Francisco Reyes & Asociados

The Oil & Gas Industry in Colombia and the Ecopetrol Partial Privatization

Dallas Bar Association - International Law Section March 18, 2008

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Index I. II. Doing Business in Colombia Colombian Oil & Gas Background Information

III. Ecopetrol Partial Privatization IV. Other Important Actors in the Colombian Oil & Gas Industry V. Colombia Round 2008
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VI. Conclusion

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I
Doing Business in Colombia

Background

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Geographic and Demographic Background 1. Area: 1.14 million sq. km. (440,000 sq. mi.); about three times the size of Montana; fourth-largest country in South America in terms of size. 2. Main Cities: Capital - Bogota (pop. approx: 7.1 million). Other major cities include Medellin, Cali, Barranquilla and Cartagena. 3. Colombias Population: 44 million as of July 2007
Source: US State Department
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Economic Background 1. GDP (2006): $131 billion 2. Annual growth rate (2007): 6.65%. 3. Natural resources: Coal, petroleum, natural gas, iron ore, nickel, gold, silver, copper, platinum, emeralds

Source: US State Department

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Average Inflation
YEAR Consumer index Change 2003 6,49 -0,500 2004 5,5 -0,990 2005 4,85 -0,650 2006 4,48 -0,370 2007 5,69 1,210

IPC

7 6 5 4 3 2 1 0

6,49

5,5 4,48 4,85 5,69

2003

2004

2005

2006

2007

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Average Devaluation
YEAR Average devaluation Change 2003 15,22 6 2004 8,56 -6,66 2005 -11,57 -20,13 2006 1,63 13,2 2007 -11,05 -12,68

Average devaluation
20 10 0 -10 -20 -30
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2003 2004 2005

15,22

8,56 1,63
2006 2007

-11,57

-11,05

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Commercial Interest Rate Earned on Deposits (DTF)

YEAR Interest rate (DTF) Change 2003 7,92 0,22 2004 7,71 -0,21 2005 6,31 -1,4 2006 6,82 0,51 2007 9,15 2,33

DTF - 90 days
10 8 6 4 2 0 2003 2004 2005 2006 2007
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9,15 7,92 7,71 6,31 6,82

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The Move to a Market Economy 1. Colombia is a market economy with commercial and investment ties to the United States. 2. Transition to a less regulated economy has been underway for more than 15 years. 3. Unlike many of its neighboring countries, Colombia has not suffered any dramatic economic collapses (i.e. extreme currency devaluations, sovereign debt default, etc) in modern times.
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Economic Improvement Factors contributing to economic growth: 1. Increase in domestic security 2. Low inflation 3. Stable currency (Colombian peso) 4. Increased exports to neighboring countries and the US

Source: US State Department

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Foreign Investment in Colombia 1. U.S. is largest source of foreign direct investment (FDI) in Colombia, particularly in areas of coal and petroleum. 2. In 2006 FDI totaled $6.3 billion, an increase of 294% from 2002. 3. Most new investments are in mining and oil and gas sectors.
Source: US State Department
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Stability Agreements under Law 963 of 2005 Legal and regulatory conditions applicable to contract at moment of its execution shall remain applicable during the time determined for its performance Foreign investors pay a yearly fee of 1% over annual investments to Colombian Secretary of Treasury Regulatory stability is ensured for a period of 3 years to 20 years
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Stability Agreements under Law 963 of 2005

44 Requests 20 Approved 8 Signed contracts

As of February 2008

2008

20 Requests 14 Signed contracts

Projected

Bavaria, Alpina, Proficol Andina, Divco, Almacenes xito, Sofasa, and Comertex have signed stability agreements.
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Free Trade Agreement US-Colombia Free Trade Agreement currently pending approval before the US Congress Colombias Congress has approved the FTA Constitutional Court ruling is pending

Source: US State Department

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Improving Security 1. Ongoing civil conflict with socialist guerrillas (FARC, ELN) and paramilitary organizations 2. By 2004, the government had reestablished its presence in all of the country's 1,099 municipalities.
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Source: US State Department

