Discoveries, Financial Strength Lift Colombia

Colombia is expanding domestic gas supplies to fuel an increase in its electric power generating capacity. This is a BP Exploration (Colombia) well site at Volcanera field in the eastern foothills of the Andes mountains, where estimates of gas reserves reach as high as 10 tcf.

Colombia plans to play a growing role in international oil markets while expanding and privatizing its domestic gas and electricity industries.

Officials intend to curb the government's spending on energy development while increasing its energy revenues. Their plans imply growing participation in energy projects by private companies.

Despite its political uncertainties, Colombia has strong sovereign credit and one of South America's most stable economies. Its economy in 1995 grew by 5.5% and has shown sustained strength in this decade.

Officials believe the country's financial reputation and range of opportunities will attract the estimated $27 billion needed in the next 4 years for new infrastructure, including big expansions of oil, gas, and power facilities.

Also certain to help attract investment capital is the country's new standing as a world-class oil and gas province. Discovery of Cusiana oil field in 1989 and of Cupiagua oil field in 1992 added 2 billion bbl of oil and 3 tcf of gas reserves, effectively doubling Colombia's totals. Exploration near the giant Cusiana-Cupiagua complex, in the eastern foothills of the Andes about 100 miles northeast of Bogota, has turned up an estimated 10 tcf of gas and 1 billion bbl of oil in Volcanera field and two discoveries overlying it, Florena and Pauto Sur.

Colombia has seized the opportunity provided by Cusiana-Cupiagua to quickly boost oil output. Production during phase two development of the fields, under way since mid-1995, is to reach more than 500,000 b/d by the end of 1997 (OGJ, Nov. 20, 1995, p. 27). Cusiana-Cupiagua operator BP Exploration Co. (Colombia) Ltd. and partners since mid-1995 have been producing 180,000-185,000 b/d of oil from phase one facilities.

Oil output countrywide by the end of the century, by some estimates, could surpass 900,000 b/d. In addition, the large gas reserve additions at Cusiana, Volcanera, and others areas will help Colombia boost domestic electricity markets.

Colombia's critics say that, despite its laudable economic stability and improving oil and gas prospectivity, political impediments could interfere with progress toward its lofty energy goals.

Proponents of the expansions maintain the government's energy reforms will come surely but slowly-slowly because a democracy must build national consensus before trying to implement major energy reforms.

Whatever the future holds for Colombia's energy industries, foreign companies in growing numbers are apparently concluding that opportunities in the country outweigh the risks.

Political risks heightened

Evidence has emerged, however, that political risks have heightened in the country since the beginning of the year.

After a general decrease in guerrilla activity since 1992, rebels this year have launched a new offensive against Colombia's petroleum industry. Also adding to increased political uncertainty are allegations that Colombian Pres. Ernesto Samper accepted contributions from Cali drug lords during his 1994 presidential campaign.

U.S. officials last month were reviewing bilateral relations with the country after Colombia's legislature in a lopsided vote opted to drop impeachment proceedings against Samper. The U.S. last spring canceled its certification of Colombia for not supporting the U.S. war on drugs. The decertification scuttled a $180 million U.S. Export-Import Bank credit that was part of the financing package for the $2 billion Oleoducto Central SA crude oil pipeline, being built to support Cusiana-Cupiagua development. The credit was quickly replaced through private placements.

U.S. officials later revoked visas of Colombia's attorney general and comptroller, alleging they accepted favors from drug traffickers.

Samper, addressing a national television audience after being exonerated by the legislature, proposed several new measures intended to turn up the heat on Colombia's narcotics dealers. However, U.S. officials held out the possibility of more economic sanctions against the country.

Insurgents since February have stepped up attacks on oil and gas facilities in Colombia, bombing several key pipeline systems more than once. Attacks have targeted the 100,000 b/d Colombia pipeline in Antioquia province, the 240,000 b/d Cano Limon-Covenas pipeline near Saravena in Arauca province, and the 100,000 b/d Transandino pipeline in southern Colombia near Ecuador, as well as smaller pipelines.

Ecopetrol has speculated rebels initiated the bombing campaign during Samper's political crisis in hopes of extorting protection payments by making the government look weak.

Colombia in February 1995 had voted to begin phasing out the $1.10/bbl "war tax" on oil production, charged to multinational companies to support security forces. However, the government has responded to the renewed rebel threat by proposing a one time income surtax of 1.5% to raise about $400 million to cover costs of stationing more troops at key exploration and production areas and along key pipeline links. As a result, insurgency operations in Colombia appear likely to continue adding 2-10% to oil and gas companies' operating costs.

