Government Issues New Supply Conditions - International Law Office

Decree 2687, issued on July 22 2008, includes several important rules and procedures to protect and ensure the supply of natural gas, as follows:

• Producers and dealers are obliged to attend to demand for natural gas for internal consumption first.
• Natural gas owned by the state is received in exchange for royalty payments via exploration and production agreements concluded with the National Hydrocarbon Agency. This gas must also be used to attend to demand for internal consumption in a preferential manner, in accordance with procedures enacted by the Regulatory Commission of Energy and Gas.
• By April 1 2009 producers must file with the agency a certificate of their proven reserves, which are the quantities of natural gas that analysis of geological and engineering information suggests may be commercially recovered by a specific date under known accumulations and economic and operational conditions.
• The commission will regulate the procedure that must be followed by producers of natural gas that have notified the Ministry of Mines and Energy that they have production available to offer. The procedure will:
  • ensure that prices include all the items which affect the opportunity cost of the natural gas;
  • include mechanisms to ensure the supply of natural gas to residential and small commercial users; and
  • provide that agents that have purchased this natural gas cannot export it.
• Producer-commercializers for which maximum prices are regulated must offer their available production for sale in accordance with the following rules:
  • The natural gas must be offered first to distributors that require the gas for residential and small commercial users within the recognized distribution network and that have executed firm supply agreements, at the maximum regulated price.
  • Thereafter, it must be offered to other distributors that supply residential and small commercial users, at the maximum regulated price.
  • It must subsequently be offered to distributors that supply industrial regulated users that have executed firm supply agreements, at the maximum regulated price.
  • Finally, it must be offered to other distributors that supply industrial regulated users, at the maximum regulated price.
• Producers and producer-commercializers of natural gas must declare to the Ministry of Mines and Energy by January 30 each year, by means of a certificate issued by their respective legal representatives and for a period of 10 years:
  • the final available production to offer (the daily quantities of natural gas from a specific well that will be offered for sale in excess of the natural gas production engaged);
  • the interruptible available production to offer (the daily quantities of natural gas from a specific well in excess of the natural gas production engaged that must be offered for sale as interruptible supply);
  • the natural gas production engaged (the daily quantities of a well engaged by means of natural gas supply agreements that guarantee enforceability for attendance to the national demand, exports and other uses); and
  • the potential production of each well.
  Any variation in the aforementioned items must be notified to the Ministry of Mines and Energy. The first production declaration must be filed within 30 calendar days of the decree's entry into force (ie, by August 22 2008).

It is expected that the new regulations will generate much debate in the local marketplace, particularly with respect to ongoing projects in the gas sector. Investors should factor the effects of this law into their medium and long-term projections.

For further information on this topic please contact José V Zapata at Holguin Neira y Pombo Abogados by telephone (+571 312 2473) or by fax (+571 312 2513) or by email (jozapata@hnpabogados.com.co).