Montly Report November

HydrocarbonsCoolloommbbia

News and analysis for Colombian Hydrocarbons Industry StakeholdersNovember 2012

November 15, 2012

To anyone who needs to understand the Colombian Oil and Gas Industry

Welcome to Hydrocarbons Colombia Inner Circle Monthly Report

Hydrocarbons Colombia Inner Circle members are a select group with access to our in-depth analysis and commentary.

Every month these special individuals will receive our monthly report, the second of which is in your hands.

The report mixes expert commentary from our network of collaborators with statistical information and analysis from our Hydrocarbons Colombia staff analysts. The combination will give you unprecedented sight into the inner workings of the Colombian oil and gas industry.

This month we start with commentary by José Vicente Zapata Lugo, a senior partner in the firm Suárez Zapata & Partners specializing in environmental issues. He takes up the theme that Colombia risks scaring off investors by being unclear about processes and requirements. Our interview this month is with ex-viceminister of justice in the Uribe government, Rafael Nieto, who gives his thoughts on the vital “community consultation” issue.

Hydrocarbons Colombia collaborator and well-known industry expert Tomás de la Calle provides his analysis of the results of the 2012 Round of auctions where companies avoided making risky calls. His Eye on Ecopetrol feature this month points out the National Oil Company's (NOC) sloppy use of language in describing production and the problems that can cause.

There are also our monthly features on the security situation in the country and our analysis of environmental licensing performance. Every month we highlight some aspect of company financial and operating results and this month we look at trends in Colombia oil prices, relative to the global benchmarks.

In less than 10 pages, Hydrocarbons Colombia’s Inner Circle Monthly Report gives you an easy-to-read summary of the month’s key issues and current trends.But being an Inner Circle member goes beyond our daily newsletter and this monthly report. On our special Inner Circle webpage we publish longer analytic pieces, exclusive statistical analyses and more commentary.

Be a member of the Hydrocarbons Colombia Inner Circle and learn what you need to know to make the right decisions about this fascinating and important market.

Wally SwainManaging Editor

HydrocarbonsColombia


News and analysis for Colombian Hydrocarbons Industry Stakeholders

Oil and Gas: The Risk of Losing the 'Big Picture'

November 2012

Hydrocarbons Colombia Inner Circle Exclusive Monthly Report for November 2012 3

JOSÉ VICENTE ZAPATA LUGO Bogotá, D.C.

Over the past years Colombia has undertaken a worldwide relevant effort to 'sell' itself as a jurisdiction where investors should direct their capital. This effort, however, has failed to trickle down to what is known as the 'operational levels' of government. It is at this level where sustainable development shall ultimately be defined.

Over the last couple of years the influx of capital has increased, particularly in oil and gas. Investors, 'captured' by the diligent discourse of high level officials, have sought opportunities whether through capacity building to obtain exploration and production contracts or technical evaluation agreements, or through the secondary market of working interests or net profits interests. This increased attention, evidently, arises from varying factors. Top sellers include respect for the rule of law, stability, a tradition for democratic principles, improved security and clear government policy. However, the tall tale story of certain of these elements has begun to corrode what otherwise could be one of Colombia’s most successful stories by far. As Colombia’s security improvements have taken place -even if much is still to be done- social and environmental matters have now surfaced vehemently and the fear of not doing the 'right thing' has resulted in operational stagnation. Lack of clarity in what can and cannot be done, of where projects can or cannot be developed, timing of environmental licenses, absence of clear rules for prior public consultation and the destruction of value generated from delays and further delays in being

able to develop sustainably, are adamant signs of warning.

