Directorate of Intelligence
6 JuneFOB RELEASE
DATE:5
Colombia: Promoting Energy Exports
Summary
President Gaviria's Hemispheric Energy Initiative, proposing that Latin America coordinate its energy policies to reduce regiona! dependence on Middle East oil, is largely intended to take advantage of Colombia's comparative wealth in coal and hydropower. Joint projects planned with Mexico and Venezuela should further these goals and, by allocating regional energy resources more cost-efficiently, will support US interest in strengthening regional economies. With Colombia's oil production likely to remain limited due to the size of its geological basins, Bogota's hopes for expanding energy exports rest in large part on Latin America turning increasingly to Colombian coal to generate electricity. Mexico, Costa Rica and Chile are prospective markets, although rate of conversion to coal throughout the region will be retarded as long as oil prices remain moderate. Moreover, Colombia's potential toajor exporter of hydropower is limited by financial constraints on improving the power grid to handle increased demand. Furthermore, Bogota's fitnesseliable energy supplier is undercut by the military's inability to prevent guerrilla attacks on Colombia's oil, coal, and power facilities. Despite investment risks caused by guerrilla disruptions of the energy sector, however, Colombia's success in attracting foreign investors through the use of flexible contracts and liberal regulations will help build its export potential.
Thu memorandum wat prepared by
of African and Latin American Anatytit. Commenu and queries are welcome and may be directed to the Chief,
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Gaviria's Henuspherk Energy Initiatire
President Gaviria's Hemispheric Energy Initiative, first introduced at the Group of Three' meeting in Caracas last September, seized upon the Persian Gulf crisis to promote Colombia's regional energy exports under the rubric of increasing Latin American energy independence. Although it produces more energy than it consumes. Latin America imports as muchillion barrels of crude per day from the Middle East because some of its refineries are not configured to use the type of crude produced regionally.roposed that Latin American governments reduce their dependence on oil imports from the Middle East by diversifying their energy consumption and integrating energy policies. H
In promoting his plan, Gaviria gave priority to forging agreements with Latin America's two other major energy producers--Venezuela andsaw in hisolicy framework for promoting their own energy agendas. Venezuela was expanding its oil production capacity to compensate for lost Iraqi and Kuwaiti production and was eager to secure new and lasting markets in the region even after the Gulf crisis ended. Mexico was looking for an alternative, cheaper fuel for domestic consumption in order to free more of iu oil production for export. The Group of Three agreed at the Caracas meeting to cooperate in energy exchanges and projects that would play to each of their strengths.
Colombia and Venezuela would export coal and gasipeline to Mexico, permitting Mexico to export more petroleum.
Mexico agreed to use coal and gas-fired generation in new therrnoelectric plants, relieving some additional demand on oil, which could then be exported.
Colombia and Venezuela would link their electrical grids, and later connect with Mexico through Central America.
Bogota and Caracas would investigate the possibility ofas pipeline from Lake Maracaibo to central Colombia.
Gaviria's Initiative, however, has drawn little interest from most key South American countries, which had already recognized the benefits of energy integration and were moving ahead with joint projects of their own. Over the past year, for example, Brasilia and La Paz have dusted off plans toipeline torazilian thermoelectric plant with Bolivian gas, although financing problems have put the project temporarily on hold. With its
Tba Group of Threecomposed ofeornxlm,Muico. (U)
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financing in place, Argentina isas pipeline lo Chile thai eventually will supply Santiago. Brazil and Paraguay reportedly arc considering selling electricity from the jointly-owned Itaipu Dam to other Southern Cone Common Market (Mercosur) countries, and Paraguay and Argentina are building the Yacyreta Dam across the Parana River.|
Steering Away from Oil
Faced with the overwhelming dominance of Venezuela and Mexico inmarkets, Gaviria's Initiative did notarge role forindustry. Colombia exportsarrels of oil percompared withndoreover, until recently, Colombia's oil and gas discoveries hadpace with prodproven
reservesillion barrelsillion barrelsast month, however, British Petroleum and its foreign partners. Total Compagnie Francaise and Triton Energy Corporation, announced that they hadew deposit containing as muchillion barrels of high quality crude. Some industry analysts believe the field containsillion barrels, but no one will know the size of the find with any confidence until additional testing is completed and analyzed later this year. If British Petroleum's initial assessment is correct, Colombia would double its reserves, allowing it tomall exporterccording to our estimates. Colombia's natural gas reserves amount torillion cubic feet, but production is allocated entirely to the domestic market
Marketing Coal
Recognizing Colombia's limited oil export potential, Gaviria probably intended his Initiative primarily to promote coal exportseriod of oversupply and sluggishoal is Colombia's richest mineral resource, with reserves of someillion metric tons and output of close toillion metric tons per year. Exports6 million tons last year, and Colombia expects to double that amount within the next five years asillion ton La Loma mine begins production. The coal, whichow sulfur content and lessercent ash content, willrullennium at the current rate of extraction, according to an industry spokesman. P
