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Authors: Leopoldo Olavarría, Inès Elvira Vesga, Lucia Escobar Rubio Publication | August 1st, 2018

Hydrocarbons Exploration and Production model contract for offshore areas

Introduction

On June 14, 2018, the ANH published a new model Hydrocarbons Exploration and Production Contract to be used in offshore areas (the "Contract") after its approval by the ANH and by the Ministry of Mines and Energy.

The birth of the new model Contract is based on the new regulatory framework established in ANH’s Agreement 02 of 2017, and seeks to make the country more competitive, as well as to stimulate, retain, encourage and attract large companies to Colombia’s offshore upstream oil sector. In our view, the new model Contract incorporated welcome changes to the prior model, some of which resulted from the Colombian Government’s effort to socialize its terms with the oil & gas industry.

The new model Contract will apply to those operators who carry out activities under technical evaluation agreements (“TEAs”) and have the right to convert said contracts into hydrocarbon exploration and production (“E&P”) contracts. Likewise, the new model Contract will apply to companies that are selected in future competitive processes organized by the ANH to award offshore areas.

Below we will describe some of the main changes incorporated in the new model Contract. In doing our analysis we compared it with the latest version of the hydrocarbons exploration and production contract used by the ANH for offshore areas it awarded in the context of the "Ronda Colombia 2014" competitive process.

Preliminary Phase

In the new model Contract, the ANH develops the concept of a Preliminary Phase (formerly known as Phase 0). This is a phase prior to the exploratory period, which takes place before the term of the Contract’s performance begins. In the Preliminary Phase, the Contractor must: (i) establish a branch in Colombia, in the case of foreign legal entities, or extend the term of the pre-existing branch; (ii) confirm with the competent authorities the presence of ethnic groups or communities in the area of influence of the project and conduct prior consultations, if required; and (iii) obtain the environmental authorizations and licenses required for the Exploration Period to begin. This last point is a novelty since under the prior model contract the environmental license was applied for and obtained by the Contractor when the Contract’s Exploration Period was already running.

In view of the foregoing, situations in which the Contractor must justify a request to the ANH to re-establish the term of the Exploration Period when it has been unable to obtain the required permits, especially the environmental license, for causes not attributable to the Contractor, will be avoided. Another positive aspect worth highlighting is that the Contractor will be accompanied by the ANH during this Preliminary Phase.

Remaining Exploratory Activities

In the new Contract model, the term "Remaining Exploratory Activities" is used instead of the “Remaining Investments” contemplated in the model contract used in the context of the 2014 Colombia Round. The new definition is applicable to the Minimum Exploratory Program, as well as to the Additional or Subsequent Program; not only to the Additional Exploratory Program.

The Remaining Exploratory Activities correspond to those activities carried out by the Contractor that make up the Minimum Exploratory Program, as well as to the Additional or Subsequent Program, if any, that have not been effectively and satisfactorily completed at the expiration of the corresponding Period or Program. The ANH allows these activities to be developed in: (i) areas of other E&P Contracts or Technical Evaluation Agreements (TEAs), provided that the Contractor is a party to these, or (ii) available areas of interest to the ANH.

Minimum Exploratory Program and Additional Exploratory Program

The Minimum Exploration Program will be set by the ANH and the Additional Exploratory Program will be that offered by the Contractor in the development of the selection procedure.

Types of Exploratory Wells allowed

The new model Contract opens the possibility that, with the ANH’s authorization, the exploratory wells contemplated in the Exploratory Programs may be stratigraphic, of type A2 or of type A3. This flexibility is certainly a welcome change, as the previous model contract only allowed type A3 wells.