Rebels by yearend 1995 had mounted about 375 attacks on the 485 mile Cano Limon-Covenas pipeline since it began operating in 1986. Ecopetrol estimated combined losses from the incidents at $67 million.

Unequal pace of reform

Some critics of Colombia's energy strategy complain that reform is moving faster in the gas and power sectors than in the oil sector.

Indeed, Colombia has made big strides toward deregulating its electric power industry, in which large industrial customers already are able to buy supplies through the country's stock markets.

In one of the latest steps in the plan to privatize the power industry, officials last spring opened a bidding round to receive offers from private companies for seven power plants with combined capacity of about 2 million kw. Selling facilities included in the tender would put about 20% of Colombia's installed electric capacity in private hands by yearend 1996.

The government proposes to privatize the 1 million kw Chivor hydroelectric plant, 500,000 kw Betania hydro plant, 189,000 kw gas or oil-fired Termocartegena plant, 150,000 kw Termotasajero plant, and three gas-fired plants owned by Ecopetrol with combined generating capacity of more than 120,000 kw.

The sales are to occur in two rounds, the first of which would offer shares to employees and workers' cooperatives. Remaining shares are to be offered through a tender to open in September. Potential investors are to prequalify by the end of October and present sealed bids by the end of November.

Officials estimate the government will receive $1.5-2.5 billion from the sales.

Colombia's electricity demand has been growing at a rate of 5.9%/year since 1992. Observers estimate more than $2 billion in private capital will be needed in the power sector in the next 4 years to build new plants and avoid electricity rationing.

Hydroelectric plants represent about 78% of Colombia's current 10 million kw of capacity. Much of the new generating capacity will be gas-fired.

Gas pipeline construction

Colombia's gas industry deregulation, meantime, is entering the final stages.

Officials since 1991 have been laying plans to expand the role of gas in domestic energy markets.

The so-called gas massification plan contemplates spending of more than $3 billion on gas transportation and distribution pipelines, compressed natural gas stations, and customer hardware conversions to double gas consumption by 2000 to 800 MMcfd. Most of the needed capital is to come from private sources.

The plan essentially would create a national gas pipeline grid by linking Colombia's Atlantic Coast with interior markets, the latter of which are being interconnected by a series of pipeline construction and conversion projects (see map). An estimated 1,400 km of trunk lines and 1,000 km of distribution pipelines are to be built and about 900 km of oil pipelines converted to gas service.

A group led by Enron Corp., Houston, in February 1996 finished and placed into service the $215 million gas trunk line connecting Colombia's coastal and interior gas markets (OGJ, Feb. 5, p. 27). The 18 in. Centragas pipeline runs 575 km from Ballena on Colombia's Caribbean coast to Barrancabermeja in central Colombia.

Ecopetrol controls the Centragas system's entire 150 MMcfd of capacity through a 15 year contract. Under Colombian law, Ecopetrol is the only company authorized to transport gas on the emerging national grid.

Colombian utility Promigas SA operates the Centragas system, as well as Colombia's Atlantic Coast gas transportation pipeline. Enron in late January acquired a 38.7% interest in Promigas.

Earlier in 1996, units of TransCanada PipeLine Ltd., Calgary, and BP began a $310 million construction program to develop Colombia's second large diameter gas trunk line. TransGas de Occidente's 345 km, 20 in. main line by yearend 1996 is to begin transporting gas from Mariquita, northwest of Bogota in Tolima Department, to Cali in Cauca Department. The system also includes about 420 km of 2-8 in. distribution laterals to serve some 47 Cauca Valley communities.

Other trunk lines to form segments on Colombia's national gas grid are in various stages of development under build-operate-transfer (BOT) schemes. Officials created the BOT framework to overcome investment restrictions of the government and help distribute risks among public and private players.

Gas regulatory transparency

Meantime, Colombia's Energy & Gas Regulatory Commission (CREG), created in 1994, is revising rules to allow third party transportation contracts and third party purchases and sales of gas. The country's new, more transparent regulatory regime is evolving based on the gas transportation system recently implemented in the U.S.

The government earlier this year submitted a bill to Colombia's legislature proposing to create Ecogas, a state-owned company to take control of gas transportation from Ecopetrol.

Vesting Ecogas with responsibility to operate and develop Colombia's gas transportation network would assure the separation of gas transportation and production. All gas producers and consumers, through Ecogas, would have equal access to transportation capacity on the national gas grid.

