NEW INCENTIVES

Colombia 2017 | ENERGY & MINING | INTERVIEW

TBY talks to Germán Arce Zapata, Minister of Energy and Mines, on incentives to increase investment in the hydrocarbon sector, potential impacts of these incentives, and new opportunities for the sector following the peace deal.

 Germán Arce Zapata
BIOGRAPHY
Germán Arce Zapata became the Minister of Energy and Mines in April 2016. He holds a degree in economics from the Universidad del Valle and a master's in international securities, investment, and banking from the University of Reading. Arce has over 24 years of experience in the public and private sectors, with previous positions including President of the National Hydrocarbons Agency, Deputy Minister of Finance, General Director of Public Credit, and President of the Board of Directors of the Energy Finance National (FDN), among many others.

What is your outlook regarding foreign investments in the hydrocarbon sector?

At the beginning of 2017, there was still a negative impact from the collapse in international commodity prices. There has been a strong fall in prices since 2015-2016, which has led to an ongoing investment standby. That being said, prices have stabilized at around USD45-55 per barrel. With prices stabilizing, we will start to see investment programs recovering and regaining traction throughout 2017. The initial calculations from the Colombian Petroleum Association (ACP) show that exploration investments are doubling in 2017. The target for this year is 840 million barrels, but we expect that to increase as things recover.

What are your ministry's strategies to further incentivize investments in this sector?

The tax reform that was approved in December 2016 includes provisions that incentivize new investments. We have an investment instrument that was used in the 1990s for export promotion, the Certificate for Tax Reimbursements (CERT), which helps with reimbursement for various taxes in cases where a company can prove it is putting delta investments over the minimum commitments in the E&P contract. Basically, we create financial incentives that will improve the breakeven cost of new exploration and additional reserve projects. We are also doing a target incentive for mining to incentivize additional investments there too. This will improve the base of investments, and also hopefully expedite these programs. Another instrument that we have introduced in the tax reform is the reimbursement of VAT for offshore exploration. This is critical, because a new frontier offshore project in the Caribbean has long-term periods of exploratory phases, with nine-year averages. Companies will now be able to get reimbursed for VAT the first year after investment, which translates into 10 years if the project is on time. The financial cost of a 19% VAT over 10 years is huge. Hence, as long as a company keeps money flowing into the investment program, it can be reimbursed in the first year following the investment. We also introduced incentives for renewables, which will be significant in the coming years, given the huge opportunity in the market for incorporating new renewable technologies into the energy matrix.

What impact do you expect these measures to have on investments?

The first calculations the ACP did in oil exploration show that we could double our investment from USD1.5 billion per annum to more than USD3.3 billion from 2016 into 2017. Once the incentives come into effect, we will start seeing results as soon as 2018. The Colombian Mining Association also estimated investments of up to USD7.5 billion over the next five years, which is 10 times the annual average. Therefore, we expect a significant recovery of investments in oil and mining, and a great deal of new resources coming into the energy market through new renewable investments.

What role must the energy and mining sectors play in the post-conflict era?

The aim is to be able to access these regions and do the studies and geophysical tests to determine what is out there. The peace agreement will now allow us to be able to do this. The energy sector will indeed be important in terms of economically opening these regions up and integrating them into the national grid. After five decades of internal conflicts and civil war, the post-conflict peace process necessitates a different way in which companies, governments, and territories relate and talk to one another. We will have to learn new ways to communicate and work together. It will take time; however, we need new ways of relating to each other to implement and construct a lasting and sustainable peace.