As to what has happened and what one should expect, there is much to be stated. Investors seeking to develop their assets are aware that countries have specific policies and conditions for such development to take place, including environmental and social matters. However, such specificities must be structured, outlined, detailed and clearly set forth to ensure effectiveness and materialization of expectations. Colombia needs to solve the inertia. While initial competitiveness may have been based on attraction, its continuance is dependent upon firm, clear and timely response from institutions to what is ultimately sought. No one may criticize that there are environmentally protected areas or that communities need to know beforehand what a project will imply or that social awareness and responsibility and a social license to operate are fundamentals of any project, undertaking or activity. Albeit, what is expected may not be silence, evasive language, demands which are not substantiated, illicit delays, ex post facto changes or for that matter evasion of the duty to such sustainable development. Thus, oil and gas ventures seeking to grow in Colombia will only do so if and only if productivity is feasible. This is not merely, as some have thought a question of fast tracking environmental licenses or prior public consultation. It is a matter of higher government policy swiftly yet firmly permeating through layers of government in order that the message is understood and heard, nice and clear. Coming of age comes with duties and responsibilities. Time is of the essence.

Index

Pag 3. Guest Commentary: The Risk of Losing the 'Big Picture' by José Vicente Zapata Lugo of Suárez Zapata & PartnersPag 4 Upstream: Round ANH 2012: A bittersweet outcome by Tomás de la CallePag 6. Eye on Ecopetrol: Assessing Ecopetrol performance by Tomás de la CallePag 7. Finance and Operational Results: Colombian oil prices, WTI and BrentPag 8. Environment: Regional distribution of licenses and applicationsPag 9. Security and Public Order: Hard to believe things are getting betterPag 10 Communities and CSR: Rafael Nieto: The industry’s biggest challenge is Community ConsultationPag 11 The Back PageComing Up Next Month

Who is José Vicente Zapata?

Partner at Suárez Zapata & Partners Abogados, counsel in environmental, corporate and commercial law matters, and a leading practitioner in mining and oil and gas ventures. Adjunct professor for corporate responsibility, liability and sustainable development at leading Colombian universities. Mr. Zapata graduated from Pontificia Universidad Javeriana and holds an LLM from McGill. He speaks Spanish, English and French.

Upstream


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November 2012

The National Hydrocarbons Agency (ANH) held its 2012 bid-round in Cartagena last month (October 17th) whereby the expected outcome was an‘Initial’ order of eligibility for the participating OilCo’s. On October 31st, the ANH published the ‘Preliminary’ order of eligibility after filtering the initial one through the financial capacity of the participants. The ‘Final’ list will be published only on November 26th. We focus the discussion on the ‘Preliminary’ list since we do not expect major changes to happen when the ‘Final’ list is released.

The Outcome: The blocks on offer were classified in three types according to the level of maturity of the basins: Type 1 for mature basins (33 blocks), Type 2 for less-mature ones (34 blocks), and Type 3 for frontier areas (48 blocks). While Type 1 blocks were all on-shore over conventional-prone basins, Type 2 and 3 also included some off-shore ones (12 in total), and some blocks

(30 in total) in non-conventional-prone areas.

Defining ‘success ratio’ as the quotient of the number of blocks assigned over the total number of blocks offered, it goes from as high as 82% for Type 1 areas, to as low as 17% for Type 3 blocks, with Type 2 sitting in between at 41%. The overall success ratio was 43% (=49/115).

The ‘Sweet’ side: As expected, Type 1 blocks attracted most of the interest by both established players and new-entrants. The principal bidding variable was the premium offered to the ANH on top of normal mandatory royalties.Competition triggered high figures for some blocks: as high as 34%. When royalties are added (by law they range from 8% to 25% according to the production level) to such figures, we wonder how the economics would work!


Round ANH 2012: A bittersweet outcome These mature basins also managed to entice interesting new players into the fray, for example, Bridas Corporation (‘BC E&P’) owned 50/50 by CNOOC, and the Argentinian Bulgeroni family, that in turn partners (40/60) with BP in Pan-American Energy (200+ mboe/d production). Since Nexen has recently been acquired by CNOOC, the three blocks awarded to BC E&P will enhance the former’s portfolio. Other newcomers include Andes (the big winner with seven blocks awarded), Petróleos Sudamericanos (also from Argentina) and Optima/Range from the US. Finally, the extreme note was set by PetroNorte that originally ‘won’ ten blocks only to end up with four since its financial resources did not allow for more.

