Colombia's Oil & Gas Update

Quarter 1 2011

Prepared by
Gonzalez Consulting International Corporation
 Colombia Today
Colombia's new policy allows private companies benefits such as 100% ownership upon exploration
success, while incorporating a generous sliding friendly environment, national security, and royalty
scale starting at 8% on production of 5,000 barrels per day or less. In response, $367 million in oil
investment contracts were established between the Colombian ANH and private investors in 20051.

Unlike the 1980s, there is a new stability and security in Colombia, America’s closest Latin American
neighbor. Adding to the positive foreign investment atmosphere is the nation’s stable economy, with
estimated GDP per capita of $7,900 and $14.96 billion of foreign exchange and gold reserves in 20052,
and the spirit of cooperation between the governments of Colombia and the US, as indicated by 40.4%
of the country’s exports going to America3.

Currently, in Latin America, the development of major energy projects has been put on the table for
earnest discussion. Operation of extra heavy oil fields, development of natural gas projects and
technological improvement on offshore drilling, are key topics opened as investment opportunities in
the region. There are also some other issues such as refining extra heavy crude oil, selling it in a market
suited to lighter crude slates, and gas availability for the development of such projects, that also provide
some interesting avenues for business.

Colombia is one of six Latin American countries with significant oil reserves, estimated to be 2.6
billion barrels. Oil is the country’s largest foreign exchange earner. The industry has attracted foreign
investment from leading multinational energy companies including Mobil, Esso, Texaco, Oxy, Shell,
BP and others, operating under association of concession modes in the country. The industry in
Colombia includes production companies, oil services, advisory companies and a supporting
manufacturing sector with equipment, plants and materials.

Colombia’s long history of oil and gas exploration and discovery has attracted investors from around
the world, developing cultivating a large base of experienced and skilled oil industry professionals. But
Colombia remains a relatively unexplored country, with enormous potential in its frontier areas. More
than 80% of the country’s territory remains unexplored. 4

Today, 27% of the Colombia’s total exports are related to the international commercialization of
hydrocarbons. This exceeds all other Colombian export products, including coffee.

1 US Department of State
2 Central Intelligence Agency's World's Factbook
3 The Economist (2005 numbers)
4 Colombia's Embassy in Washington, USA; Colombia's energy industry: recent developments and new opportunities
 The Potential in the Colombian Oil Market
The era of cheap and easy oil is coming to an end. Since 2003 oil prices soared from $30 to $125 per
barrel5. The one year forecast for crude oil is estimated to go up to $131 per barrel. Additionally, big
discoveries are less frequent. High oil prices and increasing demand are a natural stimulus for the
search for hydrocarbon resources. The existing perception regarding hydrocarbon potential in different
countries, as well as political stability, are important considerations for investors deciding to participate
in this risky business. The effect of these factors has also been crucial in Colombia.

Colombia is getting a lot of attention in the last two years from the investors' market due to the
continued solid economic stability and increased in safety. However, in the last two months the eyes are
on this country. On March of this year S&P raised Colombia to investment grade on its growth outlook.
Colombia’s credit rating was boosted to investment grade by Standard & Poor’s, 11 years after it was
cut to junk in the midst of an insurgency, as violence recedes and growth prospects improve. S&P
raised Colombia one step to BBB-, from BB+. The increase puts Colombia’s rating in line with that of
Brazil and Peru.

Adding to the news from S&P are the following:

• Carlos Slim probably knows more about investing in emerging markets than anyone else alive.
Mr. Slim is richest man last year according to Forbes Magazine. His holdings are currently
estimated at $70 billion. His telecommunications investments in Latin American countries have
been his best earners to date, but the multibillionaire is not stopping there. On February of this
year he announced his interest in one Latin-American country that many investors overlook.
The country he spoke about was not Mexico, or even the super-hot Brazil; he is talking about
Colombia. Carlos Slim is investing in Colombia because the country has the potential to power
the next generation of oil production.
• The Central Bank expects the Colombian economy to grow an additional 4.5 percent in 2011,
after growing an estimated 3.7 to 4.1 percent last year.
• It is important to note that rising commodity prices from a recovering global economy will help
Colombia’s future economic growth. As emerging markets like China and India require more
resources for their expanding middle classes, commodity prices will rise and will favor oil-
producing countries like Colombia.
• Colombia is seeing the outlook for its energy sector improve with progress on two fronts -- new
oil finds and higher production from existing wells. Ecopetrol President Javier Gutierrez said
the company, the largest integrated hydrocarbons company in the country, would aim to be
producing at least 1.45 million barrels per day of oil equivalent by 2013. The discovery opens
up a new era for Ecopetrol by branching out to new types of exploration activities involving
stratigraphic traps (those in which hydrocarbons accumulate due to variations in the deposit
environment) in the Valle Superior del Magdalena and helps increase reserve inventories in this
area of the country6. Ecopetrol announced this month that tests on a new oil well in the south of
the country showed encouraging assessments. The 7,371-foot deep Nunda-1 well in the Tello
municipality of the department of Huila was first drilled on Jan. 27. Initial tests had a flow of
318 barrels of fluid a day, 71 percent of which was water, corresponding to an average of 92

5 Brent Crude Oil Index; As reported on www.oil-price.net

6 Ecopetrol President Mr. Javier Gutierrez on Press Release April 25, 2011.
 barrels per day of crude oil, the company said in a news release.
• Colombian oil production in March reached 884,000 barrels per day, up 15 percent from the
same month in 2010. Ecopetrol and its associates extracted 786,000 barrels per day, while the
contracts administered by the National Hydrocarbon Agency ANH exceeded 98,000 barrels per
day, Ecopetrol said in a news release. On average Colombia has produced 860,000 barrels of
crude oil daily so far in the first quarter of 20117.
• The latest Colombia Oil & Gas Report from BMI forecasts that the country will account for
2.54% of Latin American regional oil demand by 2015, while providing 10.5% of supply. Latin
American regional use averaged an estimated 7.88mn barrels per day (b/d) in 2010. It should
rise to 8.07mn b/d in 2011 and reach 8.69mn b/d by 2015. Regional oil production averaged an
estimated 10.03mn b/d in 2010 and is set to rise to 11.66mn b/d by 2015.
• Colombia’s crude oil production reached an average 23.6mn barrels per month in 2010, some
16.9% more than in 2009 and 39% above the govt. target for the year. Considerable advances
were also made in exploration. In December, crude oil production in Colombia reached an
average 825,000 barrels per day, giving a total 25.6mn barrels for the whole month. This was
12.4% more than was produced in December 2009, when output was a mean 734,000 barrels
per day and 22.8mn barrels for the month.

Chart provided by: CEIC Data

7 Ecopetrol President Mr. Javier Gutierrez on Press Release April 25, 2011.
In 2010, a year when all oil production records were broken, daily average production was 785,000
barrels, 39% more than the government´s target for the year, which was 671,000 barrels per day.
Monthly average production in 2010 was 23.6mn barrels, some 16.9% higher than the average in 2009.
The results achieved in production, as well as the progress achieved in exploration have made 2010 the
best year in history for the Colombian oil sector.
Consensus Forecast : Oil production to reach 30mn barrels/ month in 2011 and 38mn
barrels/month in 2012
Based on analysts’ predictions, crude oil production will reach 1mn barrels a day in 2011, some 30mn
barrels per month on average, before rising to 1.2mn-1.4mn barrels a day in 2012, which would be 36-
42mn barrels per month. Between 2010 and 2020, BMI are forecasting an increase in Colombian oil
production of 51.7%, with crude volumes peaking at 1.47mn b/d in 2018, before declining to 1.22mn
b/d by 20208. Oil consumption between 2010 and 2020 is set to increase by 26.8%, with growth
averaging an assumed 2.5% per annum towards the end of the period and the country using 250,000 b/d
by 2020. Gas production is expected to rise gradually, from an estimated 11bcm in 2009 to 15bcm in
2018-2020. With demand growth of 34.4%, this implies peak export potential of 3.6bcm by 2018.
Details of BMIs 10-year forecasts can be found in the appendix to this report.

8 BMI Colombia Oil and Gas Report Q1 2011