COLOMBIA ENERGY POLICY

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COLOMBIA ENERGY POLICY Roger Tissot
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A Recent History of Oil
The hard lessons of obsolescing barging


Cusiana
New petroleum policy
Cano Limon
Association Contract, R factor, War tax
Oil Importer
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A Recent History of Oil
Change has been the norm

• Colombian oil industry early daysgt 1918-1970s
• 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 Deregulationgt1970s-1994s
• Colombia net oil importer (1970s)
• 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 factorgtCollapse 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 Recent History of Oil
And 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 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

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THE ECONOMICS OF OIL
And 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

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LEGACY OF THE PAST OIL BOOM
Dutch disease, oil curse

Despite large surpluses from oil exports,
Colombia incurred in significant fiscal
Imbalances during the 1990s
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LEGACY OF PAST OIL BOOMS
Economic recession, chronic fiscal vulnerability

Colombia GDP per capita change Y-O-Y
During the 1990s 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 Colombias 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
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THE 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 IOCs
• 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 IOCs
  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 investgtsubject to
  budget pressures

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NEW STRUCTURE
Different Roles for different stakeholders


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SENDING A CLEAR SIGNAL
Lower government take


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SENDING A CLEAR SIGNAL
By offering very attractive terms


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SENDING A CLEAR SIGNAL
By ignoring resource nationalism


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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 SIGNAL
and new opportunities were included


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AMBITIOUS OBJECTIVES
Removing the risk of oil imports


ANH goal is to Increase by 4 MMB Colombias oil
reserves by 2020
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AMBITIOUS OBJECTIVES
Requiring significant investments


Investment requirement Base Case Scenario
Approx US2.5 b/year
Approx US2.6 b/year
Approx US2. b/year
Approx US1.2 b/year
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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 NOC
Ecopetrol 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 Colombias
  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 ECOPETROL
Production up


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THE NEW ECOPETROL
New geographic areas


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THE NEW ECOPETROL
Financial independence


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THE NEW ECOPETROL
A One million b/d company?


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MARKET RESPONDED
From 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
• Exxongt offshore Colombia
• Shellgt Heavy Crude oil

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MARKET RESPONDED
Ecopetrol is still the biggest player


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 Responded
An Investment and Exploration Boom

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

• 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

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FINAL COMMENTS
Colombia, A success story?

• Colombias 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 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.

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