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Reduction in Hostilities and Criminal Activities 1. Attacks by insurgents against rural towns decreased by 91% from 2002 to 2005 2. Between 2002 and 2006, Colombia saw a drop in homicides (37%), kidnappings (78%), terrorist attacks (63%), and attacks on the country's infrastructure (60%)

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Source: US State Department

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Recent Developments
1. Successful military strike against high-ranking FARC member Raul Reyes 2. Border incident with Ecuador, which led into diplomac dispute with Ecuador, Venezuela, and Nicaragua 3. Diplomatic relations were reestablished after the Rio Convention in the Dominican Republic (March 2008)
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II
Colombian Oil & Gas Background Information

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The Colombian Oil & Gas Sector

Improved security measures and new drilling activity have moderated the decline in production The projection is for Colombia to be a net exporter through 2011 (given current production estimates) Colombia is trying to revitalize its oil and gas reserves and production

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Venezuela/Colombia Gas Pipeline Sale of Colombian gas to Venezuela

First section: 225 kilometers Construction start date: July 2006 Total investment: US$325 million Capacity: 500 million cubic feet of natural gas per day

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Average Oil and Gas Production Year OIL (million barrels per day) GAS (million cubic feet per day)

Source: National Hydrocarbon Agency

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Average Production (in thousands of barrels per day) -noted in blue-

Reserves (in million of barrels) -noted in green-

OIL

Year

Average Oil Production (mbpd)

Years Reserves
Source: National Hydrocarbon Agency

Production 23

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Average Production (mm of cubic ft. per day) -noted in blue-

Reserves (cubic gigafeet) -noted in red-

GAS
Average Oil Production (mbpd)

Years Reserves
Source: National Hydrocarbon Agency

Production 24

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Colombia Oil and Gas Pipeline System

Source: National Hydrocarbon Agency

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Oil Fields and Gas Pipelines

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Major Oil Field Discoveries

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III
Ecopetrol Partial Privatization

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Company History
1. 2. 3. 4. 5. Ecopetrol was formed in 1951 as the national oil company In 2003, Ecopetrol was converted into a wholly owned stock company (Decree 1760) In 2006, Ecopetrol was authorized to carry out an IPO on Colombian Stock Exchange for 10% of its common stock (Law 1118) In December 2007, Ecopetrol was listed on Colombian Stock Exchange, raising US$5.7 billion The law authorizes subsequent public offerings for the issuance of up to an additional 10% of Ecopetrols common stock
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Subscription of Ecopetrol IPOs Shares

Law 226 of 1995 provides a preemptive right in favor of current and former workers, pensioners, trade unions for privatized companies

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Composition of Publicly Traded Shares in Ecopetrol

Individuals Companies Pensions funds

Total number of shareholders: 482,941 at time of IPO

Pensions funds 37%

Individuals 62%

Other companies 31

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Ecopetrols Corporate Structure

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Ecopetrol Upper Management and Board

CEO: Javier Gutierrez CFO: Adriana Echeverry

PRINCIPALS Fabio Echeverri Correa Hernn Martnez Torres (Minister of Mines and Energy) Ignacio Sann Bernal Oscar Ivn Zuluaga Gustavo Gaviria ngel Carolina Rentera Rodrguez Omar A. Baquero Soler

ALTERNATES Roberto Silva Salamanca Andrs Felipe Arias Leyva (Minister of Agriculture) Gloria Ins Corts Arango Julio Andrs Torres Garca Andrs Escobar Arango Mara Elena Velsquez Restrep William Escaf Escaf
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Ecopetrols Corporate Regulation Colombian Securities Regulation (Law 964 of 2005) By-laws Corporate Governance Code Special rules for the shareholders meeting Special rules for the board of directors

