ALGIERS AUSTIN DALLAS FORT WORTH HOUSTON LONDON MEXICO CITY MONTERREY NEW YORK PARIS SAN ANTONIO Successes, Opportunities and in Colombia: A Gringo s Perspective Latin American Oil & Gas Conference Rio de Janeiro July 11, 2011 William Prescott Mills Schwind 713.951.5820 Scott.Schwind@tklaw.com Introduction Colombia is a tremendous success story by almost every metric There are tremendous opportunities in Colombia, but there are also challenges Some of those challenges are remarkably similar to what Brazil has faced and is facing Someone s challenge represents another person s opportunity 1
I. Colombia s Successes Colombia s economy has grown dramatically: Gross Domestic Product rose from $3B to $4.6B between 2009 and 2010 Foreign Direct Investment is on pace in 2011 to double the total from 2010 Almost 1/3 of Foreign Direct Investment has been in the oil & gas sector The Colombian stock exchange has been very active Example is Ecopetrol, the stock price for which has improved in value by 258% since the public offering in 2007 Domestic investors and foreign investors are using the stock exchange I. Colombia s Successes Colombia is considered a new BRIC, together with Turkey, Vietnam, Indonesia and South Africa. growing and diverse economy increasing internal demand and consumption political stability and legal framework educated and professional workforce Colombian companies are investing outside of Colombia 2
I. Colombia s Successes Turning point: improved security FARC s numbers and territory have been reduced Paramilitary activity has decreased Improved security translates into consumer confidence A secure investment environment attracts foreign investors Security is not the only reason for Colombia s success, but it is an important one I. Colombia s Successes Colombia has embraced foreign investment ranked by the World Bank as the best country in the region in protecting foreign investors ranked fifth worldwide ranked third most business friendly country in Latin America multiple bilateral tax treaties with the United States? 3
I. Colombia s Successes The Colombian oil & gas regulatory regime saw fundamental changes in 2003 Ecopetrol S.A. was spun-off and the National Hydrocarbons Agency (ANH) was created Ecopetrol is now owned 90% by the Colombian government, 10% by private investors Ecopetrol is now expanding internationally and hopes to increase production to 1 million BPD I. Colombia s Successes Proven oil and gas reserves in Colombia have grown oil production from Colombia is steadily rising, from 671,000 BPD in 2009 to 785,000 BPD in 2010. gas production has also steadily risen, from 874mmcf in 2008 to 1,016mmcf in 2009 and 1,090 mmcf in 2010. Colombia s current oil reserves are: - 2,400,000 proven barrels of oil - 1,700,000 probable barrels of oil - 5,700,000 possible barrels of oil 4
I. Colombia s Successes The contract regime for oil and gas is stable and transparent concession contract regime - contract is relatively balanced and consistent with international standards 30 year term - 6 year exploration period - 24 year production period, which can be extended royalties vary between 8% and 25% (sliding scale based on amount of production) - royalties can be paid in cash or kind contracts feature a stabilization clause competitive bid process transparent bidding process and a balanced concession contract II. Colombia s Opportunities and There are ample opportunities to invest in the Colombian upstream petroleum sector Ecopetrol recently announced that there are more than 400 projects that are available for foreign investment. active E&P industry with new ANH bidding rounds expected this year active international players shift from domination by Ecopetrol to increased role by private companies healthy range of small and medium sized players 5
II. Colombia s Opportunities and Could gas be a game changer in Colombia? domestic demand is healthy and expected to increase 80% of electricity in Colombia is from hydro, so there is potential for expanding use of gas for power generation (10 projects have been proposed) Government is promoting development of gas resources, specifically unconventional resources. Decree 2100 recently enacted. Formation of a National Gas Operation Commission II. Colombia s Opportunities and Could gas be a game changer in Colombia? (cont.) Government recognizes the need for gas internationally and has made it easy to export gas from Colombia, with some safeguards for domestic use exports to Venezuela? potential for LNG exports? shale gas resources are thought to have the potential to increase the country s total reserves of recoverable gas from 4 billion cubic feet to 19 billion cubic feet shale has been a game changer in the U.S.; could it be a game changer in Colombia too? contractual regime for gas is less well-developed than the regime for oil technology to develop unconventional resources? 6
II. Colombia s Opportunities and How will the oil and gas get to market? biggest challenge is lack of sufficient pipeline infrastructure to meet current production what will happen in the future, as production grows? small producers have limited access to existing pipeline infrastructure as recently as July 1, transportation bottlenecks were cited as affecting smaller producers ability to get production from the Llanos field to market up to 30,000 BPD is not being produced from Llanos due to insufficient transportation infrastructure II. Colombia s Opportunities and How will the oil and gas get to market? (cont.) somewhat improved with expansion of Ocensa oil pipeline in March but real improvement won t happen until December, when the first stage of the Bicentenario pipeline enters in service transportation by truck or rail is not feasible refining capacity? Ecopetrol has announced that it will modernize the Barrancabermeja refinery ports are at maximum capacity and are overcrowded 7
II. Colombia s Opportunities and How stable is Colombia s security situation? FARC still has almost 8,000 members there have been attacks and indications that the FARC is regrouping in June, FARC kidnapped four Chinese oilfield workers and ambushed an army unit ELN also is estimated to have around 2,000 members some paramilitary groups have become active again, now as criminals Mexican gangs heading south? some oil and gas producing areas are dominated by criminal groups II. Colombia s Opportunities and Who will provide oilfield services? as demand increases, may not be enough local capacity to meet that demand technical services are in particular demand, especially for developing unconventional gas resources there may be ample opportunities for foreign entities to partner with Colombian oilfield service companies there may also be opportunities for foreign entities to establish subsidiaries and branches in Colombia 8
II. Colombia s Opportunities and Where will the employees come from? Colombian engineers and geologists are in high demand lots of Venezuelans have moved to Colombia brain drain from Venezuela has been a short term benefit for Colombia, but is it sustainable? what happens if there are significant political changes in Venezuela? using foreign employees requires an immigration process that is bureaucratic and time-consuming (although not as bad as in some countries) to grow the oil and gas sector in a sustainable way, Colombia needs to develop local oil and gas professionals II. Colombia s Opportunities and Is Colombia s economy getting too hot? Santos warned last week against interest rate increases in Colombia could lead to more foreign investment and more appreciation of the peso Peso is 9% stronger against the U.S. dollar this year could also damage Colombia s export sector too much of a good thing is always a risk 9
Conclusions Colombia is a tremendous success story, with tremendous opportunities but also some challenges The challenges in Colombia are similar to those that Brazil has faced and is currently facing, so there are a lot of lessons that can be shared Every obstacle presents an opportunity Successes, Opportunities and in Colombia: A Gringo s Perspective Thank you! William Prescott Mills Schwind scott.schwind@tklaw.com (713) 951-5820 10