In a nutshell: oil and gas law in Colombia

An extract from The Oil and Gas Law Review - 7th edition

Introduction

Currently Colombia is under a new government, presided over by President Ivan Duque. The government has aimed its efforts in attracting foreign investors through the implementation of regulations that promote industries such as the oil and gas sector. It is important to state that these regulations for promoting investment in the country had already started to be issued. Thus, governmental agencies have been focusing on evaluating the best manner to improve the rule of law so as to allow for increased interest in the oil and gas sector. Nonetheless, the development of exploration and production activities in unconventional reservoirs suffered an important setback as the Council of State ordered, as an interim measure, the suspension of the regime under which these activities were regulated. Oil average production has presented a partial recovery in comparison to previous years, fluctuating from an average production of 848 thousand barrels per day (KBPD) in 2018, to 872KBPD up to May 2019. This continues to confirm that the creation of exploration incentives, and promotion continues to be a matter of relevance, considering the favourable conditions in neighbouring countries and that exploration activities have decelerated. The outlook for the sector has been very favourable, as higher production has been achieved, reaching about 900KBPD, similar numbers to those for 2016. Similarly, the National Hydrocarbons Agency (ANH) has seen increased proposals for new exploration and production contracts, and alongside Agreement 2 of 2017 and its recent modifications made through Agreement 3 of 2019, related to the possibilities and procedure for the withdrawal of a contract by the contractor, and an exception to the presentation of the joint and several debtor's guarantee to those companies recognised in various international rankings.

Additionally, assignment of new areas under the new permanent contracting conditions was carried out in June and July 2019, resulting in 11 assigned areas – 10 continental and one offshore. Therefore, Colombia continues to advance in its attempt to provide structural and regulatory reforms to reactivate the oil and gas industry, as well as legal stability that guarantees the rule of law, which is profoundly needed, particularly regarding the rulings of the judicial branch. The government has expressed its strong intention to bet for offshore production, which has been evidenced, for example, in new discoveries in the Colombian Caribbean Sea, along with the issuance of a new model of the offshore contract. This new contract model includes certain provisions that are attractive to foreign investors, such as a provision under arbitration clause that allows international arbitration as long as certain Colombian law conditions are met.

In 2003, the Colombian government enacted Decree 1760 by means of which two substantive changes for the Colombian petroleum industry were adopted: (1) the creation of the ANH as a special administrative unit to be in charge of the administration and regulation of hydrocarbons in Colombia (at a later stage, Decree 4137 of 2011 modified the legal nature of the ANH and converted it into a state agency); and (2) the transformation of the legal nature of Ecopetrol into a corporation (by means of Law 1118 of 27 December 2006, Ecopetrol adopted the legal nature of partially state-owned company) dedicated exclusively to the upstream and downstream business inside and outside Colombia, and, therefore, it submitted the applicable regime of its acts and agreements to private law.

With those changes, Colombia started to be a more competitive state as Ecopetrol became another competitor in the market, leaving the sole regulatory and administrative management of hydrocarbons to the ANH. However, since 2014, exploratory activities have been in steady decline, but lately showing some signs of a slight recovery.

Under the term of President Ivan Duque, the country expects support from government for the industry reactivating exploration activities, which should also increase as a result of the implementation of the peace process.

In the first quarter of 2019, 74 exploratory wells were drilled, which represents a 61 per cent decrease compared to the same period in 2018. Oil reserves are estimated at 1,958 million barrels of oil, increasing from the 2017 estimate of 1,782 million barrels of oil. Nevertheless, they still represent a significant decrease compared to the 2,002 million barrels of oil reserve estimated in 2015.

Regarding gas production, as of May 2019 compared to 2018, one can detect a significant increase, as production reached an average of 1,128 million cubic feet per day. The previous reflected an important recovery in the production level, compared to the 1,133 million cubic feet per day produced in 2015 and the average production of 1,081 million cubic feet per day produced during 2016.

There are still changes that need to be incorporated since the government must provide and ensure greater legal stability for investors as well as establishing contractual terms that are much more attractive to investors.