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Ecopetrols Present and Future Projects Propilco S.A. Modernization of refineries International investments Ecobiodiesel Colombia S.A. Plans to invest US$17.5 billion between 2008 and 2015* US$3.76 billion to be invested in 2008*
*Source: Reuters
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Ecodiesel Colombia S.A. Diversification into alternative energy sources Joint venture between Ecopetrol and palm growers to create Ecodiesel Colombia S.A. (biodiesel project) Equity contributions: 50% Ecopetrol - 50% Palm growers

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Projected Biodiesel Demand in Colombia

Base scenario

High scenario GDP

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Production of Palm Oil

Area

Production
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Propilco S.A. Ecopetrol has signed an agreement to acquire 100% of the Colombian firm Propilco S.A. based in Cartagena Propilco is a processor of Polypropylene

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Propilco S.A. Propilco has annual capacity of 320,000 metric tons divided in two plants
Plant 1
Technology: Unipol PP Capacity: 140,000 mtons/year Products: Homopolymers, Impact Copolymers and Random Copolymers

Plant 2
Technology: Novolen Capacity: 180,000 metric tons/year Products: Homopolymers and Random Copolymers.
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Ecopetrol International Expansion Plans

Source: IPO Prospectus

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Ecopetrol Oil Refinery Facilities - Cartagena Refinery

Glencore International AG (51% for US$654 million) is Ecopetrols partner (49%) for the refinerys modernization project (2006 selected)
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Oil Refinery Facilities - Barrancabermeja Plant for Hydrotreatment of Fuels

In October 2006, Ecopetrol and Consortium Technip Italy and Tipiel entered into agreement for management of Barrancabermeja plant
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Ecopetrols Gulf of Mexico Project Deep water exploration in the Gulf of Mexico In December 2007, Ecopetrol America Inc. signed agreement for the exploration of blocks 777 and 778 located in the Garden Banks area Shell Offshore, Inc. Ecopetrol America, Inc. Newfield Exploration Company 65% (Operator) 25% 10%
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IV
Other Important Actors in Colombian Oil & Gas Industry

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National Agency of Hydrocarbons (ANH) Manages countrys hydrocarbon reserves (Decree 1760 of 2003) Provides geological information Authorizes hydrocarbon exploitation Grants exploration and exploitation rights to private entities

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Energy and Gas Regulatory Commission (CREG)

Governmental agency which oversees regulation in the downstream area (Law 142 of 1994, Art. 73)

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Ecogs Operates approx. 3,644 kms of natural gas trunk pipelines in Colombia In 2006, ECOGAS was privatized (i.e., purchased by the Empresa de Energia de Bogota) for US$1.44 billion

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Superintendency of Public Utilities Governmental agency that carries out administrative supervision and control over public utility companies and acts as a bankruptcy court for such companies

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Foreign Companies Including Texaco, BP, and Triton, which are important actors in the Colombian oil and gas sector

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V. Colombia Round 2008

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Bidding process being carried out by ANH 43 exploration blocks offered in 4 different basins Road shows in March and April 2008, Bogota, Houston (March 26), and London

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Areas that are being offered

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Pre-Qualification Requirements Payment of US$100,000 bid package fee Corporate legal requirements Technical and Operational qualifications Adequate financial condition Certain qualifications waived for companies within the Petroleum Intelligence Weekly Top 100 List

Source: AHN

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Conclusion
Contrary to other countries in region, Colombia has rejected resource nationalism 2003 reforms provided important legal reform of dividing roles of regulator and commercial actor 2007 Ecopetrols partial privatization may give rise to better corporate governance (professional management vs. state owned company) and increased capital expenditures Improvement in Colombias domestic situation and economic growth has increased attraction for foreign investors in oil and gas sector

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Contact Information
Larry B. Pascal Haynes and Boone, LLP 901 Main St. Suite 3100 Dallas, TX 75202 direct dial: 214.651.5652 direct fax: 214.200.0702 larry.pascal@haynesboone.com Francisco Reyes FR & A Carrera 12 # 96-67 Office 304 Bogot, Colombia ph: 571.256.0590 fax: 571.6914647 freyes@cable.net.co

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