BOGOTA, March 17 (Reuters) - Colombia may extend a sliding-scale royalty system to older oil production concessions and prolong certain contracts to provide incentives to explore for oil at a time when the sector is coping with a drop in prices, the government said on Tuesday.
Though the world's oil market is well supplied and drillers are slowing projects with crude prices down, Colombia remains under pressure to keep up exploration work because reserves are equivalent to just around seven year's output, which is considered low.
The proposals, included in the National Development Plan that outlines the objectives of the government's economic and social policy, must be decided on by late June.
"Companies are making adjustments. The first thing they sacrifice is exploration projects because they don't see oil immediately or cash flow," Mines and Energy Minister Tomas Gonzalez told reporters.
"What we are doing is providing flexibility, to give them a little more time to fulfill exploration commitments, or they can concentrate on areas with better prospects," Gonzalez said.
The royalty proposal would apply the current sliding-scale regime to concessions licensed before 2002, which currently pay a fixed rate of 20 percent on output. They would switch over to the 8-25 percent scheme paid by concessions granted after then.
Rates increase in line with output under that system, meaning the many small oil companies operating in Colombia would likely benefit most.
The other idea is to extend the current 11-year limit which companies have to explore their concessioned areas. Oil is the biggest export and major source of income for the government of Latin America's fourth-biggest producer of crude.
Half of oil companies in Colombia are considering cutting or canceling investment in exploration in the next two years due to tax increases, long waits for environmental licenses, disputes with local communities and attacks by leftist guerrillas, says the oil industry association, ACP.
The minister said keeping up exploration levels would make it possible to maintain production levels which have been around 1 million tonnes for two years.
There are currently around $7 billion in exploration investments pending in Colombia's oil sector, Gonzalez said. (Writing by Peter Murphy; Editing by Jonathan Oatis)