In a different ‘league’, Type 2 and 3 succeeded in drawing the attention of new big players: Exxon, Shell, Anadarko, Gulfsands (all four winning blocks) plus Statoil and Harvest Resources, that unfortunately did not manage to win any block.

Type 1 blocks – Initial versus Preliminary Eligibility

LLA-2/11%LLA-2/11%LLA-1/31%LLA-1/31%PUT-5/22%PUT-5/22%

LLA-33/34%LLA-33/34%LLA-78/22%LLA-78/22%LLA-83/25%LLA-83/25%

VMM-39/18%VMM-39/18%

VIM-21/3%VIM-21/3%

VIM-19/15%VIM-19/15%PUT/12/29%PUT/12/29%LLA-65/15%

PUT-24/3%

LLA-3

LLA-28/9%LLA-28/9%

LLA-53/33%LLA-53/33%VMM-7/15%VMM-7/15%LLA-43/24%LLA-43/24%LLA-64/22%

LLA-44

LLA-51/13%LLA-51/13%LLA-70/13%LLA-70/13%VSM-1/18%VSM-1/18%LLA-66/15%LLA-66/15%

LLA-54

LLA-79/15%LLA-79/15%PUT-25/19%PUT-25/19%LLA-50/6%

VIM-11

VMM-8/10%VMM-8/10%

LLA-12/24%

VIM-18

1 2 3 4 5LLA-12/11%

LLA-49/26%

VMM-22

6 7 8 9 10Andes / Integra

Petro Norte

Optima / Range

BC E&P

Vetra

C&C

Clean Energy

Geoproduction

OGX

Amerisur / Pluspetrol

Ecopetrol

Petróleos SudAmericanos

NO BIDS

LLA-49/9%

LLA-50/24% LLA-64/27% LLA-65/23% LLA-24/20%

Preliminary AssigmentInitial Ranking

Continues on next page

Chart shows what each company bid for each block. The block number is first followed by the bidding criteria in this case royalty premium. The cream color is the bid

on the day of the auction. The green color is the preliminary adjudication. Dark-green represents Llanos

basin; light-green, Magdalena Valleyand Putumayo basins.


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The ‘Bitter’ Side: Inside the Type 2 group, two sub-classifications were established: Type 2a that required companies to demonstrate (among other things) a production over 5 mboe/d, and Type 2b areas that, as well as Type 3 blocks, required a production over 20 mboe/d. This effectively excluded most of the players whose base is only or primarily Colombia. According to our proprietary Colombian oil production data base, only a dozen, that is,

around 20% of the circa 60 companies currently producing in the country would surpass the Type 2a hurdle.

Moreover, just four companies (Ecopetrol, Pacific Rubiales, Oxy and PetroMinerales) produce over 20 mboe/d within the country and so were able to bid for Type 2b and 3 based on their Colombian production alone.

In other words, it is apparent that these blocks were aimed not at strictly local players but at new entrants. If this was the strategy, the outcome is fairly poor: taken together only eight (out of 82) Type 2 and 3 blocks were awarded to new

entrants, and five blocks were awarded to existing players, excluding ECO, or fourteen blocks including ECO that all in all was by far the biggest winner with one third of the total blocks assigned.

Bottom-Line: The ANH put on a brave face for the press but the government has to be disappointed with the overall outcome. Yes, there was success in the Type 1 Llanos basin and majors like Shell or Anadarko won blocks. But the government’s stated goal is building reserves and the next Piriri/Rubiales or Caño Limón will not come from Llanos fields left over from previous rounds. It will come from someone taking a chance on the Type 2 or Type 3 blocks that were left without a dance partner. The ANH's head, Orlando Cabrales, said it was because not enough geological information had been provided. But the sight of a completely empty bid-box for Type 3 non-conventional blocks was as clear a statement as any: the industry views Colombian hydrocarbons investment itself as inherently risky. Unless the Colombian government removes the uncertainty around licensing, environmental permits, etc., the industry has other countries in which to spend its exploration money. See José Vicente Zapata's commentary on Page 3 of this edition.


