ROYALTIES IN THE ROYALTIES HYDROCARBONS´ SECTOR
ROYALTIES IN THE ROYALTIES HYDROCARBONS´ SECTOR
MINISTER OF MINES AND ENERGY Hernán Martínez Torres AGENCIA NACIONAL DE HIDROCARBUROS - ANH NATIONAL HYDROCARBONS AGENCY -ANH Decreto Ley 1760 de 2003 ROYALTIES IN THE HYDROCARBON SECTOR DIRECTOR OF THE AGENCIA NACIONAL DE HIDROCARBUROS José Armando Zamora Reyes EDITORIAL COORDINATION Adriana Ospina Zapata CORPORATE COMMUNICATIONS Adriana Acero Cadena TEXTS Área de gestión del conocimiento (Knowledge management area) Área comunidades y medio ambiente (Communities and environment area) ILLUSTRATIONS John Israel Rojas Henao PHOTOS ANH DESIGN AND DIAGRAMATION TBWA \ COLOMBIA S.A. Bogotá – 2008
PRESENTATION PRESENTATION
For the National Hydrocarbons Agency –ANH- it is clear that the adequate, transparent and effective investment of the resources derived from royalties is a determinant factor, as it strengthens the institutionalism of the State and benefits communities through the social investment that the municipalities and departments must execute according to Law. In this sense, with this publication, the ANH wants to facilitate information to communities and local and regional authorities regarding royalties in the hydrocarbons sector (Oil – Gas).
INDEX What are royalties? Royalties and the national political constitution
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Existing norms regarding royalties
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How are royalties classified?
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Determinig the value of royalties
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Sharing of benefits varies according to production role
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Indian reserves royalties sharing article 11 of Law 756
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Distribution of royalty funds for indian reserves article 11
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Which are the entities involved with royalties?
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In what are royalties invested?
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Who controls that royalty investments are assigned where they are supposed to?
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WHAT ARE
ROYALTIES? The Colombian Political Constitution in article 360 defines royalty as… “an economic compensation for the State that is caused by the exploitation of a non renewable natural resource…”
The generation of royalties starts in the production stage
IN WHICH STAGE OF THE HYDROCARBONS´ PRODUCTIVE
CHAIN ARE ROYALTIES FIRST GENERATED? In the PRODUCTION stage.
SEISMIC EXPLORATION STAGE 6
EXPLORATORY DRILLING STAGE
PRODUCTION STAGE
ROYALTIES AND THE NATIONAL POLITICAL CONSTITUTION: ROYALTIES AND THE
ARTICLE 332: “The Colombian State owns the subsoil and the non renewable natural resources…”, this means that no other person can exploit hydrocarbon resources (oil and gas) in their own name, since an authorization of the State is always required, in this case from the National Hydrocarbons Agency
REFINING STAGE
– ANH - , which is the entity in charge of the “Integral Management of the Nation´s hydrocarbon reserves”. As part of its functions, the ANH is also responsible of collecting royalties and turning them over to the corresponding beneficiaries (Decree 1760 of 2003).
TRANSPORTATION STAGE
COMMERCIALIZATION 7
EXISTINGREGARDING NORMS ROYALTIES EXISTING NORMS
“La Constituyente” (a reform to the Constitution) of 1991, raised the royalties theme to Constitutional rank by its inclusion in the Articles 360 and 361. ARTICLE 360: “The law will determine the conditions for the exploitation of non renewable natural resources as well as the rights of territorial entities upon them. The exploitation of a non renewable natural resource will cause, in favor of the State, an economic compensation entitled royalty, notwithstanding any other right or compensation agreed upon. The municipalities or departments where exploitation of natural resources are taking place, as the sea or river ports through which such resources or its derived products are transported, will have the right to participate in royalties and compensations”. ARTICLE 361: “With the earnings proceeding from the royalties that are not assigned to the departments or municipalities, a Royalty National Fund will be created with the purpose of providing funds to territorial entities in the terms stated by law. These funds will be used to promote the mining industry, to preserve the
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environment, and to finance the regional investment projects that have given priority in the development plans of the different territorial entities.”
