Regulation of natural gas production

Ownership and organisation

What is the ownership and organisational structure for production of natural gas (other than LNG)? How does the government derive value from natural gas production?

There is no restriction on national origin or legal nature of an E&P company’s owners. However, oil and gas E&P must be conducted through a special purpose oil and gas corporate vehicle established in Colombia, whether it be a Colombian corporation or a Colombian branch of a foreign corporation registered with the Colombian Ministry of Mines and Energy (MME).

The National Hydrocarbons Agency (ANH) exclusively administers and assigns hydrocarbons areas for the exploration and exploitation of natural gas. Contractors are selected according to the ANH’s auctioned bidding regulations set out in its Permanent Process for the Assignment of Areas (PPAA).

Natural gas producers that sell the product in the wholesale market must be registered with the Public Residential (Utility) Services Superintendence (SSPD) and Energy and Natural Gas Regulatory Commission (CREG), provide reports periodically to the SSPD related to transactional and operational information, and deliver financial statements. Additionally, Law 142 of 1994 requires producers to hire an external auditor charged with delivering an annual report the SSPD on the consistency of a producer’s management with legal, technical, financial and accounting regulatory requirements.

ANH E&P contracts have a 30-year term where a minimum six-year exploration term is set for the contractor to complete the exploratory programmes agreed to in each contract. Minimum investment targets are set depending on the exploration basin. If the field begins marketable production before exhausting the exploration term, the contractor must deliver the investment shortfall to the ANH.

The Colombian state receives royalties on production without prejudice to other rights and compensations agreed, all of which are collected by the ANH. The amount of royalties is regulated by the General Royalties System. E&P contracts set conditions for the ANH’s kind or cash take on produced natural gas, and for subsoil use fees. Technology transfer commitments advanced in the bid term will be specified in the contract. An additional government take applies for high prices following the first five production years if the average price for any specific subsequent month would exceed the million British Thermal Units (MBTU) US dollar price set in a regulatory chart for distance intervals measured from well to delivery gate. The ANH may require additional participation in production if an exploitation period extension is sought.

Also relevant as an end-take is that the natural gas field’s assets will revert to the Colombian state when the E&P contract terminates for any cause. At that point, the contractor is obliged to deliver producing wells in perfect condition, as well as to deliver buildings and other field installations in good working condition. Rights of way and other permits will also be effectively delivered. This is all done gratuitously.

Regulatory framework

Describe the statutory and regulatory framework and any relevant authorisations applicable to natural gas exploration and production.

The ANH’s Agreement 2 of 2017 sets forth the general rules for delimiting and classifying areas to be assigned to contractors and for establishing the qualifications for the contractor to be eligible for E&P contracts. It also sets the obligations to be performed under E&P contracts, such as the exploration programme, guarantees, default fines and contract termination forms.

Applying its PPAA and its Resolution 78 of 2019 for setting the terms of reference, the ANH assigns a hydrocarbons area to the contractor holding the best bid among enabled companies.

Hydrocarbons E&P is also subject to environmental permitting issued by the National Environmental Licences Authority (ANLA). The ANLA’s licence covers the performance of each E&P activity and works, for which the contractor must submit an environmental impact study including, inter alia, information on the project, the place where it is to be developed, the natural resources to be used, information on impacts and risks, and a contingency plan previewing remedies in case of spills, fires, etc, as well as damage compensation plans.

If the ANLA’s licence is not global, the contractor must obtain environmental permits for the use of or pointed impact on natural resources such as surface water catchment, wastewater discharging, forest depletion and atmospheric emissions.

Also requisite for the environmental licence’s issuance is that the project company will have previously made a socioeconomic characterisation of the project’s influence area together with a follow-up monitoring programme in that respect. Additionally, the project company is required to inform such communities on the project’s scope and impact and on the proposed measures for the management thereof.

Different from, although related to the foregoing, is that the Ministry of the Interior must certify that the project company has complied with prior consultations with neighbouring black and indigenous communities. The terms for this consultation are set by the Ministry’s Prior Consultation National Authority. This may include the quantification of direct impacts and the ameliorating or compensatory measures as agreed with said ethnic communities.

Unconventional gas production

Are there different rules for, or any restrictions on, unconventional natural gas production (including fracking)?

The MME’s Resolutions 180742 of 2012 and 49106 of 2014 (the latter issued under the MME’s Decree 3004 of 2013) contain technical and procedural regulations regarding the integrity of wells, hydraulic stimulation, production water injection, fluids return and other technical matters associated with the exploration and exploitation of unconventional wells. However, those provisions were sued before the Colombian Council of State (the highest administrative tribunal), which suspended their effectiveness on the grounds that it is not certain that such exploitation techniques cannot gravely affect the environment and human health, further pointing to multiple studies conducted in several countries that have conveyed their being prohibited, conditioned or postponed until the true effects are ascertained. The proceeding’s evidentiary stage was completed in November 2020, and a decision may be expected by mid-2021.

Notwithstanding the said suspension, the Council of State did allow the government to carry out Pilot Integral Research Projects (PPIIs) in areas with fracking potential to investigate the viability of their use for unconventional E&P projects. The MME then issued Decree 328 of 2020 on PPIIs for unconventional hydrocarbon deposits using a multi-stage hydraulic fracturing technique with horizontal drilling. The ANH has organised an auction system for awarding PPIIs, the first of which was awarded in November 2020 to the Colombian company Ecopetrol for a well called Kale in the eastern department of Santander, where drilling is expected to begin in mid-2021 with a US$76.7 million investment. Ecopetrol will first need an ANLA environmental licence and all applicable E&P permitting, including transparency and public information access, and citizenship participation through territorial dialogues.

Three other PPIIs are in the process of being awarded by ANH using terms and conditions set out in its Agreement 6 issued in 2020 as amended (the latest amendment is dated 6 January 2021).

Required security and guarantees

Are participants required to provide security or any guarantees to be issued with a licence to explore for or to store gas?

The PPAA requires that the bidder be enabled economically, financially, technically, operationally, environmentally and legally according to documentary evidence required in the terms of reference. The validity and accuracy of such documents must be guaranteed by the bidder either by means of an insurance policy or a financial institution’s bond. If the parent company’s indicators are to support the bid as well, a joint and several guarantee taken by the parent and the subsidiary or branch is required. With a six-month validity extendable on the ANH’s request, that initial guarantee covers all obligations derived from bidding and from further being awarded an E&P contract. It can be delivered in the form of an insurance policy purchased from an acceptable Colombian insurer, or a bond issued by either an acceptable foreign or national financial institution. The acceptability thereof is regulated by the ANH.

On award, the winner must deliver a standby letter of credit to guarantee its performance of all obligations under the E&P contract, to replace the initial bidding guarantee or bond. This final guarantee may be issued by either an acceptable foreign or national financial institution. If foreign, the guarantee must be given in accordance with the legislation of the jurisdiction of issuance and executed by a duly empowered representative, as certified by external legal counsel. The performance guarantee covers damages derived from a breach of contract as well as the worth of fines. The guaranteed worth is between 10 and 50 per cent of the exploratory programmes and not less than US$100,000.

The awardee must additionally deliver:

  • a guarantee covering the contractor’s labour, social security and occupational health obligations under the E&P contract, with validity for the contract’s duration plus three years. The coverage value will be 10 per cent of annual personnel cost of the gas field’s activities and works; and

  • tort liability for damage to third parties caused by the contractor’s or its employees’ or dependants’ activities. This guarantee must be active throughout the contractual term and may be issued for annual periods, with a yearly worth of US$15 million.