November 2012

Type 2 blocks – Preliminary Eligibility

Note: dark-green is for Conventional-prone areas; light-green for Non-Conventional, and blue for off-shore blocks.

Note: dark-green is for Conventional areas; light-green for Non-Conventional, and blue for off-shore blocks.

Type 3 blocks – Preliminary Eligibility

FUT-13

COR-62

URA-4

FUT-14

LLA-69

SN-3

SUA Off-2

GUA-1CAT-2

GUA Off-4

GUA-2

VMM-29

LLA-68COR-8

GUA Off-5

VIM-8

SN-5COR-54SN Off-2

VIM-15

SN-9COR-56

1 2 3 4 5 6 7 8 9 10Ecp

Exxon / Ecp

Anadarko / Ecp

Gulfsands

Mansarovar

GTE / Perenco

ONGC

NO BIDS

CAT-3

SN-9SN-10

VMM-9

VMM-5

VMM-14VSM-6

VMM-16

VIM-15VSM-24

VSM-4 VSM-5 VSM-36

PUT-17

COR-46

COL-5

GUA Off-1

COL-3

COL-2

SN-1

PUT-15COR-2COL-1

AMA-4

PUT-16COR-8

GUA Off-5

PUT-18COR-25

TUM Off-6

PUT-19COR-47

TUM Off-7

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18Ecp

Exxon / Ecp

Anadarko / Ecp

Repsol / Ecp

Shell

Anadarko

GTE / Pluspetrol

NO BIDS PUT-20COR-48

PUT-21COR-49

PUT-22COR-50

PUT-23COR-51

COR-45COR-52

GUA-6COR-53

LLA-80COR-55

LLA-81COR-57

SN-4COR-58

SN-7COR-59

SN-8COR-60

URA-3COR-61

AMA-5COR-63

VM-10VMM-38

November 2012

Eye on Ecopetrol


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In the global oil and gas industry, when an International Oil Company (IOC) sets its production targets for the future, market analysts would understand them as equity production, that is, the sum of the production that such IOC is entitled to take in accordance with the ‘working interests’ it holds in the valid petroleum contracts it has been awarded worldwide.

This is not the case with Ecopetrol (ECO), though. ECO has set its Mega-target for 2015 as: “to produce one-million clean barrels of oil equivalent per day (mmboe/d)”. By 1 mmboe/d, ECO here means gross production which includes royalties.

There are at least two plausible reasons that may explain why production targets should be understood as equity rather than gross ones. The first is that under the US Securities and Exchange Commission (SEC) rules IOCs are not allowed to book royalty barrels (Note: Canadian rules are different in this regard). The second reason is more practical: IOCs would not expect analysts to find out for themselves the prevailing fiscal regimes in all the countries they

conduct operations, in particular the applicable royalties’ regimes for each country.

Although ECO operates in just four countries (Colombia, Brazil, United States, Peru), Colombia production still represents the lion’s share. But even in this case, the issue is not straightforward. In fact, just in Colombia, ECO participates in more than 250 fields, with royalties’ rates that vary from as low as 0% (i.e. Velásquez private concession) to rates as high as 32% (i.e. Tello reverted public concession). (Note: We contacted some analysts for this article and they agreed with our conclusion: the distinction is not made clear in ECO’s presentations.)

Based on our proprietary database, we have attempted to translate such gross figures into equity ones: the result is that on average for the oil and gas fields where ECO participates the equity production share of the gross is around 84%, which is to say that on average the level of royalties is about 16%. Thus, if this rate were to be unmodified to 2015, the 1mmboe/d target would actually mean 840kboe/d equity production.

However, assuming that the royalty level will hold unaltered is not just a risky bet but also an indirect measure of ECO performance: our focus is how much production ECO can bring into its books, not about how good they are at handling and marketing royalties they do not own.

Therefore, in future issues we will always keep an eye on their equity production or as it is called by the financial analysts their ‘underlying asset’, which is the ultimate physical measure that really adds value to an oil and gas company.

