The Business Year

Germán Arce Zapata

COLOMBIA - Energy & Mining

USD700 million in 2017 will see 5 new exploratory oil wells drilled

Minister Energy and Mines, Colombia


Germán Arce Zapata became the Minister of Energy and Mines in April 2016. He holds a degree in economics from the Universidad del Valle and a master’s in international securities, investment and banking from the University of Reading. He has over 24 years of experience in the public and private sectors, with previous positions including President of the National Hydrocarbons Agency, Deputy Minister of Finance, General Director of Public Credit, and President of the Board of Directors of the Energy Finance National (FDN), among many others.

"With prices stabilizing, we will start to see investment programs recovering."

What is your outlook regarding foreign investments in the hydrocarbons sector? How has Colombia rebounded from recent challenging years?

At the beginning of 2017, there was still a negative impact from the collapse in international commodity prices. There has been a strong decrease in prices since 2015-2016, which has led to an ongoing investment standby. These conditions have deferred investment in projects and new expansion plans. The initial impact on lower prices goes directly into the investment programs that have been executed over the last year. With lower investments, you will have a lower base of reserves, and will, therefore, see a negative direct impact on production. That being said, prices have stabilized at around a range between USD45-55 per barrel. With prices stabilizing, we will start to see investment programs recovering and regaining traction throughout 2017. The initial calculations from the Colombian Petroleum Association (ACP) show that exploration investments are doubling in 2017. By the end of the year and for 2018, we can expect to see clearer results in terms of maintaining the level of production. The target for this year is 840 million barrels, but we expect that to increase as things recover.

What are your ministry’s strategies to further incentivize investments in the hydrocarbon sector?

In terms of what we have been doing in government, the tax reform that was approved in December 2016 includes provisions that incentivize new investments. We have an investment instrument that was used in the 1990s for export promotion, Certificate for Tax Reimbursements (CERT), and CERT helps you get reimbursed for various taxes in cases where you can prove you’re putting delta investments over the minimum commitments you have in the E&P contract. Basically, what we are doing through this is creating financial incentives that will improve the break-even cost of new exploration and additional reserve projects. We’re also doing a target incentive for mining to incentivize additional investments there too. This will improve the base of investments, and also hopefully expedite these programs. These will all be critical for investments going into 2018 and 2019. Another instrument that we have introduced in the tax reform is the reimbursement of VAT for offshore exploration. This is critical, because a new frontier offshore project in the Caribbean has long-term periods of exploratory phases, with nine-year averages. You will now be able to get reimbursed for your VAT the first year after you do the investment, which translates into ten years if the project is on time. The financial cost of a 19% VAT over ten years is huge. Hence, we are saying that as long as you keep this money flowing into the investment program, you can get reimbursed on year T+1, meaning the first year following the investment. We also introduced incentives for renewables, which will be significant in the coming years, given the fact that there is a huge opportunity in the market for incorporating new renewable technologies into the energy matrix of the country.

What impact are you expecting these measures to have on investments?

The first calculations the ACP did in oil exploration show that we could double our investment from 2016 into 2017 from USD1.5 billion per annum to more than USD3.3 billion. Once the incentives come into effect, we will start seeing results as soon as 2018. The Colombian Mining Association also estimated investments of up to USD7.5 billion over the next five years, which is 10 times the annual average. Therefore, we are expecting a significant recovery of investments in oil and mining, and a lot of new resources coming into the energy market through new renewable investments.

What developments are you expecting to be made this year regarding Colombia’s offshore resources?

It is important to note that from the National Development Plan, 2010-2014, Colombia sent the policy guidelines to develop this new frontier. Thanks to geological knowledge and higher levels of seismic activity, we hope that in the medium and long term, we can add new reserves to the country’s oil potential. In 2017, we have five exploratory targets to be drilled throughout the year, at a cost of about USD700 million, a significant new frontier. It is one of the largest exploration programs anywhere in the world this year. For new frontier programs, you need to be very confident that you will find the resources you’re looking for, and three out of three drilling tests we have done this year have shown that we do indeed have the resources there, namely Kronos, Purple Angel I, and Gorgon I. That’s a high success rate. If these exploration campaigns in 2017 prove what we and the companies believe, it is a potential whole new frontier for gas and oil, and the development of offshore will become the biggest bet we’ll have for the next years. The potential capacity of resources accounts for multiple times the resources we have today. It’s early to talk about numbers as of yet, but the technical teams think we can double or even triple the country’s reserves in the medium term, depending on long-term price signals in the market. So the potential reward is huge.

What role must the energy and mining sectors play in the post-conflict era?

The potential of the resources waiting to be exploited in these regions is critical. The aim is to be able to access these regions and do the studies and geophysical tests to see what is out there. The peace agreement will now allow us to be able to do this. The first obvious thing we need to do is access the territory once closed-off by the conflict and determine what resources are there. We also introduced something called “Works for Taxes” which are infrastructure investments that can be exchanged for the payment of taxes. It is similar to what the Peruvians did for their mining industry. This will give you the capacity to structure a portfolio of projects that need to be developed in the regions, some of which are tough to get into. Therefore, the energy sector will indeed be important in terms of economically opening these regions up and integrating them into the national grid. After five decades of internal conflicts and civil war, we need to understand that the relationship with the territories needs to be done more in a one-on-one, face-to-face way. The post-conflict peace process will necessitate a different way in which companies, governments, and territories relate and talk to one another. We will have to learn new ways to communicate and work together in this sense. It will take time, for sure, but we need new ways of relating to each other to implement and construct a lasting and sustainable peace.



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