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Latin America is increasingly turning to coal to generate electricity, according to the World Energy Statistics and Balances handbook, and Gaviria clearly hopes the region willigger market for Colombia. Currently,ercent of the state-owned company Carbocol's exports are sold to Western Europe, Asia, and Africa, while the remainingercent is exportea to the
United Stales. Argentina,ew Caribbean countries, and sold on the spot market. In support of Gaviria's Initiative, Mexico Cityetter of intent toons of coal3 and anons each subsequent year until annual purchasesillion tons
In addition, the Mexicans are considering developing deposits inesar Department to produce coal to supply several thermoelectric plants presently under construction. Elsewhere in Latin America. Chile and Costa Rica are among the potential markets for Colombian coal, f
Carbocol is facing financial strains, but the rapid development of thewill help the company outgrow these difficulties and will5
billion to the United States, other othcial creditors, and international banksesult of the financing terms of the company's joint venture with Exxon at Cerrejon North, which were based on higher projected coal prices and required Carbocol to begin making principal payments before the mine began exporting coal. Cash flow statistics provided by the Ministry of Finance indicate the project will not operate in the blackarbocol's bad experience with the Cerrejon North joint venture has caused the state-owned co.-nany to reduce its involvement in new projects and grant mining contractsercent ownership to foreign companies. Although higher exports and royalties from these foreign operators should ease Carbocol's financial situation, Bogota has agreed in principle to sell off its interest in Cerrejon North to private companies as parteal to reschedule Carbocol's debt.
Hydroelectric's Untapped Export Potential
Although overshadowed by Colombia's coal industry, the country's hydropower is abundant and Gaviria's Initiative anticipates exploiting this resource over the longer term to supply dectricity to Central America and Mexico. Colombia has anegawatts of hydro potential, accordingorld Bank study,ercent of which has been tapped so far. Furthermore, Colombia's current power generating capacity is projected by the World Bank to exceed demand by ategawattsationwide power grid links the system-which includesajor hydroplants and four thermal plants-while large reservoirs assure continuity of power supply during the drier seasons.
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The Gaviria government is pressing ahead with plans lo harnesspower potentialhas requested
loans from the World Bank and the inter-American Development Banktheydroplani in Cordoba Department near theandigh-tension wire unking Colombia's electricto Venezuela's. The development of Colombia's hydroelectrichowever, is constrainedransmission system inadequate toenergy demands of its own north coast-let alone Centralby financial problems. Despite overall surplus capacity, Colombia ismeet peak demand for electricity in the economically importantDepartment because the transmission lines cannot carryBogota needs to improve its transmission capability,in central Colombia to fully supply the needs of thebefore it can export through that system to Central America.tariffs, clandestine tine tapping, and debt servicecontinue to limit funds for upgrading the transmission network.3the utilities have not generated enough revenue to service5 billion, or roughly one third of total externalthe central government,
other stale enterprises, and multilateral lending agencies to make up the shortfall. T
Bogota is aware of the problems that plague the power sector J
"hut in our view has not demonstrated the ability lo remedy the situation. After declining during President Barco's administration, illegal tap-ins increased byercent last year because of lax enforcement by the Gaviria government. Bogota raised electricity feesut probably will find it difficult to hike residential rates substantially this year while it is struggling to control inflation. Although the sector is scheduled to0 million1 from commercial banks and the Inter-American Development Bank, Colombia's failure to control the system's losses and reduce subsidies could jeopardize, or at least reduce, critical World Bank funding. |
Guerrillas Threaten Energy Sector
IDiacoaatod ctetneity km for residential coasumen-whicfa makejaproporb>-at*of lotal users iautility coeaparoca0 million per year, accordingorld Bank study. MfWWhile, nigh taeiffn changed lo commercial and internal users havo pronfKed large-scale theft and meter ttrnperiag.
Despite Colombia's export potential, guerrilla attacks on its energy infrastructure and the sector's employees limit Bogota's ability toeliable energy supplier. Over the past four years, for example, the National Liberation Army (ELN) and other guerrilla groups have blown up sections of
tbe Cano ljrnon-Covxnas oil exportimes, according to Ecopetrol, at an estimated cost0 million in foregone production, repairs, and oil spills. Outraged by the government's assault in0 on the largest insurgent group's sanctuary and their exclusion from the Constituent Assembly, the country's two major insurgent organizations have stepped up their attacks on the oil industry this year and expanded their targets list to include electrical pylons and coal mines, j
Incline disruptions have torced Bogota to reseneome crooe mi ex pom. while attacks oa electric stations have necessitated power rationing throughout the country, especially along the north coast. Attacks on mining camps have destroyed costly equipment and bankrupted at least one company.