Bottom-Line: Ecopetrol is not the first oil and gas company to make numbers look better by being unclear about definitions and it will not be the last. Investors should insist that words like “production” be clearly defined so apples can be compared to apples and oranges to oranges. This is not an academic exercise. Many performance measures depend on having the right measure of output.


Assessing Ecopetrol Performance

Ecopetrol GroupGross versus Equity Production - kboe/d

0

200

400

600

800

1000

2010 2011 2012 2013 2014 2015

EquityEquityt

Royalties

November 2012Hydrocarbons

ColombiaHyd

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Where are prices going?

At Hydrocarbons Colombia we try to focus on Colombian issues and leave the global forecasting to the global analysts. That being said, this model gives us a bit of license to speculate.

WTI, Brent and average Colombian prices are all trending downward, reflecting over supply and under demand. Thus the forces at work suggest prices will go lower.

Structural issues at Cushing are supposed to be resolved soon, releasing oil stored there. Shale oil discoveries suggest US prices and thus WTI can only go down. And statements from OPEC Secretary General like “there are no shortages anywhere” suggest supply factors favor lower prices. The economic news is also getting no better.

Only geopolitical forces like Iran blocking the Strait of Hormuz or a Japan-China war would push up prices in a sustained manner over the short to medium term.

So if there is only downward pressure on WTI and Brent and if the model works, there is only one way for Colombian prices to go. Those companies with flat or declining production will see declining revenues because prices will not rise to compensate.


Financial and Operational Results

Colombian oil prices, WTI and Brent

For the past several months, we have been publishing the Friday closing prices for WTI and Brent. Nothing radical there but we have also been making qualitative and quantitative comments about Colom-bian oil prices. These typically are not available until well after the end of the current quarter so we use current WTI and Brent prices to base our estimates. Quantitatively we only talk about the average price which, frankly, is the only one we have some technology for prediction and our forecasting technique is crude. The quantitative is designed to be more directional than anything else.

Our forecasting is based on our observations in the above chart which shows the un-weighted average Colombian oil price for those companies that report average realized prices, the average weight-ed by company production and the two common benchmarks: WTI and Brent. The weighted average is heavily skewed to Ecopetrol and to a lesser extent Pacific Rubiales since these two comprise over 70% of

Colombian production and over 90% among those for which we have price data. (We are missing some import-ant players like Oxy, Mansarovar and Emerald because they do not report Colombian prices.)

During 2009 and 2010, the average Colombian price (weighted or un-weighted) was below that of WTI. It rose faster than WTI in early 2011 because of quality improvements, according to comments in the financial results of the companies who report. By 2Q11 both averages were higher than WTI and since that time they have moved between WTI and Brent, almost exactly in the middle.

Bottom-Line: Our simple-minded forecast takes the quarter-to-date actual value and projects WTI and Brent to stay flat for the rest of the quarter. Given this up and down swings of the past few quarters this is not a bad statistical assumption even though it seems unlikely that the two prices will in fact stay flat until the end of the quarter.

0

20

40

60

80

100

120

140

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12

Average Realized Oil Prices Colombia and Benchmarks in US$

Unweighted Average

Weighted Average

WTI Average

Brent Average

Colombian Prices below WTI

Colombian Prices between WTI and Brent


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November 2012

The chart shows the geographic distribution of licenses awarded by the National Environmental Licens-ing Agency (ANLA) in the hydrocar-bons sector between January 1, 2012 and September 18, 2012. (The license for 'Cundinamarca y Tolima' is for an area of the Upper Magdale-na basin that spans both depart-ments.)

No surprise that Meta is the leader considering it represents 50% of all production. But Casanare has only 18% of production and the depart-ment of Magdalena – which covers only part of the Middle and Lower Magdalena basins – has even less. Only one license was approved in the Putumayo where we know there is significant exploration and produc-tion going on based on operator press releases.

The next chart shows those still pending approval. Again if two departments are listed it is because the application applies to a block which spans both. The activity here is a more consistent with exploration.

