With Colombia rapidly approaching a historical production record of one million barrels of oil per day, and Ecopetrol, the state oil company, celebrating its 60th anniversary, it is worth reviewing the events that led to these milestones.
There are relevant lessons that Colombia should not forget, and that have application not only in other Latin American countries but around the world.
The first commercial oil well in Colombia was drilled in 1918. For many decades the country was a modest producer, yielding 100-150,000 BOPD.
After the discoveries of Caño Limón in 1983 and Cusiana-Cupiagua in 1992, production rose to a peak of 820,000 BOPD, which then gradually declined to 520,000 BOPD.
Colombia’s oil and gas production has rose to record highs because of:
- Recent organizational changes at Ecopetrol.
- The creation of the National Hydrocarbons Agency – generally known as ANH by its initials in Spanish.
- The establishing of more investor-friendly fiscal policies, which have attracted over 130 E&P companies from around the world.
- A period of high oil prices.
Underlying these positive results are two important historical facts of Colombia’s petroleum industry:
- The government’s strict honoring of contracts with private companies.u A great deal of pragmatism of the political and business leaders in dealing with international oil companies.
Ecopetrol was born out of the reversion to the Colombian state in 1951 of the De Mares Concession in the central part of the Middle Magdalena Valley. It is the site of the La Cira-Infantas field (EUR 800 MBO), which was for many years Colombia’s largest oil field – a prominent surface anticline that produces from shallow Tertiary continental sandstones.
Reversion Ceremony
At midnight on Aug. 25, 1951, the reversion of the De Mares Concession was formalized at a surreal ceremony held at the town of Barrancabermeja. It was attended by government and industry officials, including Manuel Carvajal, minister of industry; L.P. Maier, president of Imperial Oil; managers from operator Tropical Oil Co. (a subsidiary of Imperial Oil); Emilio Sardi, the first president of Ecopetrol; the bishop of Barrancabermeja; and others.
The ceremony took place at the exact date and time on which the Supreme Court had ruled the concession should expire after a total of 30 years.
Surprisingly to some, this reversion occurred in a peaceful and amicable way, according to the terms and conditions agreed in the original concession document 30 years before, a period of high labor unrest and political upheavals – not only in Colombia but throughout Latin America, including the expropriation of private oil companies in Mexico in 1938.
Maier said at that moment, “This is to my knowledge the first time in the history of the petroleum industry in which an important property, developed by private capital under a concession, returns to the patrimony of the state by virtue of the strictly legal expiration of the contract.”
Minister Manuel Carvajal replied saying, “As rightly pointed out by Mr. Maier, the event that we are celebrating today has world repercussions. Different has been the fate of exploration contracts celebrated in other countries where misunderstood nationalism has resulted in political and international commotions in order to obtain what Colombia has received by complying strictly with the agreed commitments.
“From now on, the field will be developed by the Empresa Colombiana de Petroleos, Ecopetrol.”
This reversion and the creation of Ecopetrol are widely considered as the most significant events in the history of Colombia’s oil industry in the first half of the 20th century. It stirred deep patriotic emotions around the country. At the exact moment of the signing of the concession’s transfer the national anthem was played, bells in churches tolled, river steamers on the Magdalena River sounded their sirens and cars honked their horns through the country, all displaying the country’s joy in receiving “the oil riches.”
Background
How did all this happen?
The story begins in 1905, when Colombian land speculator and promoter Roberto De Mares obtained a concession from the government, which eventually allowed Standard Oil of New Jersey to enter Colombia, a company that became the dominant force in the Colombian oil industry in the first half of the 20th century.
De Mares traveled to the United States many times to promote his concession. In 1914 his efforts began to pay off when Standard sent geologist F.C. Harrington to Colombia to study the area.
Although Harrington’s assessment was positive, Standard took no action.
That same year De Mares signed a deal with M. Benedum, J. Tress and G. Crawford, who had experience developing fields in Mexico. On May 20, 1916, they incorporated in Delaware the Tropical Oil Co., and subsequently De Mares transferred the concession rights to Tropical Oil.
Work began in the area with the drilling of the discovery well Infantas 2.
In 1920, Standard Oil reached an agreement with Benedum, Tress and Crawford to purchase Tropical Oil for $100 million – but because of the delay in beginning to build a petroleum refinery, which was part of the concession obligations, Tropical requested an extension to complete the construction of the plant.
The government granted an extension and fixed Aug. 25, 1921, as the refinery’s on-stream target date. The decree granting the extension implied that the concession should end 30 years after this date.
Relations between Jersey and Colombia were difficult through the years because of different legal interpretations of the contract. Critics long argued that because exploration activities had begun in 1916, and because the transfer of the concession’s rights to Tropical Oil occurred on June 14, 1916, that date should have been the beginning of the 30-year-term, and therefore the concession should expire in 1946 and not in 1951.
At stake was the economic value to the nation of five years of oil production and refinery profits from 1946 to 1951 – and also whether the concession could be extended at the end of the 30-year term.
In 1941 the government notified Tropical Oil Co. that its concession rights would end on Aug. 25, 1946.
The company rejected the decision – and facing an impasse, the government requested the Supreme Court settle the issue.
In 1944, the Supreme Court ruled – in a controversial decision – that the expiration date of the contract was Aug. 25, 1951, and that on that date all the reserves, assets, equipment and the refinery would revert to the nation.
The court’s decision left the government in a quandary, however, as to what to do with the concession at the moment of its reversion. Hence, the government in 1944 created the National Petroleum Council, a technical advisory entity attached to the Ministry of Petroleum, which began exploring options to manage the concession: private company, JV between the government and private investors, and state oil company.
After failed efforts to find private investors – both Colombian and foreign – the Colombian government created Ecopetrol on Jan. 9, 1951. After long and difficult negotiations the government signed a contract by which International Petroleum Colombia (an affiliate of today’s ExxonMobil) provided technical assistance in running and managing the field for three years and for the upgrading of the Barrancabermeja refinery for another 10 years.
The refinery finally reverted to the state in 1961.
Corollary
Starting from humble origins 60 years ago as the administrator of the La Cira-Infantas field, Ecopetrol today is a modern petroleum corporation. It is Colombia’s largest oil and gas company, accounting for about 60 percent of the country‘s total production.
It is the fourth largest company in Latin America and one of the top 40 oil companies in the world.
It is involved in upstream activities in Brazil, Peru and the U.S. Gulf Coast. It also owns the main refineries in Colombia, most of the network of oil and products pipelines, petrochemical plants and is now entering into the bio fuel business – and it has set itself a production target for 2015 of 1.3 million BOPD.
Breaking with the traditional Latin American state oil company mold, Ecopetrol has been partially privatized. It is listed on the NYSE and on the Toronto, Lima and Bogota stock exchanges, and about half a million Colombians now own shares in it.