Legal Transparency and Colombia’s Oil Industry
Colombia is a country rich in fossil fuel reserves and a major petroleum exporter. During 2014, Colombia was the third largest oil producer in South America, after Venezuela and Brazil, extracting some 990 million barrels per day. Like in other developing regions, in Colombia, the state is the constitutional owner and proprietor of all fossil fuel reserves within the national territory. However, since 2004, the National Hydrocarbons Agency (ANH) is in charge of awarding and managing lease contracts for the exploration and exploitation of these resources by private and foreign companies operating in Colombia. Furthermore, since 2012, the award of exploration and exploitation contracts in Colombia by the ANH is done via a bidding process, which only exceptionally allows for direct awards to specific entities.
Legal Transparency and Colombia’s Oil Industry
Each bidding round organized by Colombia’s ANH is unique as are the specific legal terms of each exploratory concession. In principle, the bidding rounds take place every two to three years and each round process is supposed to be open, transparent, and fair, seeking to maximize the economic benefits for Colombia and minimize adverse environmental impacts. However, as recent corruption scandals, such as that of Odebrecht, have demonstrated, the bidding and award processes for these high-value projects are not always fair and clean. Once a concession or contract is awarded, the private awardee company can begin activities in Colombia, but it is subject to the regulations established by the Ministry of Mines and Energy as well as the environmental standards of the Environment Ministry. Nevertheless, in spite of the legislation and established framework for resources extraction in the country, one of the key issues within Colombia’s fossil fuels sector is follow-through and the enforcement of basic standards, such as the proper payments of royalties and respect for environmental regulations. Moreover, in some rural communities and predetermined regions of the country, the exploitation of natural resources by foreign multinationals is subject to a popular up-or-down referendum.
In terms of taxation, Colombia’s new Exploration and Production (E&P) contracts administered by the ANH incentivize, through lower taxes, the exploitation of more remote and harder to reach fossil fuel reserves, both onshore and offshore. Under the current bidding and concessions regime, E&P contracts give greater autonomy to, and imply greater risk for, private development corporations. However, it is telling that the awarded contracts do not seem to have any requirements for value-added processing within Colombia. This means that private and foreign corporations are allowed to extract fossil fuels and export them out of Colombia as raw commodities, without having to allocate any portion to the domestic refining or processing industries. In Colombia, the development of a robust extractive industry in the primary sector without profiting from value added activities and developing a local manufacturing industry can lead to the primarization of the national economy. Furthermore, it can contribute to a neo-mercantilist dynamic in relation to major manufacturing economies, such as China, which will then sell value-added goods back to the Colombian market.
(Read more about Developing Economies and Petrocurrencies in 2018)