Bottom Line: We may be trying to read too much into this data but given the paucity of information that the ANLA publishes, this is our only recourse. Those licenses which are pending further information from the applicant were not broken down by department so we are missing that vital piece. Perhaps unsurprisingly Llanos applications can expect more rapid processing since the areas are better known to the ANLA staff. Outside of the Llanos, things get more complicated. We are surprised by the large number of Casanare applications languishing since this department is the pilot project for the ANLA’s new geo-referencing system.

Why did we not publishthe ANLA performance graph?

The person who does this research for us apparently made a change in the way the questions were asked because we now get data that is somewhat – but not radically – different from the results we got when we first asked for information. We say 'apparently' because to us the requests look the same except the second request asks for the regional breakdown seen in the main article.

As a result, we now have inconsistencies in the counts of applications and in the counts of documents returned to applicants for more information. Our person has filed yet more requests to try and resolve the issues.

Here are the facts we believe to be consistent as of September 30, 2012:28 licenses have been approved since January 1, 201229 applications are still pending approval in the ANLA2 applications were rejected – one in Cesar and one in a block between Tolima and Caldas

Interestingly, only one application was received and approved this year. The processing time was 19.4 weeks. The rest of the approved licenses come from 2011 or prior years.


Environment

Regional breakdown of licences in 2012

Boyacá 2

Cauca 1

Cesar 1

Huila 1

Mar Caribe 1

Sucre 1

Norte de Santander 1

Guajira 2

Putumayo 2

Caquetá 3

Meta 6

Casanare 9

Environmental Licenses Pending Approval to September 30, 2012

Antioquia 1 Boyacá 1

Cesar 1 Cundinamarca y Tolima 1

Huila 1

Mar Caribe 1

Norte de Santander 1

Putumayo 1

Santander 1

Tolima 1Magdalena 4

Casanare 6

Meta 8

Environmental Licenses Awarded to September 30, 2012

Hard to believe that things are getting better

Security and Public Order


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November 2012

Actually we ourselves were somewhat surprised to see that incident counts were up this month because things in fact have been getting better, at least over the past four weeks. Incidents peaked in mid-October when the government and the Farc were at the bargaining table (and the industry was in Cartagena at the 2012 Round auction). Since that time they have dropped every week.

Pipeline-related incidents are up but this is mostly the result of Armed Forces activities against pipeline theft and not direct attacks on infrastructure. Being strict about our methodology incidents near major roads leading to oil fields are up but this is mostly because of a horrific situation in northern Antioquia. These incidents threaten the integrity of the major route between Medellín and the oil and gas fields in Córdoba but the problems in that area have to do more with illegal gold mining than interdiction of the highway.

There also were shifts in regions: Caguán-Putumayo calmed down but the Llanos – where nearly 70% of

Colombia’s oil is produced – increased. La Guajira has been increasing steadily over time. Production there is gas from big producers like Chevron.

The first round of peace talks in Oslo generated some excitement because the Farc wanted to re-introduce discussion items that were not on the agreed agenda. The most dramatic of these was their demand that Colombia nationalize extractive industries. The government replied that the country’s economic model was not on the table.

Bottom-Line: The ACP and MinDefensa have been saying that infrastructure attacks are down (see sidebar). This is true but oil infrastructure remains in some very dangerous places. Proof will come next week when peace talks resume in Havana. If the pattern holds, both the Farc and the Armed Forces will turn up the heat.

MinDefensa Pinzondemonstrates progress

Defence Minister Juan Carlos Pinzón was the closing speaker at the ANH’s Cartagena conference and he sent the crowd home on a positive note. Here are some of the statistics he shared with the audience:

984 of 1,102 municipalities are free of criminal gangs95% of the population has been unaffected by terrorism this yearHomicides have been cut in half since 2002 and the rate per thousand has fallen even further because of population growthKidnapping (a concern of expat executives) has fallen from 1,708 in 2002 to 208 in 2011Terrorist attacks are down from 1,645 in 2002 to 564 in 2011

The news of the highest importance to the industry was that hydrocarbons infrastructure attacks had fallen from 917 in 2002 to 196 in 2011. Attacks in 2012 were back up early in the year but have fallen since August even as the general intensity of guerrilla activity increased around the peace talks. The reason is that just under 21,000 troops have been assigned to oil and gas infrastructure with eight more battalions coming up soon.

