New Contracts Spark Interest in Offshore La Guajira

Foreign oil and gas companies are very interested in signing contracts under Colombia's new oil and gas contract model, particularly in the area offshore the La Guajira peninsula, a lawyer at Houston law firm King and Spalding, Maria Victoria Vargas, told BNamericas.

The terms of the new contracts are "very aggressive in addressing concerns that oil companies have, and the comments we are getting from our clients is that they are happy to see the Colombian government has taken this new approach," she said. National hydrocarbons agency ANH does not plan to hold a bid round for now but it has already received expressions of interest from 20-30 companies interested in signing contracts, Vargas said.

The ANH is holding road shows in Houston to promote the contracts to companies already in Colombia, such as US-based ChevronTexaco and UK company BP, as well as possible newcomers, including US companies ConocoPhillips, Burlington Resources, Amerada Hess, ExxonMobil and EOG Resources, she said.

Companies are attracted by the new contract model because of it has better terms than the previous association model in areas such as duration, operational flexibility and autonomy, rights to production, and profitability.

The La Guajira offshore area, near the border with Venezuela, is particularly attractive to companies because "there is a huge gas potential there," she said. "Some of the blocks in that area are still controlled by [state oil company] Ecopetrol, but Ecopetrol was given a deadline to find partners to explore these areas, otherwise the areas will go the ANH to administer and grant contracts," Vargas said.

As in neighboring Venezuela, there is potential for a liquefied natural gas (LNG) project in Colombia to export gas to the US, she said. "It will depend on the amount of gas that is found." The new contract model developed by the ANH reduces the state's share of production to about 50%, depending on the volume of production, from about 70% under the old model. The model is based on a royalty/tax system that allows contractors to explore and produce autonomously at their own risk and cost. "Before it was mandatory for companies to team up with Ecopetrol under an association contract, and if you had a commercial discovery you had to share your production with Ecopetrol," Vargas said. Ecopetrol would reimburse companies for exploration costs only if a commercial discovery was made, so companies often ended up paying for the exploration risk, she added. But with Ecopetrol "out of the picture," the advantage of the new contracts is that companies can now "keep all their production net of royalty and taxes," she said. Companies can still form partnerships with Ecopetrol if they wish.

In addition, the business environment for the oil and gas industry and the security situation for private companies are improving, she said. The new contract model was "triggered" by Colombia's need to reverse its declining oil production and make new discoveries soon to avoid becoming a net oil importer by 2005, Vargas said. The ANH was spun off from Ecopetrol in 2003 to administer contracts with companies and promote private investment, starting operations on January 1, 2004.

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