If you have the cash and the right information, it is a great time, but you need to be a real oil person and take the risk.

Dominic DACOSTA ORDOÑEZ Partner DACOSTA ORDOÑEZ ATTORNEYS

Colombia’s upstream obstacles

June 1, 2017

Dominic Dacosta Ordoñez, partner at Dacosta Ordoñez Attorneys, talks to TOGY about encouraging exploration, the National Hydrocarbons Agency (ANH) and financing challenges.

The law firm focuses on the oil and gas industry, with expertise in farm-ins, farm-outs, acquisitions and bidding rounds. Dacosta Ordoñez Abogados has represented and advised several oil and gas companies in Colombia and overseas, such as Canacol Energy, Integral de Servicios Técnicos, Petrolera Monterrico, Trayectoria Oil and Gas, Turkish Petroleum Company and C&C Energy.

• On exploration: “What the state needs is more seismic and exploration wells rather than keeping the cash as collateral in standby credit letters.”

• On the regulator: “The ANH needs to change things that are not realistic, such as asking for an 8-kilometre seismic study as a minimum exploratory commitment. This happened in the latest round and was not practical.”

• On financing: “No Colombian bank is going to finance hydrocarbons activities for a company that has no production, and more than 80% of the companies here have no production. Using the funds that are already being used to collateralise letters of credit is the solution.”

 

Dominic Dacosta Ordoñez went in depth about exploration activity in Colombia, existing obstacles to investment and the opportunities in the region. Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find an abridged version of the interview with Dominic Dacosta Ordoñez below.

How can Colombia increase investment in exploration?
There are millions of dollars belonging to oil companies that are tied up in collateralised letters of credit to the ANH and which could be used for exploration. What the state needs is more seismic and exploration wells rather than keeping the cash as collateral in standby credit letters. Many companies are short in cash at the moment and are not fulfilling their contractual obligations. This means the state is going to end up collecting the letters of credit and taking the money, instead of having the money spent on oil activities.
The ANH can decide to return to the trusts system using the money that is already in banks supporting letters of credit. This will enable seismic work and the drilling of wells to actually take place when they see a company is following all environmental procedures and is ready to operate. Additionally, because of the drop in oil prices, seismic acquisition costs and drilling expenses would be cut in half.
We have listened to the agency in seminars and we do not want to keep the money, we want to put it to good use, in the same way that similar agencies in Brazil and Peru do. They are extending deadlines to help companies comply with their duties, but the reality is that no Colombian bank is going to finance hydrocarbons activities for a company that has no production, and more than 80% of the companies here have no production. Using the funds that are already being used to collateralise letters of credit is the solution.
Who is going to provide financing for pure exploration with the current prices? The answer is that there are a couple of big companies and others that have internal investors from private markets that are restoring the sector.

What are the obstacles to an increase in oil and gas investment in Colombia?
The obstacle is political will and fear of being watched by public servants and outside entities. The ANH needs to take the role of facilitator for company compliance. When a company complies with their seismic and drilling commitments, they declare compliance to the bank and the bank releases guarantees with the ANH. If ANH decided to help companies a bit by replacing the existing letter of credits granted by oil companies to trusts, where the money can actually be invested in the blocks, it would become a pioneer in its field, as all contracts would be fulfilled. This means more work and income for the ANH, but also the assurance of compliance as money in trusts can only be used to pay oil and gas contractors. They may fear political opposition, but they need to overcome this and do what is right.

What are ANH’s prospects in the next couple years?

Companies have shut down and lost their resources in credit letters granted to the ANH to secure the execution of exploration obligations.
These are difficult times due to the worldwide oil crisis, which is why the ANH has already started to make things easier for companies. If a company cannot comply with their duties under a block, they try to move their exploration commitment to another area. Two years ago this was not possible, but the ANH has evolved since then. Something that we could try, which is used in the US, is that a company could offer to drill wells for a smaller company. A company would take on the exploratory duties of another, equally sized company, making things more dynamic.
The ANH needs to change things that are not realistic, such as asking for an 8-kilometre seismic study as a minimum exploratory commitment. This happened in the latest round and was not practical. There could be swaps in services from seismic to rigs, while others only carry out seismic. There are many default contracts that could be saved with these changes.

How do opportunities offered by Colombia’s oil and gas industry compare with other oil producing countries in the region?
You can finance your company with public entities and invest in Colombia. Some believe this is the best time. If you have the cash and the right information, it is a great time, but you need to be a real oil person and take the risk.
Another bet is Argentina and Venezuela with their change in regime that has brought more opportunities. In Panama and similar basin-risk countries, with current prices, it is not worth exploring. In Guatemala there are very few successful companies. In Guyana, we have seen mining projects.
At a regional level, Colombia is the best option for investment. We strongly believe if we had the changes that I mentioned, we would become more attractive again and acquire exploratory resources that would bring reserves, new rigs and information to get more.

For more information on Dacosta Ordoñez Attorneys and the latest regulatory changes in the Colombian market, see our business intelligence platform, TOGYiN.
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