This content is from: Local Insights


Gómez Pinzón & Asociados Bogotá

Colombia continues to move rapidly towards a legal and economic regime which is attractive to international investment. The Colombian government hopes to attract international investors by establishing more open legal regulations and, simultaneously, working on the stability of the national economy. Indeed, recently the Government accomplished the amendment to Article 58 of the Constitution, which protects property rights from any type of expropriation without previous indemnification.

The Colombian oil sector is one of the priorities of this campaign. The Colombian government has adopted new incentive measures that are expected to have an effect on oil exploration by next year. The standard participation of the Colombian oil sector during the last decade, has been of around 20% of the total exports of the country. The proposed measures include three incentives as well as a drastic simplification in the obtaining of environmental permits.

Recently, the official version of the regulations issued by Ecopetrol concerning the incentives for boosting oil exploration in Colombia were given to notice. After the Development Plan Law is in force, such incentives are as follows:

First of all, article 73 of the Development Plan Law established a new regime to calculate the hydrocarbon's exploitation royalties. Such royalties will vary from a 5% to 25%, depending on the average daily production of the exploitation area. A straight line equation will determine the royalties for projects whose production is in between 5,000-125,000 b/d (5%-20%) or 400,000-600,000 b/d (20%-25%).

Moreover, the associates' participation in the production of liquid hydrocarbons will start at 70% until 60 million barrels are produced and Factor R is below 1.5. Such participation can decrease until 35% depending on Factor R, defined as the relation between the income and the expenses of the associate in each contract. Another important change is that for purposes of Factor R, the income and expenses of the associate will be permanently indexed according to industrialized countries' inflation rates.

Finally, the amortization of intangible assets of the wells, which under the former regime had to be done based on the technical units of operation systems, can now also be done through a straight line depreciation method, during a period of minimum 5 years, according to Law 488 of 1998.

Finally, Colombia recently succeeded in obtaining international support from the IMF for its orthodox economic program. The approved IMF's loan funds will be used exclusively to defend the exchange stability of the economy.

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