Legal frame In development of what is established in the Constitution, Law 141 of 1994 creates: The Royalty National Fund The Royalty National Commission Additionally it: Regulates the right of the Nation to collect royalties. Establishes clear rules for their settlement and distribution. Law 765 of 2002 modifies Law 141 of 1994 and introduces new concepts such as: Defines variable percentages for the payment of hydrocarbons´ royalties to territorial entities. Establishes the payment of an additional royalty for contracts reverted in favor of the Nation after 1994.
HOW ARE ROYALTIES CLASSIFIED? HOW ARE
Royalties are classified as direct and indirect. DIRECT ROYALTIES Are those that directly benefit the territorial entities where the hydrocarbon exploitations are taking place, the municipalities with river and sea ports through which these resources are being transported, and the municipalities within the area of influence of such ports.
INDIRECT ROYALTIES Indirect royalties are the funds that are not directly assigned to the producing States or Municipalities, and they are distributed by the Royalty National Fund.
WHO BENEFITS FROM THE ROYALTIES? THE STATES AND MUNICIPALITIES where there is hydrocarbon PRODUCTION.
where the reserve is located.
THE MUNICIPALITIES where SEA and RIVER PORTS are located through which these resources and their derivatives are transported.
NON PRODUCING DEPARTMENTS AND MUNICIPALITIES, benefit from royalties through the Royalty National Fund.
INDIAN RESERVES: when hydrocarbons are exploited in the reserve NO MORE THAN 5 KILOMETERS away from it. Such funds are managed and settled, with the agreement of Indian authorities, by the municipal or state offices
THE DEPARTMENTS AND MUNICIPALITIES located on MARINE COASTS UP TO 40 NAUTICAL MILES AWAY of the hydrocarbons´ exploitation zone.
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DETERMINIG THE VALUE OF ROYALTIES DETERMINIG THE VALUE
For new findings Law 756 of 2002 is applied as follows:
8%
Up to 5.000 barrels per day
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20%
From 125.000 to 400.000 barrels per day
25%
More than 600.000 barrels per day
SHARING OF BENEFITS VARIES SHARING OF BENEFITS VARIES
ACCORDING TO PRODUCTION ROLE
General Sharing of the beneficiaries is:
DEPARTMENTS (STATES)
47,5% PORTS
8% 12,5%
MUNICIPALITIES
32%
The Royalty National Fund F.N.R. (INDIRECT ROYALTIES)
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INDIAN RESERVES ROYALTIES SHARING, ARTICLE 11 OF LAW 756 Legally established Indian reserves have a right to share royalties’ funds when producing wells are located within the reserve, and if the limits of the reserve are located up to five or less kilometers from producing wells.
INDIAN RESERVE
5 KILOMETERS OR LESS
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DISTRIBUTION OF ROYALTY FUNDS FOR INDIAN RESERVES, ARTICLE 11 5% of the royalties to which the Department (State) is entitled to for the production of the well or wells that are located inside the reserve or 5 kilometers or less away from it. 20% of the royalties to which the Municipality is entitled to for the production of the well or wells that are located inside the reservation or 5 kilometers or less away from it.
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WHICH ARE THE ENTITIES INVOLVED WITH ROYALTIES? MINISTRY OF MINES AND ENERGY: Establishes the hydrocarbons´ related policies of the country and carries out the settlements for the payment of hydrocarbon royalty funds.
WHO SETTLES THE ROYALTIES? THE MINISTRY OF MINES AND ENERGY is responsible of CALCULATING THE AMOUNT DUE for royalty concepts and the NATIONAL PLANNING DEPARTMENT REVIEWS this settlement.