Legal and regulatory framework

In Colombia, there is a clear differentiation between the upstream, midstream and downstream oil and gas regulations. The midstream and downstream levels gas regulation must be differentiated in multiple aspects from that relating to crude oil. The 1991 Constitution determines that the state is the owner of the subsoil and of non-renewable natural resources, without prejudice to grandfathered rights. Similarly, the basis for royalties is constitutionally defined by establishing that any production of non-renewable natural resources shall entail a royalty in favour of the state in addition to any further right or compensation that is agreed to.

As to the underlying titles or agreements that allow for the exploration and exploitation of hydrocarbons, Colombian regulations refer to: (1) association contracts (the association agreements) still in effect with Ecopetrol; (2) the technical evaluation agreements (TEAs); and (3) exploration and production contracts (E&Ps) entered into with the ANH. These various forms of contractual agreements allow any party to develop its activities in the oil and gas sector. As to the regulations in place for the development of hydrocarbons activities, rules have been issued essentially by the Ministry of Mines and Energy while the ANH has defined particular rules for TEAs and E&Ps in its condition as a state agency in charge of executing these contracts with the corresponding participants. A final set of rules are those that regulate environmental and social conditions for the development of operations in oil and gas. One must remember the various timelines that each of these sets of regulations entail and the manner in which exploration and production activities must be completed.

The hydrocarbons sector in Colombia has been developed since the early 1940s. The Colombian Petroleum Code (the Code) dates back to 1953 as a significant starting point for all matters associated with oil and gas. Parties seeking to enter into an association agreement, a TEA or an E&P contract will be required to verify whether their legal, financial, technical, operational, environmental and social capacities allow them to farm in or access a new underlying agreement, according to ANH capacity thresholds.

As per the midstream and downstream levels, gas regulation is separated in a significant manner from oil regulations. Considering the technical definitions, gas regulations encompass aspects ranging from contractual relations, technical standards, transport conditions, sale terms, distribution, consumption and heads of power to further regulate such matters. The Commission on Regulation of Energy and Gas (CREG) is the principal governmental entity that regulates these aspects since its inception under Laws 142 and 143 of 1994. Gas has been considered directly linked to public utilities and fundamental constitutional rights. The belief that gas belongs to a more local market has led to this separate set of rules.

As a civil law system, Colombia has a tradition of sector-specific regulations affecting all aspects of upstream, midstream and downstream operations. When reference is made to oil and gas at the upstream level, the regulatory framework includes norms, technical rules, structure regulations and historic norms.

Framework regulations are essentially found in the Petroleum Code. While various aspects of such Code have undergone modifications since 1953, the Code continues to be of fundamental relevance to many aspects of the oil and gas industry, providing the key regulatory guidelines. The perception of the petroleum industry as of public interest in aspects of exploration, production, refining, transport and distribution, is a relevant factor. Also, all data obtained during the course of scientific, technical, economic or statistical activities must be provided to the Colombian government, as part of the duties that parties involved in the oil and gas industry must abide with. Aspects relating to contracts, royalties and fines have since been updated by further regulations.

Technical rules that were contained in the Petroleum Code have also been updated. Decrees 70 of 2001 and 3724 of 2009, granted regulatory powers to the current Ministry of Mines and Energy. Accordingly, Resolution 181495 of 2009 was issued. This Resolution fully comprehends the main regulatory framework for the exploration and production of hydrocarbons with the purpose of maximising their recovery and avoiding waste. Resolution 181495 (updated by Resolution 40098 of 2015) establishes that the Ministry of Mines and Energy is in charge of all activities regulated in the norm, issuing any technical rules and administrative decisions associated with the regulation, and imposing applicable sanctions for breaches thereof. Regulated operations are expected to comply with national and international standards, including in particular AGA, API, ASTM, NFPA, NTC-Icontec, Retie or similar as found in the petroleum industry. The Resolution recognises that it is subject to all such regulations pertaining to environmental protection and sustainability as well as consultation requirements with communities, health and safety requirements, and labour conditions defined under the ILO Agreements 174 and 181. Parties to an underlying agreement must understand the particularities of the definitions found in Resolution 181495. Colombian law is strict in defining terms and conditions, which when not clearly understood or applied by the interested party can lead to breach of obligations or loss of rights under the underlying agreement. This rigidity has been compounded by the many agencies with oversight over public agencies and officials. The system consists of a prior authorisation and reporting structure. Any activity or operation to be undertaken by the operator of record under an oil and gas contract requires the due filing of documentation and forms before the Ministry of Mines and Energy for them to approve and control activities development under the contracts. There have been recent attempts to simplify this system, easing the operational burdens for contractors. However, the system seeks to ensure that rules are fully respected and that expected activities by an operator are fully undertaken.