Pinzón's name comes up when President Santos is said to be considering a shuffle because his fortunes rise and fall with the always unpredictable security situation. He survived the last ministerial changes and got a well-deserved standing ovation from the crowd in Cartagena.


0

50

100

150

200

250

Jul Aug Sep Oct

Security Incidents Near Oil and Gas Infrastructure

Lower Magdalena

Cordillera Oriental

Sinu-San Jacinto

Guajira

Middle Magdalena

Cauca-Patia

Catatumbo

Road

Arauca

Upper Magdalena

Llanos

Caguan-Putumayo

Pipeline

142

179 181

233

Communities and CSR


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We had lunch last week with Rafael Nieto, founder of the firm NSG, which helps companies with issues of community relations and environmental permits.

Frankly, he does not see environmental permitting as the main issue in the medium and long term. Certainly there are delays today and the system is not working as efficiently as needed. But he points out that the Environment Ministry is very new and the National Environmental Licensing Agency (ANLA) even newer. ANLA head, Luz Helena Sarmiento, is a controversial figure in the industry but he comes down on the side that she is a competent manager facing a huge task. It will take time to bring new processes into predictability and efficient operation.

Instead, Nieto expresses concern about the community prior consultation process which the Colombian constitution requires but for which the rules are by no means clear. He says there is no framework for when the process must be applied or how it must be done. This leaves projects at the mercy of the courts which are inconsistent and contradictory, even at the highest level.

We heard rumors of a new law to regulate the process – rumors which had the industry both hopeful that the rules would finally be clear and fearful that the demands and costs would increase. But Nieto says he has heard nothing about the law for six months and given the government’s current legislative priorities between now and the end of the year – when

November 2012

this congressional session ends – he does not see it happening before later in 2013.

Perhaps the biggest uncertainty about the constitutional requirement for consultation is exactly how far consultation must go. Nieto says that the jurisprudence recognizes that “Consultation does not necessarily lead to agreement”. The current rules call for arbitration when companies and communities cannot agree. His problem is that the arbiter for dispute resolution is the Ministry of Interior which is under-staffed in this function.

He thinks the only way to improve the situation is via a constitutional amendment and a new law, rather than simply a law as presently planned. The benefit of the constitutional amendment is that it would be much harder to change. Another benefit is that the courts would be restricted to interpreting a clear statement on community consultation rather than inventing policy in response to individual cases.However, he recognizes that constitutional amendments do not come over night. That is their principal advantage but obviously this sword cuts both ways: harder to change once made but harder to establish in the first place.

Bottom-Line: We agree with Rafael Nieto that this will be the critical issue for the industry over the coming years. Local populations have high, often exaggerated expectations of what they will get out of 'prior community consultation'. Without a clear legal framework to manage expectations, the situation can only get worse.

Who is Rafael Nieto Loaiza?

Lawyer and socio-economist, specialized in constitutional law, international law, and human rights.

Rafael was Justice Vice-Minister of Colombia and the main consultant regarding political and international aspects, human rights and international law for three Defense Ministers of Colombia. He was a consultant for the National Constituent Assembly in 1991.

Today, he is President and partner of NSG, a specialized consulting company in surroudings’ management and in sociopolitical analysis and strategies for companies within the energy, oil, mining and infrastructure sectors. He is the senior director and representative for Colombia of McLarty Associates (before Kissinger McLarty Associates), a boutique management consulting company. Through his own company, he specializes in the search of conciliatory solutions in arbitral and judicial processes and in business management.

He is the author of various books and articles about justice, human rights, international humanitarian law, security, defense, armed conflicts, and peace processes. He is a permanent columnist for El Colombiano and El País newspapers, a permanent analyst for the Hora 20 program and for Caracol Radio.


