Transactional, Social, and Legal Aspects of Oil Exploration and Extraction in Colombia

Palau, Juan Carlos | January 1, 2001

In Colombia, as in many other countries with oil reserves potential, the government has sought to reduce the activity’s inherent high degree of un-certainty by shaping the legal and economic environment that foreign com-panies have to operate in, making it more profitable and attractive for them.16 This paper seeks to accurately represent this environment to the pro-spective investor, starting with the structures of the two basic transactions, referred to herein as “modes”, through which most commonly, foreign com-panies participate in the oil industry in Colombia, namely, the Standard As-sociation Mode (“S.A.M”) and the Risk Sharing Mode (“R.S.M.”).17 The contractual agreements corresponding to these modes are standardized and allow little tailoring to fit individual company needs. This part of the analysis will also include recent modifications to the foregoing modes, introduced to meet the government’s announced oil-policy objectives of increasing production, exploiting the existing reserves, and finding additional ones. In addition, a brief examination of the taxation re-gime will be followed by a discussion of the regulation implemented to pro- tect the environment and Colombian minority ethnic groups.