NATIONAL HYDROCARBONS AGENCY – ANH - : manages the hydrocarbons´ reserves of the Nation and is responsible of collecting and transferring royalty funds. NATIONAL PLANNING DEPARTMENT: exerts control and registration of projects that have been approved by the Ministries, to be financed by the Royalty National Fund, and at the same time controls and watches out for the correct use of the royalty funds.
WHO COLLECTS THE ROYALTIES?
WHO PAYS OUT THE ROYALTIES? The NATIONAL HYDROCARBONS AGENCY – ANH – is who pays out royalties to beneficiaries. Agencia Nacional de Hidrocarburos
The NATIONAL HYDROCARBONS AGENCY – ANH -, is in charge of RECEIVING ROYALTIES in cash or other sorts from the companies exploiting hydrocarbons.
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IN WHAT ARE ROYALTIES INVESTED? IN WHAT ARE DEPARTMENTS (STATES)
90% INVESTMENT IN PRIORITY PROJECTS FROM THE DEVELOPMENT PLAN
45%
HEALTH, EDUCATION, DRINKable WATER AND SEWERAGE SYSTEMS FOR THOSE NON RECEPTORS OF ROYALTIES (MAXIMUM 15% IN ONE MUNICIPALITY)
SOCIAL INFRASTRUCTURE investments according to the DEVELOPMENT PLAN; ROADS, PARKS, SPORT COMPLEXES, CULTURAL OFFICES, etc.
OTHER PROJECTS OF THE MUNICIPAL DEVELOPMENT
TECHNICAL INSPECTIONS
of a finished project with royalty funds
ACTIVATION and OPERATION EXPENSES
Of the finished projects with royalty funds.
In general, 90% of the money proceeding from ROYALTIES must be invested in the PRIORITY PROJECTS of the DEVELOPMENT PLAN of the municipality or state. The other 10% must be divided in 5% for TECHNICAL INSPECTIONS and 5% for the ACTIVATION and OPERATION of the projects. DEPARTMENTS must invest in municipalities that DO NOT receive royalties, 45% of these resources go to HEALTH, EDUCATION, DRINKABLE WATER and SEWERAGE SYSTEMS. An additional 15% will 16
75%
ENVIRONMENTAL CLEAN UP, HEALTH, EDUCATION, DRINKable WATER, SEWERAGE SYSTEMS AND OTHER BASIC SERVICES
+ 15 % UNTIL REACHING MINIMUM COVERAGE
5% 5%
MUNICIPALITIES
be invested, until minimum coverage is obtained, as well as SOCIAL INFRASTRUCTURE according to the DEVELOPMENT PLAN: ROADS, PARKS, SPORT COMPLEXES, CULTURAL OFFICES, etc. On the other hand, MUNICIPALITIES must assign 75% of royalties to ENVIRONMENTAL CLEAN UP, HEALTH, EDUCATION, DRINKABLE WATER and SEWERAGE SYSTEMS and other PUBLIC SERVICES, besides investing in OTHER PROJECTS of the MUNICIPAL DEVELOPMENT PLAN.
WHO CONTROLS
WHO CONTROLS THAT ROYALTY INVESTMENTS ARE ASSIGNED WHERE THEY ARE SUPPOSED TO? The National Planning Department and governmental control organisms: National Controlling Office and the Public Ministry (Nation´s Law Office, Legal Representation) and People´s Representation Offices.
THE IMPROVEMENT OF THE QUALITY OF LIFE OF COLOMBIANS HIGHLY DEPENDS ON THE CORRECT USE OF THE RESOURCES GENERATED BY THE HYDROCARBONS RELATED INDUSTRY OF THE COUNTRY. 17
Calle 99 No. 9A - 54 (piso 14) • Tel.: (57+1) 5931717 • Fax: (57+1) 5931718 • Bogotá. D.C. -Colombia www.anh.gov.co | info@anh.gov.co