Oil Producers Gain from New Royalties Act - International Law Office

Incentives for Oil Producers
Mining Royalties Unaffected

The Colombian Congress recently enacted a new Royalties Law, which furthers the oil incentives policy in practice since the enactment of Law 619/2000. The new act changes the variable royalties system, modifies association contracts and introduces new tax provisions.

Incentives for Oil Producers

The variable royalties system is retained, but with a range of between 8% and 25% depending on the level of production of the relevant oilfield. The previous system provided a minimum 5% royalty. However, the change applies only to new oil discoveries. In the case of wells discovered prior to its introduction, the former royalties system shall remain in effect.

The new law seeks to encourage both offshore and onshore gas exploitation. Offshore exploitation at a depth greater than 1,000 feet will attract a 60% royalty. In the case of onshore and offshore exploitation at a depth of less than 1,000 feet, the royalty will be 80%.

Several other incentives are included in the new act. Heavy oil exploitation generally involves significant costs and may discourage investment. Therefore, such producers will now receive a 75% royalty. Incremental production contracts are defined and will have a similar variable royalties system. This incentive will also apply to discoveries of new fields.

Mining Royalties Unaffected

The mining industry remains largely unaffected by the new law. The 1% royalty for construction materials adopted by the Mining Code is unchanged. In order to avoid divisions within mining companies, the rule that the royalties are granted according to the total production of each title or mining contract holder is retained.

The only change affecting the mining industry is the inclusion of provisions regulating mining inspections. The government seeks greater control over mineral production and corresponding royalty payments, so provisions preventing illegal mineral transportation from producer districts to royalty-receiving districts have been approved.

Finally, the Royalties National Fund will allocate significantly more resources to the financing of environmental programmes and projects, instead of using them to fund mining projects.

For further information on this topic please contact José Alejandro Torres at Posse, Herrera & Ruiz by telephone (+57 1 312 3124) or by fax (+57 1 3130259) or by email (josealejandro.torres@phrlegal.com).