British Petroleum Co. plc's proposed development of Colombia's Florena, Volcanera, and Pauta oil and gas fields is currently in limbo amid a deepening controversy over contract terms with state-owned Empresa Colombiana de Petroleos (Ecopetrol).
BP has claimed that what it considers to be onerous contract terms make development of the three fields uneconomic. That prompted Ecopetrol and the Ministry of Mines and Energy to request studies by Colombia's National University and private think tank Fedesarrollo looking at contract alternatives.
The controversy flared anew last month when three members of Ecopetrol's board resigned, protesting proposed contract changes.
Resigning board member and former Ecopetrol Pres. Jose Fernando Isaza cited Fedesarrollo studies showing BP could earn a rate of return of almost 14% under current terms. He warned the government that changing BP's contract terms would set a dangerous precedent for other foreign companies in Colombia (OGJ, Sept. 16, Newsletter).
Results of those studies are expected to be disclosed soon, but that is likely to reignite the controversy.
This comes against a backdrop of long criticism by foreign oil and gas companies aimed at Colombia's tax and petroleum fiscal regime. Those companies maintain Bogota's efforts to improve association contract terms help Ecopetrol more than foreign producers (OGJ, Oct. 9, 1995, p. 33).
Proposed development
The three fields, covered by the Piedemonte contract signed by BP and Ecopetrol, are just north of BP's supergiant Cusiana/Cupiagua oil field complex in the department of Casanare.
Reserves in the three fields are estimated at a combined 3-4 tcf of gas and 1 billion bbl of liquids.
Rodrigo Villamizar, Ministry of Mines and Energy, was quoted in Bogota daily El Tiempo as saying, "Those currently committed to carry out the third phase (field development) have found that, due to the high costs, the terms are not attractive and prefer to abandon the project rather than proceed."
The ministry also cited a relatively low return on petroleum investment rate in Colombia when compared with rates in other nations.
The crux of the problem is that the contract was agreed under the terms of a sliding-scale production model under which Ecopetrol's share, before taxes and royalties, would increase to a high of 76% while BP's would be reduced to 24%. At the same time, both firms would be required to shoulder an equal share of development costs, pegged at $1.5-2.2 billion the next 3 years. The 76% threshold for Ecopetrol commences once a total of 150 million bbl of output is attained.
Options
According to Alejandro Martinez, Director of the Colombian Petroleum Association, two options exist for the government.
The first of these-a refusal to modify the terms of the contract and seek a different firm that might accept them-is unlikely, Martinez contends.
Modifying the deal, then, seems the only sensible solution, he said.
Martinez claims no other company would undertake the project given present conditions and added, "It would be neccessary to offer (a new operator) a lot more than what they could eventually negotiate with BP."
David Turbay, recently retired from the cabinet post of state controller under President Ernesto Samper, accused BP of attempting to cash in on the current political turbulence in Colombia.
His administration plagued by scandals and crises, Samper apparently has undertaken a policy of nation-wide giveaways to buy popularity and to stave off an ouster, Turbay said.
Industry officials in Colombia dismiss this view, pointing rather to the extremely high cost of drilling-often to as deep as 18,000 ft in harsh terrain and difficult geology-in the Piedemonte area.
Contract details
Industry officials tried to sort out how BP came to sign off on what later proved to be unacceptable contract terms.
One oil industry executive suggested that, prior to BP's request for a unit agreement covering the three fields under the Piedemonte contract, using a sliding scale production split to develop a single small field was commercially acceptable.
Under a different scenario, however, involving not one small field but three large ones, development becomes unprofitable as production from each field is added to output in the other fields. Thus the aggregation of incrementally higher levels of production sets off progressively higher splits for Ecopetrol.
Martinez, a former vice-minister, quotes association studies regarding sliding scale contracts that indicate returns are slashed by 45% when compared with the 50-50 cost and production-sharing models now in use elsewhere.
Industry officials speculated that BP's concerns over the economics of its other Colombian projects may have affected its outlook for the Piedemonte contract terms.
An official at a competing multinational firm said, "Maybe what has come to light after awhile and once the experience factor is in, is...how marginally profitable Cusiana really is."
Industry concerns
The Colombian government's goal of investing $22 billion in oil and gas infrastructure development projects the next 4 years makes keeping major players like BP satisfied a high priority.
Martinez, illustrating Colombia's recent failure at securing sufficient exploration and development commitments from foreign oil and gas companies to meet this goal, cited Bogota's tender to 150 oil and gas firms in 1994, which was met with responses from only four companies.
Given the key importance that petroleum is assuming in Colombia for foreign exchange earnings, against a backdrop of a continuing crisis in the coffee industry, Samper will be hard-pressed to make such oil and gas industry development overtures more appealing to foreign multinationals in the future.
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