Discovery Holdback

The new model Contract contemplates a new figure, called "Discovery Holdback", which implies that, if the Contractor, after presenting a Notice of Discovery to the ANH, determines that the Discovery is not commercially viable individually, but could be commercially viable in the future, either individually or integrated with another discovery, the Contractor may request the ANH to hold back (or retain) such Discovery. Said discovery holdback may be made for successive 4-year periods, up to a maximum discovery holdback of 12 years, counted from the date of the holdback notice. In consideration for the Discovery Holdback, the Contractor must drill an A3 well for each 4-year holdback period. The holdback application presented to the ANH by the Contractor must contain a Holdback Program, which, in turn, must contain: (i) the exploration plan seeking to add additional reserves in order to achieve the commerciality of the discovery, and (ii) the execution schedule and budget for the A3 exploratory well required during the discovery holdback phase.

Time Periods

In relation to the terms, the Exploration Period will continue to be of 9 years, subject to extensions, counted from the effective date, and will be divided into phases (described in Annex B). The Production Period will remain at 30 years. The term to present the Commercial Declaration of a Discovery was increased, going from 3 to 6 months, and, in similar fashion, several terms established in the Contract were extended (for example, to present information to the ANH and to request extensions). For its part, the term of the Evaluation Program went from 2 years to 3, 5 or 7 years, depending, respectively, on the depth of the water where the discovery is located. If it is less than 500 meters, the term of the Evaluation Program was increased to 3 years. If the depth is between 500 meters and 1,500 meters, the term was increased to 5 years. If the depth is greater than 1,500 meters, the term was increased to 7 years.

Development of Production and Transportation Infrastructure Stage

The new model Contract created the "Development of Production and Transportation Infrastructure Stage ", whose term will be of up to 5 years, counted from the day the ANH receives the Commercial Declaration. After this period, the Production Period will begin, which will last 30 years. In the previous version of the offshore E&P Contract, the 30-year term of the Production Period was counted from the day on which the ANH received the Commercial Declaration. This change implies that, basically, the term of the new Contract will be extended by 5 years.

Programs in Benefit of the Communities (PBCs)

Annex F of the Contract, which establishes the guidelines for developing the Program in Benefit of Communities, is still in draft form and is currently being socialized by the ANH with the industry to receive comments, prior to its official publication. Although the concept and scope of the PBC is not new, in the new model Contract a specific chapter was created where they are developed.

The new model Contract does not specifically define how to determine the affected communities or zone of influence of an offshore E&P contract. In this connection, ANH’s Agreement 02 of 2017 sets forth that the zone of influence is that resulting from a social baseline study. In the case of offshore areas, the zone of influence’s extension shall be delimited by the social baseline study carried out by the Contractor.

Economic Rights

Economic rights will be governed by the provisions in the tenth chapter of ANH’s Agreement 02 of 2017. We see this as positive, since the amount and the method to calculate these rights are public and known by all companies interested in the award of offshore E&P Contracts, and will no longer depend on the provisions in future terms of reference issued by the ANH to award offshore areas.

Types of Compliance Guarantees

In relation to the guarantees, specifically, to the compliance guarantee, the new model Contract allows, in addition to a stand-by letter-of-credit (issued in Colombia or abroad), the granting of other types of guarantees, such as: (a) an insurance policy issued in Colombia and (b) a first-call guarantee, also issued in Colombia.

Penalties

The new model eliminated the imposition of fines as penalties (multas sancionatorias), and only maintains comminatory (or pressure) fines (multas conminatorias o de apremio), in a fixed amount of USD 25,000 per day of delay in compliance with Contractor’s obligations, subject to a maximum amount of USD 1,000,000 per breach. This may worry certain oil and gas operators, especially considering the fixed per day amount, regardless of the severity of the breach. However, a provision was added that expressly limits the power of the ANH to impose penalties if the Contractor remedies the breach.

Dispute Resolution

The new model Contract opens the possibility of agreeing to an international arbitration clause. Before, only national arbitration was contemplated. The arbitration clause will be agreed at the time of entering into the Contract and will depend on the fulfillment of Colombia’s norms (i.e., Law 1563 of 2012).

Please do not hesitate to contact us in case you have questions or comments. We will be pleased to discuss and review the topics that you consider appropriate.


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