New Incentives For Boosting Oil Exploration In Colombia

By Jean-Pierre Lenaerts and German Villamil

In an attempt to stimulate oil exploration, the Colombian government adopted new incentive measures that should have an impact by year 2000.

Indeed, the current profitability of oil investments in Colombia being around 17/19 percent while the average return should normally amount to 30/35 percent, foreign investors were keen to invest in the country. Also, the average exploratory risk in Colombia amounts to 80 %. If we add the circumstance that, absent any additional significant oil discoveries, Colombia should lose its status of self-sufficiency by year 2004, it was urgent to boost the exploration.

The proposed measures include three (3) incentives as well as a drastic simplification in the obtaining of environmental permits.

The first incentive provided by the National Development Plan of the Pastrana Government is a modification of the royalties regime applicable to the production of crude oil. Under the current regime, all royalty payments are subject to a 20% flat rate. This rate is irrespective of the production of the well. Under the new regime, which will only apply to new oil discoveries, the applicable rate on royalty payment will depend upon the volume of production, as follows:

Daily Production of Barrels

Applicable Royalty Rate

Below 5,000


Between 5,000 and 125,000


Between 125,000 and 400,000


Between 400,000 and 600,000


Above 600,000







The second measure provides for a modification of the level of participation of the state-owned company Ecopetrol ("Empresa Colombiana de Petróleos") in the new Association Agreements that will be entered into with private operating companies. There are currently 12 pending Association Agreements that should benefit from the new system. Under the current regime, Ecopetrol participates for at least 50% in all Agreements. Under the new regime, which was approved is still under review by the its Board of dDirectors of Ecopetrol held on July 2, 1999, its Ecopetrol´s participation will vary upon the volume of the productive well and the profitability factor (Factor de Rentabilidad or R Factor). As a result, for wells producing more than 560,000 b/d, the participation of Ecopetrol will be of 30% if the R Factor ranges between 1 and 1.52 ; If the R Factor is superior, then the participation rate will increase progressively up to 65% when the R Factor is equal or superior to 2.5. If the production from the field is less than 560,000 b/d then the participation of Ecopetrolthe associated private company will be of 30% range between 52.5 and 95% depending upon the Factor R.



Association Contract Schemes

Graph -New Royalties Regime

Graph -Former Scheme of Contract

Graph -New Scheme of Association Contacts

The last incentive which had been adopted in December 1998 as part of the last Tax Reform consists in an amendment to the amortization system for intangible assets. Under the previous regime, the associated company had to apply the Unit of Operation Method amortizing the exploration and operating rights it had acquired based upon the duration of the Association Agreement with Ecopetrol. Under the new regime, the investor will be entitled to amortize using the Straight Line Method over a minimum term of five years.

Beside the introducing of above described incentives, the Colombian government has also adopted measures in the environmental area. In particular, it has been decided to facilitate the issuance of environmental permits required for oil projects through a reducing of 50% of the requirements for drilling, exploration, and operating phase. As a result, it will now be possible to obtain an environmental license in 120 to 180 days while, until now, a one year waiting period was needed.

The above measures are only applicable to new projects, they should not have any impact before year 2000. Ecopetrol is expected to open new bids for exploration projects that should start by the end of the present year.

Jean-Pierre Lenaerts is a Belgian attorney, international tax consultant with Gómez Pinzón & Asociados in Colombia. German Villamil is a partner of the firm in charge of the oil and gas department.