The military has responded to the damaging guerrilla offensive by beefingat major installations and increasing the number of air patrols overpipelines, but these steps have had limited effect so far. Theand isolated locations of pipelines and powerlines make itto protect them from the guerrillas' small-unit, hit-and-runincrease its capacity for coping with the guerrilla challenge to thethe Army is planning to form in the coming weeks two newof select counterinsurgency troops andompanies--three toipeline under constructionColombia, one each to patrol oil facilities inand southern Bolivar Department, and four to covergrid and mining camps. The military will be supported byrecruited pobeemen. Although Bogota is planning toar taxtaxpayers and the energy industry to pay for these initiatives,will be hard pressed to find enough qualified personnelstaff the new units.
Foreign Investment Key to Eaergy Sector
The growing costs and risks of operating in Colombia have discouraged some prospective investors and limited reinvestment in the energy sector. Foreign oil companies often are forced to pay war taxes to guerrillas.
las well as provide the military with vehicles and other
supplies- I
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rench pipeline construe lion company halted operation*kidnapped three of its engineers.rge UScompany temporarily suspended operations after its campraided by insurgents.
Despite these negative factors. Cc4cnnbiaelatively attractiveforeign investors, in part because the government realizes thatis key to enhancing export potential and has sought toincentives. US companies alone have invested3 billionprimarily in rhe petroleum and coal industries, and USother foreign firms ownercent of total oil output and more thanof coal production.flexibility
and benefits of Colombia's association contract (see box below) are directly responsible for attracting the foreign capital that has madeet exporter. Moreover, Bogota appears willing to negotiate better contracts to assuage the concerns of multinational companies about guerrilla attacks. For example, foreign companies signed more thanew association contracts after Bogota yielded to their pressure innd revised the joint risk contract to increase their ownership of oil discoveries. Q
Moreover, Colombia's foreign iir*estrnent regulations compare favorably with those of many other Latin Americanew law passed in1 puts foreign investors oo an equal footing with local companies and permits foreign firms to remit as muchercent of capital registered during the past year, up fromercent previously. The law also provides foreign investors with export incentives and equal access to local credit sources. Ln addition, Ubor, tax, and foreign exchange Uws have been changed to encourage economic growth and exports.
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The Association Contract
Since the, foreign companies wishing to invest in Colombia have entered into association contracts with state-owned companies.ew remaining concessionsercent ownership granted prior4 are soil In operation.
Under the standard association contract, the operator assumes the risk associated with exploration. If thereommercial find, however, development costs and revenue from production are shared equally with the state energy company, such as Ecopetrol. Foreign operators0 percent income tax0 percent royalty. Contract terms generally are forears,ix year exploration period.
Joint risk contracts, applied to petroleum operations in areas reserved for Ecopetrol, place some of the burden of exploration risk on Ecopetrol and increase its share of the discovered oil. Ecopetrol's participation is determined by tbe output of the most productive well in the oil field, beginning0 percent minimum. The same tax, royalty, and terms apply to the standard and joint risk contracts, but the potentially smaller production share make the joint risk contract relatively less attractive to foreign investors.
Outlook and Implications
We believe Gaviria's Hemispheric Energy Initiative will have mixed results in achieving its objective of increasing Colombian energy exports by focusingreviously ignored market-Latin America. While Latin America, and in particular Mexico, probably willarger market for Colombian coal within the next few yean, the regionhole is likely to remain highly dependent on-the one energy resource in which Bogota does notomparative advantage. As long as oil prices remain moderate, Latin American countries probably will not undertake the conversion of plants fueled by petroleum tt> coal. Moreover, inadequacies of Colombia's trans mission system and the time it takes to build new hydroelectric plants are likely to prevent Colombia from exporting electricity within the next five yean. Finally, Colombia's reputationeliable energy supplier will suffer as long as guerrillas attack the country's pipelines and power grid with virtual impunity J
ALA
The export potential of Colombia's energy sector will continue to depend heavily on the active involvement of foreign companies- While the high cost of operatingostile environment may discourage all but the largest multinational companies, wc believe Bogota will continue to attract foreign capital. In addition to benefiting Colombia, Bogota's incentives to encourage foreign investorsodel for other Latin American countries wishing to develop their energy sectors with the aid of foreign investment, I
From the perspective of US interests, Gaviria's Initiative has multiple potential benefits. By freeing Mexican oil for export and increasing regional coal production, the Initiative supports US National Energy Strategy objectives to increase and diversify surplus energy production capacity outside the Persian Gulf. Moreover, Colombia's low sulfur coal is an available alternative to high sulfur coal as US power plants convert to cleaner fuel to comply with provisions of the Clean Air Act Amendmentsn addition, the integration of energy policies among the Group of Three should strengthen Latin economies over the long term by increasing the supply of energy in the hemisphere and decreasing the cost, making them better trading partners for each other and for the United States. I
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Unclassified
Colombia: Energy Exports
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Original document.
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