1 ALGIERS AUSTIN DALLAS FORT WORTH HOUSTON LONDON MEXICO CITY MONTERREY NEW YORK PARIS SAN ANTONIO Successes, Opportunities and Challenges in Colombia: A Gringo’s Perspective Latin American Oil & Gas Conference Rio de Janeiro July 11, 2011 William Prescott Mills Schwind 713.951.5820 [email protected]Introduction ● Colombia is a tremendous success story by almost every metric ● There are tremendous opportunities in Colombia, but there are also challenges ● Some of those challenges are remarkably similar to what Brazil has faced and is facing ● Someone’s challenge represents another person’s opportunity
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ALGIERS AUSTIN DALLAS FORT WORTH HOUSTON LONDON
MEXICO CITY MONTERREY NEW YORK PARIS SAN ANTONIO
Successes, Opportunities andChallenges in Colombia: A Gringo’s
Colombia’s economy has grown dramatically:● Gross Domestic Product rose from $3B to $4.6B between 2009
and 2010
● Foreign Direct Investment is on pace in 2011 to double the totalfrom 2010
● Almost 1/3 of Foreign Direct Investment has been in the oil &gas sector
● The Colombian stock exchange has been very active▶ Example is Ecopetrol, the stock price for which has improved in
value by 258% since the public offering in 2007
▶ Domestic investors and foreign investors are using the stockexchange
I. Colombia’s Successes
Colombia is considered a new “BRIC,” together withTurkey, Vietnam, Indonesia and South Africa.
● growing and diverse economy
● increasing internal demand and consumption
● political stability and legal framework
● educated and professional workforce
● Colombian companies are investing outside ofColombia
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I. Colombia’s Successes
Turning point: improved security
● FARC’s numbers and territory have been reduced
● Paramilitary activity has decreased
● Improved security translates into consumerconfidence
● A secure investment environment attracts foreigninvestors
● Security is not the only reason for Colombia’ssuccess, but it is an important one
I. Colombia’s Successes
Colombia has embraced foreign investment
● ranked by the World Bank as the best country in theregion in protecting foreign investors
● ranked fifth worldwide
● ranked third most business friendly country in LatinAmerica
● multiple bilateral tax treaties… with the UnitedStates?
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I. Colombia’s Successes
The Colombian oil & gas regulatory regime sawfundamental changes in 2003
● Ecopetrol S.A. was spun-off and the NationalHydrocarbons Agency (ANH) was created
● Ecopetrol is now owned 90% by the Colombiangovernment, 10% by private investors
● Ecopetrol is now expanding internationally andhopes to increase production to 1 million BPD
I. Colombia’s Successes
Proven oil and gas reserves in Colombia have grown
● oil production from Colombia is steadily rising, from 671,000BPD in 2009 to 785,000 BPD in 2010.
● gas production has also steadily risen, from 874mmcf in 2008to 1,016mmcf in 2009 and 1,090 mmcf in 2010.
● Colombia’s current oil reserves are:
● - 2,400,000 proven barrels of oil
● - 1,700,000 probable barrels of oil
● - 5,700,000 possible barrels of oil
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I. Colombia’s Successes
The contract regime for oil and gas is stable and transparent● concession contract regime
- contract is relatively balanced and consistent with internationalstandards
● 30 year term- 6 year exploration period- 24 year production period, which can be extended
● royalties vary between 8% and 25% (sliding scale based on amount ofproduction)
● - royalties can be paid in cash or kind● contracts feature a stabilization clause● competitive bid process● transparent bidding process and a balanced concession contract
II. Colombia’s Opportunities andChallenges
There are ample opportunities to invest in the Colombianupstream petroleum sector
● Ecopetrol recently announced that there are more than 400projects that are available for foreign investment.
● active E&P industry with new ANH bidding rounds expectedthis year
● active international players
● shift from domination by Ecopetrol to increased role by privatecompanies
● healthy range of small and medium sized players
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II. Colombia’s Opportunities andChallenges
Could gas be a game changer in Colombia?
