On February 6, 2015, the government submitted to Congress its Bill for the 2014-2018 National Development Plan (the NDP), which includes competitiveness and strategic infrastructure as one of its cross-cutting strategies. This strategy has five goals, one of which is mining and energy development for regional equity, for which it intends to allocate COP 78.5 trillion of the National Public Investment Plan, COP 65.7 trillion of which it hopes will be financed by the private sector. The NDP provides, among others, for flexible rules and accommodating royalty regime for off-shore, unconventional and incremental production projects. Its most relevant aspects the hydrocarbons sector are summarized below:
Overlapping of areas of unconventional hydrocarbons deposits and mining rights
The NDP states the need to coordinate unconventional hydrocarbons and mining exploration and exploitation projects in event of the overlapping of areas between unconventional hydrocarbons deposits and mining rights. the NDP presumes that the holders of both rights will reach an operational agreement for the development of both resources. In such cases, the mining authority may authorize the suspension of mining titles without affecting their contractual term in order to allow an integrated and coordinated management of the two activities. If no agreement can be reached between the parties, the Ministry of Mines and Energy (MME) will determine the conditions under which an integrated management of operations could be arranged, granting each party the conditions necessary for development of their projects. However, the NDP does not include any guidelines for these operational agreements, nor to the MME for regulating the development of joint operations in overlapping areas.
Modification of contracts by mutual agreement with the ANH
For both oil exploration and production contracts and technical evaluation contracts in force at the time of the approval of the NDP, the National Hydrocarbons Agency (ANH) is empowered, by mutual agreement with contractors, to: (i) amend the terms for exploration, evaluation and filing of declaration of commerciality; (ii) approve the transfer of investments from one area to another area of the same contractor; (iii) adjust the terms of contracts for offshore areas with contracts entered into prior to Ronda Colombia 2014, to those corresponding to the contracts deriving from such round.
Although this last provision is unclear, we assume that it would allow contractors for offshore contracts entered into prior to Ronda Colombia 2014, to adapt to the terms of the contracts entered into during Ronda Colombia 2014, when such terms are more favorable for them.
The ANH’s board of directors must determine the bases for implementing the above. However, under no circumstance could the contractually-agreed commitments be reduced.
Agents of the liquid fuel distribution chain
Agents of the liquid fuel distribution chain breaching public service operational rules or failing to comply with the orders of the MME, could receive the following sanctions from the Ministry, according to the seriousness of their conduct: (i) fines of between 10 and 2,000 monthly legal minimum wages (Salario Mínimo Legal Mensual Vigente - SMLMV); (ii) suspension of the service between 10 and 90 calendar days and temporary blocking of the SICOM code (which would prevent the agent from providing the service during the suspension term); (iii) cancellation of the authorization and permanent blocking of the SICOM code, and (iv) administrative seizure of assets and operations.
Violation of the Petroleum Code
The MME may impose administrative fines of between 2,000 and 100,000 SMLMV on whoever fails to comply with the obligations under the Petroleum Code, when the breach should not produce expiry of contracts or cancellation of permits, or when the government prefers to opt for this sanction instead of declaring the expiration.
Royalties for new incremental production projects
The escalating royalty regime for hydrocarbons production set forth in Article 16 of Law 756 of 2002, which ranges from 8% to 25% depending on the monthly average of daily production, will be applied to incremental production projects (i.e., those that add recoverable reserves as a result of new investments made as of the date of entry into force of the NDP, and which are intended to increase the recovery factor of existing deposits).
This escalating royalty currently applies only to production from the so-called Discovered and Undeveloped Fields and to incremental production from: (a) Ecopetrol’s incremental production contracts; and (b) projects undertaken by Ecopetrol for the same purpose. The escalating royalty does not apply to production from fields discovered prior to the entry into force of Law 756 of 2002, which is subject to a rate of 20% of the value of production at wellhead, in accordance with Law 141 of 1994 (modified by Law 756 of 2002 for the production of hydrocarbons discovered following the date of its entry into force). Furthermore, currently Ecopetrol’s production under those Association or Concession Agreements that have been terminated or have reverted to the nation as of January 1, 1994, are subject to an additional royalty of 12% over basic production (i.e., the total production obtained from such fields).
According to this provision the escalating royalty regime set forth in Article 16 of Law 756 of 2002 will apply to all the production of new incremental production projects.
New incremental production projects must be previously approved by the MME. To this end, we understand that the same approval procedure will be followed as is used for Ecopetrol’s incremental production projects, established in Decree 3176 of 2002.
Approval Procedure for the NDP
By Decree 133 of January 22, 2015, the President of the Republic convened Congress for special sessions between February 6, 2015, and March 15 of this year, exclusively for discussing the NDP. During this period the government hopes to receive final approval for the NDP.
In principle, the NDP would be subject to prior consultation pursuant to Article 6 of Law 121, which states that the government shall "consult with the parties concerned, through appropriate procedures and in particular through their representative institutions, whenever legislative or administrative measures are planned that may directly affect them."
Over the last year, the National Planning Department (“DNP” of its initials in Spanish) has made some progress on such prior consultations, although its progress and results have not been public. In this regard, it is well worth mentioning that the PND has filed some formalization acts of prior consultations carried out with some communities, without specifying whether they obey to the enquiries about the PND Bill Draft or to its basis. The Bill draft´s file (including its annexes) is currently held by Secretaries of the Third Committees on Economics of the Congress of the Republic, and it has not been disclosed at the time.
However and facing a possible absence of the PND bill draft´s total formalization, please note that in recent statements the president of the Constitutional Court mentioned that there is a judicial precedent clarifying that the prior consultation would not be required to approve an administrative or legislative bill, and would only do so in regard to the execution activities resulting thereof and only in those sections that directly affect said communities. In any case, the compliance or not with the procedural requirements on prior consultations may lead to unconstitutionality claims which would affect the passing or validity of the PND.