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COLOMBIA ENERGY POLICYCOLOMBIA ENERGY POLICY

Roger TissotRoger Tissot

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A Recent History of OilA Recent History of Oil The hard lessons of obsolescing barging

Colombia Oil Reserves and Production

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1980

1985

1990

1995

2000

2005

Oil

Res

erve

s M

MB

0

100

200

300

400

500

600

700

800

900

Oil

Pro

du

ctio

n M

BD

Oil reserves Oil production

Oil Importer

Cano Limon

Cusiana

Association Contract, R factor, War tax

New petroleum policy

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A A Recent History of OilRecent 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

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A A RecentRecent History of Oil History of OilAnd the easy oil has already be

discovered

Source: Oil in Colombia, History, Regulation and Macroeconomic Impact. CEDE March 2009

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THE ECONOMICS OF OILTHE 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

Colombia GDP by Sectors

0%

20%

40%

60%

80%

100%

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Agriculture Mining & oil Manufacturing Construction Services

Colombia Oil Exports

0

10,000

20,000

30,000

40,000

50,000

1978 1983 1988 1993 1998 2003 2008

0.0%

10.0%

20.0%

30.0%

40.0%

Total Exports Oil Exports % oil exports to Total exports

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THE ECONOMICS OF OILTHE ECONOMICS OF OILAnd 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

Colombia Royalties % GDP

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2000 2001 2002 2003 2004 2005 2006 2007 2008

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LEGACY OF THE PAST OIL BOOMLEGACY OF THE PAST OIL BOOM Dutch disease, oil curse

Colombia Central Government Revenues, Expenditures and Balance % GDP

0

20,000

40,000

60,000

80,000

100,000

19

78

19

83

19

88

19

93

19

98

20

03

20

08

Fis

ca

l ba

lan

ce

US

$ m

illio

n

-7.00

-6.00

-5.00

-4.00

-3.00

-2.00

-1.00

0.00

1.00

Fis

ca

l Ba

lan

ce

% G

DP

Despite large surpluses from oil exports, Colombia incurred in significant fiscal Imbalances during the 1990’s

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LEGACY OF PAST OIL BOOMSLEGACY OF PAST OIL BOOMS Economic recession, chronic fiscal

vulnerability

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

1978

1983

1988

1993

1998

2003

2008

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

Colombia GDP per capita % change Y-O-Y

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THE URGENCY OF PRAGMATISMTHE 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

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NEW STRUCTURENEW STRUCTURE Different Roles for different stakeholders

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SENDING A CLEAR SIGNALSENDING A CLEAR SIGNAL Lower government take

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SENDING A CLEAR SIGNALSENDING A CLEAR SIGNAL By offering very attractive terms

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SENDING A CLEAR SIGNALSENDING A CLEAR SIGNAL By ignoring resource nationalism

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SENDING A CLEAR SIGNAL 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

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SENDING A CLEAR SIGNALSENDING A CLEAR SIGNAL and new opportunities were included

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AMBITIOUS OBJECTIVESAMBITIOUS OBJECTIVES Removing the risk of oil imports

ANH goal is to Increase by 4 MMB Colombia’s oil reserves by 2020

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AMBITIOUS OBJECTIVESAMBITIOUS OBJECTIVESRequiring significant investments

Approx US$2.5 b/year

Approx US$2.6 b/year

Approx US$1.2 b/year

Approx US$2. b/year

Investment requirement Base Case Scenario

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WHERE IS THE OIL?WHERE IS THE OIL?The Importance of Heavy Crude Oil

• 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

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NEW POLICY, NEW NOCNEW POLICY, NEW NOCEcopetrol redefined role

• 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

From sleepy bureaucratic company To gutsy mover

following the steps of Petrobras

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THE NEW ECOPETROLTHE NEW ECOPETROLProduction up

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THE NEW ECOPETROLTHE NEW ECOPETROLNew geographic areas

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THE NEW ECOPETROLTHE NEW ECOPETROLFinancial independence…

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THE NEW ECOPETROLTHE NEW ECOPETROLA One million b/d company?

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MARKET RESPONDEDMARKET RESPONDEDFrom 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

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MARKET RESPONDEDMARKET RESPONDEDEcopetrol is still the biggest player

Colombia Oil Production by companies

0 50,000 100,000 150,000 200,000 250,000

EcopetrolOxyBP

Meta PetroleumPetrobras

HocolPerenco

Mansarovar EnergyHupecol

PetromineralesGran Tierrapetrotesting

EmeraldInteroil

PetroSantanterC&C Energy

KappaWinchester

MonteczConequipos

RepsolHarkenSipetrol

Petrolera del NorteUnion Temporal Andina

Solana PetroleumSogomy energy

Union TemporalRamshorn

Union TemporalPetroleo de ColombiaDrilling and Workover

IsmocolUT Omega EnergyConsorcio Campos

ColtanquesCopp

Mompos ConstruccionStratus Oil & Gas

Union Temporal MocanWell logging

Great North Energy

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

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Market RespondedMarket RespondedAn Investment and Exploration Boom

• 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

Exploration Wells A3 Colombia

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20092005200119971993198919851981

To date no significant discoveries have been made, but if history repeat itself, efforts should show some results in the next couple of years

Units

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FINAL COMMENTSFINAL 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

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FINAL COMMENTSFINAL 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.