In 2013, Decree 3004 of 2013 was issued by the Ministry of Mines and Energy, seeking to define a framework for technical rules. This resulted in the issuance of a further set of rules contained in Resolution 90341 of 2014 from the Ministry of Mines and Energy. In addition to regulations under Resolution 181495, the Resolution 09341 sets forth the technical parameters applicable to the exploration and exploitation of unconventional reservoirs. On the basis of this regulation the government sought to ensure the sustainable development of non-renewable natural resources based on appropriate industry practices. It should be noted that Resolution 09341 of 2014 abrogated Resolution 189742 of 2012, except for the Articles that regulate the 'operational agreements' understood as those entered with the operator with the titleholders of mineral rights whenever unconventional reservoirs overlap with mining titles. Pursuant to Resolution 09341 of 2014 the exploration and exploitation procedures not regulated in Resolution 09342 of 2014 shall be governed by the procedures applicable to conventional reservoirs in Resolution 181495. The importance of unconventional hydrocarbon plays was further evidenced by the parallel work undertaken to issue regulations addressing environmental concerns for the exploration of these reservoirs under Resolution 0421 of 2014 of the Ministry of Environment and Sustainable Development and the set of rules and contract drafts for unconventional reservoirs issued by the ANH in Agreement 2 of 2017, which included provisions on that matter that were under Agreement 3 of March 2014. It is notable that the Ministry of the Environment has already issued terms of reference for the exploration of unconventional reservoirs, but the government is still working on applicable environmental parameters for the exploitation of these resources. Therefore, even though there is currently 'developed' hydrocarbons regulation for exploration and production of unconventional resources, environmental regulations, which are complementary and must be abided by to conduct hydrocarbon operations, are still behind on how to produce these resources. Environmental licences that allow companies to develop unconventional reservoirs must be granted by the National Environmental Licensing Authority (ANLA), in order to maximise Colombia's potential in this regard, and attract foreign investment for the industry.

Unconventional reservoir potential has provoked, as in other jurisdictions, debates on fracking, which, as previously indicated, has resulted in Decree 3004 and Resolution 09341 currently being temporarily suspended as an interim measure decreed by the Council of State within a nullity claim presented against these norms. Such a claim argues that the development of fracking activities in Colombia contravenes higher hierarchy norms, such as the sustainable development clause, and, therefore the, precautionary principle (of constitutional order) should be applied thus declaring the nullity of the suspended norms.

As per the transportation regulations, technical regulatory conditions are included under Resolution 72145 of 2014, which regulates the transport of crude by pipelines, and Resolution 72146 of 2014, which defines tariffs for transport via such pipelines. Resolution 72145, in line with Decree 1056 of 1953, recognises that the transport of crude is a public service, which implies that parties undertaking such activity must operate in accordance with regulations applicable to public utilities. After many years of discussion as to whether or not public access was to be granted to oil pipelines, the regulation to ensure free access to parties without any form of discrimination was granted in accordance with the Petroleum Code, defining a set of fair and reasonable transport principles and prices. In furthering the principles of the Code, the government's preferential right in the transportation of hydrocarbons was reiterated. This right, which is held by the government and exercised through the ANH, in relation to the capacity of the oil pipeline is defined for public pipelines in terms of the right of transport of state crude and with respect to private pipelines for royalty crude. This right extends to 20 per cent of the calculated capacity of the pipeline as constructed. Another aspect that merits comment is the fact that Resolution 72145 required transporters to issue a manual for transportation and to make such manuals public. Transportation manuals must include a full description of the system, its capacity and connection terms as well as access conditions and applicable tariffs. Colombia holds more than 8,500km, including pipelines and flowlines; 5,467km of pipelines and 3,100km of flowlines.

