Until 1974, exploration and exploitation of oil and gas in Colombia was performed through concession and association contracts. The concession contracts were prohibited through Decree 2310 of 1974. In the concession contracts, the Nation granted private entities the possibility to explore and exploit oil and gas under their own risk in previously defined zones, by the payment of a fee and a royalty.

As of 1974, exploration and exploitation of hydrocarbons in Colombia is permitted only through association agreements in which the Colombian Oil Company (ECOPETROL) is the contractor. It is important to highlight that the relationship between the parties is governed almost entirely by the clauses set forth in the association contracts.

Decree 2310 also grants ECOPETROL the possibility to develop exploration and exploitation activities directly.

Association agreements are divided in two phases: The exploration and the exploitation phase. The exploration phase has a maximum term of six years during which all the activities related to the exploration of oil are developed. During this phase, the associated party must assume all the costs and expenses. The exploitation phase starts upon the declaration of commerciality of the field by ECOPETROL, for a term no longer than 22 years, which could be extended if the circumstances are suitable.

Currently, the distribution of production under the association agreements, is done through a mechanism denominated the R Factor, as explained below. Nevertheless, ECOPETROL has signed agreements in the past using the 50-50 and the escalating distribution formulas. In all these contracts, a 20% royalty over the accounted production must be paid to the Nation. Also, once the field is declared commercial, the expenses incurred by the associate party during the exploration phase are proportionally reimbursed.

In the 50-50 distribution formula, production is shared in equal shares among the parties. On the other hand, the escalating distribution formula is characterized by a distribution of production in equal shares among the parties until a 60 million barrel production level is reached. If production increases over said limit, the share could raise up to 70% for ECOPETROL and diminish up to 30% for the associate party.

The R Factor distribution formula, provides that total production after royalties shall be divided in equal shares, until production reaches a 60 million barrel level. After this limit, the production is distributed using a formula in which the profitability of the field and the expenses incurred are taken into account.

Association contracts provide for an Executive Committee composed of representatives of the parties to said contracts which, among others, set the development and production policies under the contract.

It is worth mentioning that there are some Joint Risk Agreements in which ECOPETROL has entered into, whereby exploration costs are shared by ECOPETROL from the beginning, and in which ECOPETROL also acts as operator. Under such arrangement, production distribution is set forth according to the bid initially presented by the associate party when the field is declared commercial.

Recently, the President of ECOPETROL disclosed that the company is studying the possibility of structuring new alternative agreements whereby the differences of the fields within the available areas are taken into account, in an attempt to make small and marginal fields attractive to foreign investors. Also, ECOPETROL has informed that a separate agreement for the exploration and exploitation of gas is being prepared.

Prepared by Gustavo Andres Hoyos and German Villamil from Gomez Pinzon y Asociados.

These notes are intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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