The industry’s biggest challengeis Community Consultation


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Other Inner Circle Articles PublishedThis Month on Our Website

Coming Up Next Month

1. The Industry’s Biggest Challenge is Community Consultation – Full version of our conversation with Rafael Nieto of NSG2. Colombian Oil Prices, WTI and Brent – Full version of our analysis of Colombia oil prices with additional charts and analysis3. Round 2012 Auction Hits Colombia Government Numerical Target – Our initial reaction to the most important auction this year.4. Weekly Inner Circle Summaries – For those without the time to read through our daily newsletters or browse our website.

1. Round 2012 a success?– We debate the issue with Armando Zamora, founding head of the National Hydrocarbons Agency (ANH).2. Barrancabermeja and Cartagena – Tomás de la Calle reviews Ecopetrol’s refinery business especially the controversial Reficar project.3. Trucks, Pipelines and Ports – An overview of the country’s crude oil transport infrastructure and what is needed.4. Updating the Hydrocarbons Colombia Stock Index – How have companies performed now that 3Q12 results have been published and processed by investors

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www.hydrocarbonscolombia.com

Hydrocarbons Colombia is an innovative news service that gives investors and other stakeholders the information they need on Latin America’s most dynamic oil and gas market.

Combining daily news, statistical analysis and commentary from leaders in the Colombian industry, Hydrocarbons Colombia is the only on-line source available in English.

Every day, every week, every month understand the Colombian oil and gas market as no one else can and make better decisions.

Send an email to [email protected] or call us at +57 1 621 8186 to hear about subscription options including multi-seat offers for corporate accounts.

All rights reserved by Mirador Communications SAS.

Inner Circle members have the right to use charts or up to five lines of text so long as “Source: Hydrocarbons Colombia” is included in any document. For longer extracts, source data or other uses of the material please send an email to [email protected] or call us at +57 1 621 8186.

November 2012


Need to know how muchoil Perenco received throughworking interest?

Need to know how muchEcopetrol sends toother partners from wellsit operates (and to whom)?

Need to know the royalty rateand API for he Katmandu block?

We have the answers to

these and other mysteries in

our exclusive database.

Call us at

+57 1 621 8186 or write to

[email protected]

to find out more.

We encourage debate!We encourage debate!

Do you have a commentor somethingyou disagree with?

Send your comments to:[email protected]

And remember that web-page articles always have spacefor comments.

Hydrocarbons Colombia is an innovative news service that gives investors and other stakeholders the information they need on Latin America’s most dynamic oil and gas market.

Combining daily news, statistical analysis and commentary from leaders in the Colombian industry, Hydrocarbons Colombia is the only on-line source available in English.

Success in this industry means not only on selecting the right properties and the right places to drill. Regulation plays a huge role determining everything from environmental licensing to transport infrastructure to community relations to royalties. Understanding these forces means understanding the culture, the individuals and the language.

Hydrocarbons Colombia focuses on these so you can focus on the right decisions.

Receive an email every morning with the day’s happenings. One click takes you to our website for in depth reporting and commentary. Our value-add: every article has a Bottom-Line – what this means for the industry and what stakeholders should do about it.

While there, look for industry statistics including exclusives like our report on production by company and field or environmental licensing performance.Colombia has unusual challenges in security. Peace is coming one way or another but for now guerrilla groups continue to strike at civilian and economic targets. We know where the hot spots are and whether the situation is getting better or getting worse.

But what really makes Hydrocarbons Colombia unique are our collaborators: leaders who work in the industry every day and have served upstream, midstream, downstream, as regulators and as policy makers. They ensure our content is focused on what industry stakeholders need to know.

Our collaborators also lead our monthly report. Their commentary goes way beyond the news and the numbers with insight into how Colombian policy makers think and what they are likely to do.

Every day, every week, every month understand the Colombian oil and gas market as no one else can and make better decisions.

Sign up today for a limited time free trial at:www.hydrocarbonscolombia.comSend an email to [email protected] or call us at +57 1 621 8186 to hear about subscription options including multi-seat offers for corporate accounts.

To The Hydrocarbons Colombia Website!Sign Up Today

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