The ANH is currently in charge of administrating TEA and E&P contracts, leading to considerations of contract rules. Currently Agreement 2 of 2017, issued by the ANH, includes several modifications and defined rules pursuant to which a participating interest in such contracts could be held; it also established contract rules and how to evidence capacities required to be a contractor under an oil and gas contract. With Agreement 2, and its modifications as per Agreement 3 of 2019, the ANH established rules for the award of hydrocarbon blocks, and it also determined the criteria for exploration and exploitation of hydrocarbons in Colombian territory. These criteria include selection of contractors, and management, execution, termination, liquidation, monitoring, control and supervision of E&P contracts.

In 2018, the ANH launched the Permanent Process of Allocation of Areas, which will allow the interested companies to request areas for exploration and production of hydrocarbons continuously, eliminating the need for carrying out bidding procedures for the allocation of areas. Under this process, the interested companies will send their proposal to the ANH, which will then make public the proposal inviting third parties to participate and bid for the allocation.

Key modifications include the determination of contractual principles that pursue the observance of the rule of law, so that contractors have a due process guarantee in their relations with the government, and protection towards parent companies as the government must endeavour to solve its contingencies with the local entities. Also, work programmes are not locked to currency amounts, but to a new points systems that provides benefits as it avoids eventual currency differences, and allows an obligations exchange between the contractor and the contracting party. In addition, the Agreement clearly states the terms, conditions and obligations arising from contracts. It also includes measures to mitigate the effects of falling international oil prices, and limits the rights of operators and non-operators, establishing less stringent participation conditions for the latter, differentiating also offshore and offshore operations, such as conventional and non-conventional.

Nevertheless, Agreement 2 regulates contracts entered into as of 18 May 2017. Prior contracts are still ruled by the Agreements under which they were granted. However, the parties may submit modifications, additions, extensions, assignments and other actions related to the execution of the Contracts, to the provisions under Agreement 2 of 2017.

While the ANH is empowered to enter into direct contracts with interested investors, over the past few years the ANH has developed a bidding system through bid rounds, which attempt to attract a larger number of interested parties in a more competitive environment, where economic proposals ought to be predominant. Bid rounds may, however, define particular additional conditions for certain offers as has been the case of offshore plays or unconventional reservoirs, including specific capacities to be evidenced for said bid round.

Pre-existing direct operations of Ecopetrol or Association Agreements are regulated by different regulations, due to their historic existence. Decree 1895 of 1973 was the previous technical regulation considered applicable, in line with Legislative Decree 2310 of 1974, which assigned the administration of oil and gas to Ecopetrol and its further regulation contained in Decree 743 of 1975.

On the other hand, and considering the regulation of gas supply in Colombia, Decree 2201 of 2003 must be highlighted as a mechanism seeking to promote and ensure national supply of natural gas. Aside from this particular decree, most other regulations have been contained in various resolutions issued by CREG as the regulatory body empowered to ensure operational aspects post-upstream chain:

1. in 1999 Resolution 071 defined the Unique Technical Rules for the Transport of Natural Gas;
2. in 2010 Resolution 126 defined general criteria for the remuneration of transport of natural gas and the General System for Charges of the National Transport System; and
3. in 2015 three key resolutions, 041, 062 and 089, regulated the methodology to calculate the cost of non-exported natural gas, the income for imported natural gas in security generation scenarios and regulated commercial aspects of the wholesale market of natural gas, respectively.

