In 2003, the restructuring of Colombia's hydrocarbon sector was consolidated with the creation of the National Hydrocarbons Agency (“Agencia Nacional de Hidrocarburos” or “ANH”) as an administrator and regulator of the oil and gas sector in Colombia. With the creation of this entity, the Partnership Contract Model was replaced with the Exploration and Production ("E&P") Contract Model. Under the E&P Contract Model, a “contractor” such as Canacol can acquire the exclusive right to explore the Contracted Area and exploit State-owned Hydrocarbons that are discovered within the area awarded at their own risk and cost, subject to existing royalty and tax regulations.
The E&P Contract model includes three (3) different stages: exploration, evaluation, and production. The exploratory stage is divided into exploratory phases: Two phases of the Exploration Period, each of three (3) years, and the possibility of opting for a two phases Subsequent Exploratory Program, each of 18 months.
The evaluation period shall apply for each of the discoveries obtained, the timeframe of which could be between one (1) and three (3) years, depending on the proposed evaluation activities and the type of hydrocarbon to be evaluated.
The production stage extends over the period of twenty-four (24) years from the declaration of commerciality of each Production Area, with the possibility of extending to the economic limit. The value of royalties corresponds to an escalating percentage according to the volume of production obtained, with a minimum amount of six percent (6%).
Canacol operates over 1.5 million net acres in 11 exploration and production contracts in Colombia where it is focused on exploring for and developing natural gas. These blocks are all located in the Lower & Middle Magdalena Basins of Colombia. The Lower Magdalena Basin Blocks are located near the Caribbean coast and the cities of Cartagena and Barranquilla , while the Middle Magdalena blocks are located near a TGI operated gas pipeline which has spare transportation capacity, meaning that any discovery made can be quickly commercialized and sold into the interior market.
In addition, the company holds interests in three legacy non-core and oil-focused contracts in Colombia acquired prior to 2012, including the mature producing Rancho Hermoso field in the Llanos Basin south east of Bogota, and the VMM-2 and VMM-3 unconventional oil E&P contracts in the Middle Magdalena Basin. The Rancho Hermoso field is operated under direct contract with state oil company Ecopetrol, due to the field’s discovery prior to the establishment of the ANH in 2003.