regime or is there specific petroleum tax legislation?
Do special environmental rules apply to oil and gas exploration and production?
No. Decree 2820 of 2010 issued by the MADS establishes the basic procedures and requirements to obtain an environmental licence for several activities including oil and gas exploration, and production.
There are specific terms of reference for the preparation of environmental impact assessments for oil and gas projects (which need to obtain environmental licences).
Applicable environmental standards to the oil and gas industry, such as effluent and emissions standards, also apply to other industries and depend on the activity but not on the industry.
Are environmental regulations in your country consistent with any international standards?
Must companies in the oil and gas industry obtain special environmental or other government permits (other than licences or concessions to carry out oil and gas exploration and production) in to operate in your country?
If there are indigenous or African-Colombian territories or communities in the area of influence of the project, these communities will have to be consulted and agreements procured to mitigate the social and environmental impact of the exploration or production project in the areas where such communities live.
The right to consultation has been declared by the jurisprudence of the Colombian Constitutional Court as a fundamental constitutional right of ethnic communities, susceptible to protection by means of constitutional injunctions. Prior consultation is not a veto right, although the jurisprudence of the Colombian Constitutional Court has recently recognised that large-scale infrastructure projects cannot be executed without the prior and informed consent of the ethnic communities due to the projects’ potential to destroy them completely. To date there is no specific definition of what constitutes a “large-scale infrastructure project”.
The Ministry of the Interior (“MI”) is responsible for certifying the presence of ethnic communities, in order to integrate them to the prior consultation process to determine the conditions in which the project will be developed, always giving protection to the integrity of these communities. Prior consultation is mandatory if the presence of ethnic communities in the area where E&P Activities are going to be carried out or in the area of influence of the E&P Activities is certified by the MI.
Does the government (including any development banks or agency) provide financing, subsidy or other support to companies undertaking oil and gas exploration or production?
Are there any tax stability or similar regimes available to foreign investors undertaking investment in the oil and gas industry in your country?
Although there was the possibility to enter into tax stability agreements pursuant to Law 963 of 2005, the recent tax reform enacted through Law 1607 OF 2012 eliminated this possibility.
Agreements signed while Law 963 was in force, will continue to have effect.
Are oil and gas activities generally protected under bilateral investment treaties entered into by your country?
Yes. Oil and gas activities are generally protected under BITs or Bilateral Trade and Investment Agreements. Colombia has entered into the following treaties: Cuba, Chile, Canada Peru, United Kingdom, China, Spain, USA, Canada, Japan, Switzerland, India, Republic of Korea and the Belgium-Luxembourg Economic Union.
Are there any dispute resolution systems specific to the oil and gas industry? Does state immunity apply in disputes?
There are no dispute resolution systems specific to the oil and gas industry. Disputes under E&P and Association Contracts are submitted to arbitration in Colombia and under Colombian law taking into account the nature of the parties (a state entity and a Colombian branch of a foreign company or corporation).
E&P Contracts set forth an amicable resolution stage and arbitration under the rules of the Chamber of Commerce of Bogota.
The Colombian Congress recently enacted Law 1563 of 2012 which is based on the UNCITRAL model arbitration law and modernises national and international arbitration regulations in Colombia.
Do anti-corruption rules apply to the oil and gas industry?
Yes. There are numerous rules contained in the Criminal Code, Law 1474 of 2011 (the so-called Anti-Corruption Statute) and various other laws and regulations. Colombia is also party to the United Nations and Interamerican Conventions against Corruption.
Has your jurisdiction adopted any legislation or regulations governing the exploitation of shale gas (fracking)? Are any special licences or environmental permits required for such activities?
Yes. The applicable regulations for this matter are the Colombian Mines and Energy Ministry Resolution 180742 of 2012, which sets forth the procedures to explore and exploit unconventional hydrocarbons in Colombia, and the ANH Agreement 004 of 2012, establishes the criteria used by the ANH to grant, delimit and award Blocks, and to enter into E&P Contracts with interested parties.
In order to carry out activities related to unconventional reservoirs, an environmental licence must be obtained from the MADS given that it is the governmental entity that grants such licences in order to drill exploratory wells and develop oil& gas fields in Colombia.
The development of unconventional resources will require environmental licences. The government has not issued any new regulations but is expected to issue specific terms of reference for the preparation of the Environmental Impact Assessments for unconventional resource developments that will constitute the basis for the environmental licence.
These terms of reference will likely be the result of consultations between industry and the government.
Has your jurisdiction adopted any legislation or regulations governing ultra-deep-water exploration or drilling activities? Are any special licences or environmental permits required for such activities?
At the time of writing this article, Colombia had not adopted any recent legislation or regulations governing ultra-deep-water exploration or drilling activities.
Decree 2820 of 2010 requires an environmental licence for offshore seismic exploration in depths of less than 200 meters, but not for seismic acquisition in depths of more than 200mts. Also, the government has published for consultation draft terms of reference for Environmental Impact Assessments for seismic acquisition in waters under 200mts of depth and for offshore exploratory drilling, neither of which have been formally adopted.
Pursuant to the same Decree, an environmental licence is required to drill offshore exploration wells.
There is an on-going program funded by ANH to build institutional capacity with different government authorities involved in the permitting process for offshore activities and it is likely that new technical regulations for offshore drilling will be issued in the near future.