The Ministry of Mines and Energy is the principal government body in charge of regulating upstream operations in oil and gas. At the contracting level in oil and gas, and other than such association agreements that Ecopetrol held as of 31 December 2003, all subsequent contractual arrangements are executed by the ANH. The ANH's powers are defined under Decree 1760 of 2003, which created the ANH, and are further developed by Decree 4137 of 2011. While in certain matters there may be doubts as to the delimitation of powers of the Ministry and the ANH, it is clear that the fundamental regulatory powers lie with the Ministry and the ANH is merely an administrator of the non-renewable resources to be developed via TEAs or E&P contracts. As a relevant matter, in early 2013, the ANH and the Ministry executed an inter-administrative agreement that delegated to the ANH certain inspection and regulatory activities. Upon production of gas, the CREG is the governmental body in charge of regulating gas transport and commercialisation. As such, CREG regulates the exercise of activities in energy and gas in order to ensure efficient energy availability and appropriate competitive structure avoiding dominant positions.

Accordingly, there are other governmental entities that have particular roles regarding oil and gas. The Ministry of the Environment is in charge of defining principles and regulations relating to environmental impacts that may be affected by oil and gas operations. Also, there are regional environmental agencies that have the right to issue regulations that must harmonise with national norms. An environmental licence is not required for all exploratory activities. For this permission, regional environmental authorities are the ones authorised to approve these permits. In contrast, when an environmental licence is required, this environmental instrument may only be granted at the state level by the ANLA in accordance with Decree 2041 of 2014, recently compiled in Decree 1076 of 2015. Thus, in certain instances, such as the case where an operator undertakes a seismic acquisition without the need to construct new roads, the operator will only be required to obtain specific environmental permits such as water concessions or discharge authorisations, which will be issued by the regional environmental agencies known as autonomous regional corporations. Moreover, Decree 1076 of 2015 compiled all the environmental applicable rules, including the provisions included in the Decree 2041 of 2014 pertaining to regulatory requirements for unconventional reservoirs and the new terms applicable for the environmental licensing processes.

In the case of offshore activities, entities such as the maritime authority DIMAR and the environmental investigations institute INVEMAR will always play a prominent role. Similarly, when prior public consultation is required in oil and gas exploration and production with indigenous or Afro-Colombian communities, the Ministry of the Interior and INCODER will be involved, issuing the applicable instruments to certify the presence or no-presence of said communities in the area of the project. However, there have been recent discussions involving the emerging communities that were not affected by the project in first instance, but as the project develops, they seem to be affected stakeholders. In this situation, when no agreement has been reached with emerging communities it can cause a major delay in operations, since the courts' position gives these communities the right of prior consultation, even though certifications of no-presence have been issued by competent authorities. The matter is addressed by the constitutional court in the Judgment T-382/06.

With the issuance of Law 39 in 1990, Colombia became a party to the 1958 New York Convention.

Furthermore, the recently issued Law 1563 of 2012 established a complete set of rules on national and international arbitration. The regulation clearly indicates that arbitral rulings rendered abroad can be recognised and executed in Colombia in accordance with the applicable regulations.

Among the various commercial treaties recently entered into by Colombia and those that intend to further commercial relations, there have been many free trade agreements negotiated in the past few years. These treaties include:

1. the Free Trade Agreement between Colombia and Peru and the European Union and its Member States as approved by Law 1669 of 2013;
2. the Free Trade Agreement between Mexico and Colombia as approved by Law 1457 of 2011;
3. the Free Trade Agreement between Canada and Colombia as approved by Law 1363 of 2009; and
4. the Free Trade Agreement between Colombia and the United States of America as approved by Law 1143 of 2007.

In addition, Colombia has entered into various bilateral investment treaties, including but not limited to, Peru, Switzerland, China, Spain and Japan.

To date Colombia has entered into double taxation treaties with Argentina, Brazil, Canada, Chile, the Czech Republic, France, Germany, Italy, India, South Korea, Mexico, Portugal, Spain, the United States, Venezuela and the member states of the Andean Pact Community, and it is seeking to increase the jurisdictions with which it has these types of arrangements.