● domestic demand is healthy and expected toincrease
● 80% of electricity in Colombia is from hydro, so thereis potential for expanding use of gas for powergeneration (10 projects have been proposed)
● Government is promoting development of gasresources, specifically unconventional resources.▶ Decree 2100 recently enacted.
● Formation of a National Gas Operation Commission
II. Colombia’s Opportunities andChallenges
Could gas be a game changer in Colombia? (cont.)● Government recognizes the need for gas internationally and has made
it easy to export gas from Colombia, with some safeguards fordomestic use
● exports to Venezuela?● potential for LNG exports?● shale gas resources are thought to have the potential to increase the
country’s total reserves of recoverable gas from 4 billion cubic feet to19 billion cubic feet
● shale has been a game changer in the U.S.; could it be a gamechanger in Colombia too?
● contractual regime for gas is less well-developed than the regime foroil
● technology to develop unconventional resources?
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II. Colombia’s Opportunities andChallenges
How will the oil and gas get to market?● biggest challenge is lack of sufficient pipeline infrastructure to
meet current production
● what will happen in the future, as production grows?
● small producers have limited access to existing pipelineinfrastructure
● as recently as July 1, transportation bottlenecks were cited asaffecting smaller producers’ ability to get production from theLlanos field to market
● up to 30,000 BPD is not being produced from Llanos due toinsufficient transportation infrastructure
II. Colombia’s Opportunities andChallenges
How will the oil and gas get to market? (cont.)
● somewhat improved with expansion of Ocensa oilpipeline in March
● but real improvement won’t happen until December,when the first stage of the Bicentenario pipelineenters in service
● transportation by truck or rail is not feasible
● refining capacity? Ecopetrol has announced that itwill modernize the Barrancabermeja refinery
● ports are at maximum capacity and are overcrowded
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II. Colombia’s Opportunities andChallenges
How stable is Colombia’s security situation?
● FARC still has almost 8,000 members● there have been attacks and indications that the FARC is
regrouping
● in June, FARC kidnapped four Chinese oilfield workers andambushed an army unit
● ELN also is estimated to have around 2,000 members
● some paramilitary groups have become active again, now ascriminals
● Mexican gangs heading south?
● some oil and gas producing areas are dominated by criminalgroups
II. Colombia’s Opportunities andChallenges
Who will provide oilfield services?
● as demand increases, may not be enough localcapacity to meet that demand
● technical services are in particular demand,especially for developing unconventional gasresources
● there may be ample opportunities for foreign entitiesto partner with Colombian oilfield service companies
● there may also be opportunities for foreign entitiesto establish subsidiaries and branches in Colombia
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II. Colombia’s Opportunities andChallenges
Where will the employees come from?● Colombian engineers and geologists are in high demand
● lots of Venezuelans have moved to Colombia
● brain drain from Venezuela has been a short term benefit forColombia, but is it sustainable?
● what happens if there are significant political changes inVenezuela?
● using foreign employees requires an immigration process thatis bureaucratic and time-consuming (although not as bad as insome countries)
● to grow the oil and gas sector in a sustainable way, Colombianeeds to develop local oil and gas professionals
II. Colombia’s Opportunities andChallenges
Is Colombia’s economy getting too hot?
● Santos warned last week against interest rateincreases in Colombia
● could lead to more foreign investment and moreappreciation of the peso
● Peso is 9% stronger against the U.S. dollar this year
● could also damage Colombia’s export sector
● too much of a good thing is always a risk
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Conclusions
● Colombia is a tremendous success story, withtremendous opportunities but also somechallenges
● The challenges in Colombia are similar to thosethat Brazil has faced and is currently facing, sothere are a lot of lessons that can be shared
● Every obstacle presents an opportunity
Successes, Opportunities and Challenges inColombia: A Gringo’s Perspective
