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Insight

Lessons to Be Learned from Colombia's Energy Reform

Wed, 01/21/2015 - 12:08

For all the attention being given to Mexico’s Energy Reform, it could be believed by an outside observer that it was the first opening-up of one of the great Latin American markets. The truth is quite the opposite as Mexico is following in the footsteps of Colombia and Brazil, which both liberalized their energy markets in the 1990s and 2000s. Despite major differences in the resources and the frameworks put in place, Mexico has certainly been drawing inspiration from the experiences of its two Latin American counterparts. John Padilla, Managing Director of IPD Latin America, is well-placed to discuss just how many similarities exist between them. He begins by explaining that although much of the speculation revolves around contractual issues and frameworks, resources truly define where investors want to go. “If resources and opportunities are scarce, a country’s oil and gas industry might not detonate. Countries with little resources find themselves in a difficult position,” explains Padilla. Nevertheless, a well-designed and well-implemented legal framework can help overcome a relative scarcity of resources. This is where Colombia succeeded brilliantly. Ever since the establishment of the National Hydrocarbons Agency (ANH) in 2003-2004, Colombia has seen a decade of massive investment. According to Padilla, this was the result of a strong contractual framework that has truly worked. This framework has given Colombia some leeway as operators continued to seek the next big field. This search has spanned years but no such discovery has occurred. Padilla believes that offshore activity could still save the country’s energy independence. “The question will be whether Colombia’s offshore activity will focus on oil or gas. Everyone is hoping for oil because there have been monstrous gas discoveries made around the world. On the other hand, Mexico has a huge resource potential and a diversity which makes it unique, since it has resources from shale and deepwater to marginal fields, abandoned fields, and unconventionals,” he says. Mexico has another peculiar characteristic. Unlike Colombia, which saw a lot of exploration but few resources being found, Mexico has plentiful reserves but its deepwater sector is underexplored. Furthermore, fields that have been partially exploited could be better harnessed with new technology.

Despite these major differences, Padilla dwells on a number of complementary issues between the two countries. For example, Mexico has successfully integrated certain pieces of Colombia’s contractual framework, one of the areas in which the Mexican government is facing strict scrutiny from the private sector. “The problems that we have observed in Latin America derive, in many ways, from the attempts to adapt production-sharing contracts. This process has led to the development of a huge bureaucracy that complicates management and operational processes. The key in Mexico would be to regulate less, not more. That will be a major challenge because Mexico does not have a history of having this type of open market,” comments Padilla. However, while looking at Colombia’s track record in certain areas could prove useful, it should not be held up as a definitive example of a successful legal framework. A number of issues are beginning to dog its oil and gas sector’s reputation, including concerns about regulation, environmental permits, and prior consultation with communities.