Reduction in offshore gas royalties40 percent
New length of exploration phase9 years
New length of production phase30 years
Colombia’s offshore potentialJanuary 14, 2016
The increasing costs and logistical challenges that offshore activities demand have limited Colombia’s market to major companies with considerable experience. Shell’s Colombia country chair, Eduardo Rodriguez, talks to TOGY about the measures that need to be taken to ensure the creation of a structure conducive to offshore development.
What advances has Colombia made in the offshore sector?
The government and the domestic industry have made great progress in the offshore sector, allowing the country move forwards and increase its competitiveness. It is important to acknowledge the improvements Colombia has already made to enhance deepwater fiscal terms.
Efforts began by reducing offshore gas royalties by 40 percent and lowering windfall profit fees. Later on, adjusting oil windfall profit fees as well as increasing the exploration phase from six years to nine years and the production phase from 24 years to 30 years were necessary first steps to attract investment in Colombia’s deepwater areas. More recently, we have also seen the creation of offshore free trade zones, further enhancing Colombia’s competitiveness.
What obstacles in Colombia’s offshore must be overcome?
Three critical elements must be addressed: further fiscal incentives, a well-developed regulatory framework and clear rules of the game.
With regards to fiscal terms, further incentives are needed. To be specific, we believe the 40-percent tax reduction on oil royalties should be modified, as it was done for unconventionals and offshore gas. Also, further gas incentives are needed as a result of the high costs associated with offshore ultra-deepwater operations.
Colombia remains a frontier basin, which means the technical risks are very high, and the possibilities of success are very low. These situation needs to be balanced with the right fiscal incentives that make risks more bearable.
A well-developed regulatory framework helps countries’ competitiveness, because it provides companies with roadmap to obtain licences and permits for activities in a timely manner, if the conditions for these are met. We need to have clarity on Colombia’s technical, environmental and social regulatory framework.
Lastly, clear and predictable industry rules are essential and have been some of Colombia’s main assets relative to other countries. Recent circumstances such temporary tax extensions, changes in the gas price index and possible future tax reforms, exemplify situations where the lack of predictability could directly affect future investment decisions negatively.
We also need clear rules for gas exports, if we expect to develop long-term agreements with potential international buyers.
What is the outlook for gas developments in Colombia’s Caribbean Sea?
It is important to take into account that the competitive landscape in monetising natural gas resources is substantially different from monetising oil production, and the country is competing with comparatively low costs from gas discovered and ready for production in places such as the US and Canada.
Taxes, export regulations and long-term contracts also need to be taken into account. Local demand is probably not enough to develop these fields, which means we would need to guarantee stability for long-term contracts with premium markets such as Europe and Asia.
Can the existing oil and gas infrastructure on the Caribbean coast adequately support the offshore industry?
Colombia’s offshore industry is in an early stage of development, leaving room for many opportunities in the supply chain. There are three very important cities on the coast with good port infrastructure: Cartagena, Barranquilla and Santa Marta. However, there is still much to be done with regards to supply bases, aviation and vessel services and establishing a qualified workforce.
For example, the availability of helicopters approved by key offshore operators is very low, and a key part of the workforce is foreign. Taking this into account, Colombia’s industry and government need to work together to make the most of these opportunities and create an environment that encourages business development and knowledge transfer.
How have the National Hydrocarbons Agency’s recent agreements benefited the offshore sector?
Agreements 2, 3 and 4, all passed in 2015, have been a very positive measure for the offshore sector. The agreements allow operators in Colombia more flexibility their contracts, related to fiscal terms, operational commitments and deadlines.
The recently approved National Development Plan provides the National Hydrocarbons Agency with more autonomy to encourage investment in exploration and production. We are already witnessing the results of this. Although there is still much to do, we can certainly say that everything that has been done so far demonstrates that Colombia is going in the right direction in developing its offshore sector.
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