Interview: Francisco José Lloreda
What steps are being taken to improve investor confidence in Colombia’s oil and gas industry as legal uncertainties prevail in the sector?
FRANCISCO JOSE LLOREDA: The Colombian government has been introducing some measures to further improve investor confidence, principally through the adjustments made to National Hydrocarbons Agency (Agencia Nacional de Hidrocarburos, ANH) contracts. These modifications include guarantee requirements and greater flexibility in transferring investment obligations. Further changes are expected to be implemented in 2017.
However, legal uncertainties remain. There are those related to environmental matters; such as revoking previously awarded areas for exploration through free, prior and informed consultation processes, and those that reestablish the role of municipalities in permitting extractive activities in their areas. The government is well aware of this and is explaining the importance of safeguarding judicial decisions for current and future operations of extractive industries. In addition, a coherent information campaign between the national government, industry and local authorities is also taking place on a regular basis as a way to ensure a more predictable and stable regulatory framework.
What are the risks associated with the cost efficiency strategy at the exploration stage, and how is it having an impact on production?
LLOREDA: We are already seeing the effects of the cost efficiency strategy that was put in place recently, given that there have been cost reductions of approximately 30% across the industry. This development has led to a decline in investment in oil and gas exploration, as well as a reduction in production figures. On-shore seismic activity in 2016 dropped by 85% from 2014, and exploration wells are unlikely to be above 60 in 2017 — well below the figures of around 130 in 2014-15. Furthermore, development wells are going to be between 600 and 700. Production has also dropped to below 850,000 barrels per day, way below expected for ensuring fiscal stability in the country. It is clear that this tendency has to be reversed.
As Colombia looks to diversify its energy mix, what role should its natural gas reserves play?
LLOREDA: Natural gas supply is an increasingly important fuel source for electricity generation, and as an industrial and domestic energy source. However, current proven natural gas reserves in Colombia are in decline and will not be able to produce enough to meet domestic demand in the near future. Therefore, promoting and providing incentives for gas exploration, particularly offshore, will be critically important. This will need to be complemented by flexible regulations from the government, especially on imports and access to infrastructure.
How competitive is Colombia’s energy landscape from an investment perspective?
LLOREDA: The oil and gas sector has many interesting opportunities for investment in Colombia. First is the reality that there are several basins with great potential that are still unexplored. We have also seen willingness from the government to work together with the operators to further improve the investment environment in the country. This has included the aforementioned adjustments to ANH contracts and it’s likely to include fiscal provisions to reduce the government take.
However, important challenges remain including a need for changes to the environmental licensing process; a reduction in blockades; a government response to community requests; greater clarity on where oil activities can take place with respect to zoning; and also greater legal certainties in place.
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