As envisioned, Ecogas would charge shippers transportation rates set by the CREG but also could auction surplus gas supplies for producers or gas received as royalties by Ecopetrol. Within its first 5 years of existence, Ecogas could be transformed into a holding company with shares available to private investors. Depending on its appeal to private players in Colombia's deregulated gas industry, the company could become 100% privately held.

Tying gas to power

Colombia at the same time is amassing the gas supplies it will need to serve growing domestic demand.

In addition to the estimated 13 tcf of proved and probable gas reserves likely to be added at Cusiana-Cupiagua and Volcanera, Florena, and Pauto Sur, at least two other fields appear likely to play key roles in the country's growing gas markets.

A unit of Texaco Inc. has agreed with Ecopetrol to prolong production of Chuchupa field in Guajira Department in coastal northeastern Colombia, possibly doubling field output by 2004 to 600 MMcfd.

The new agreement extends Texaco's existing association contract to 2016 from 2004 and changes the terms to a build-operate-maintain-transfer pact after 2004.

Texaco reportedly plans to install a second Chuchupa offshore platform, drill as many as six horizontal wells, and lay a 12 mile gas line from the new platform to facilities onshore. Drilling is set for third quarter 1996, with pipeline and platform installation to occur in the fourth quarter.

Texaco's Guajira fields contain more than 3 tcf of proved gas reserves.

Meantime, Ecopetrol in May declared the commerciality of Opon field, under development in north-central Colombia by a group led by Amoco Colombia Petroleum Co. The announcement cleared the way for Opon production to start by late 1996 or early 1997.

Amoco at last report was negotiating a sales contract with Ecopetrol to supply about 100 MMcfd of gas to the Barrancabermeja refinery. Also in the works is a plan by Amoco's power unit to build a 200,000 kw power plant near Opon that would require a gas supply of about 60 MMcfd.

In a similar strategy, BP plans to build a 100,000-160,000 kw power plant near Volcanera to generate power for Bogota and other cities.

Reform in the oil sector

Reform in Colombia's oil sector has been shaped by the Cusiana-Cupiagua success.

In an effort to attract multinational companies to Colombia's oil and gas industry, the government in 1994 began revising terms offered through association contracts between Ecopetrol and foreign companies. Officials among other things aimed to increase incentives for firms to undertake exploration of smaller fields in Colombia.

Foremost among the changes was creation of a profitability component-the so-called R factor--which adjusts Ecopetrol's profit share to 50-75%, depending on the ratio of the partner's cumulative income to its cumulative exploration and development costs at a field. Officials also provided that as much as 50% of dry hole direct drilling costs could be reimbursed, with limitations, in any field that eventually became commercial.

Last year, the government introduced another round of reforms:

• Opening to private foreign and domestic companies areas previously reserved for Ecopetrol.

• Allowing renegotiation of expiring association contracts.

• Adding joint venture and shared risk contracts to the types of joint agreements available in partnership with Ecopetrol.

But critics asserted the changes offered more options for Ecopetrol than for prospective private partners, making it easier for the state company to finance its shares of interest in upstream projects (OGJ, Oct. 9, 1995, p. 33).

Despite the criticisms, 17 foreign companies earlier this year accepted invitations from Ecopetrol to bid in Colombia's first tender of exploration acreage based on shared risk agreements. The two tracts offered in the round--San Lope block in Los Llanos foothills and San Juan block in Putumayo foothills--previously were reserved for Ecopetrol.

Terms of the shared risk contracts name Ecopetrol as operator of any deals and require the state company and partners to split exploration costs 50-50. Thus, Ecopetrol can retain control of the acreage, while using outside capital and expertise in the field.

In addition, the company or group that offers Ecopetrol the largest share of production will win the license. Companies in the tender are to submit bids by Aug. 19, and Colombian officials are to announce the winners by the end of September.

Achieving sustainable change

While agreeing that reforms are moving at different paces in Colombia's oil, gas, and power industries, Carlos A. Valencia, a senior adviser on strategic planning and operational policy at the Inter-American Development Bank, said it is unwise to expect quick action on some of the more far-reaching changes proposed.

"When we discuss changes in the oil sector of Colombia, or of any of the Latin American countries, we have to understand that we are working with democracies," Valencia said last month in Houston, following an address sponsored by the InterAmerican Chamber of Commerce. "Under democratic processes, the only way to carry out changes is to form a consensus by consulting with many different stake holders, because if you don't have that consensus you don't have sustainable change. You end up with volatility."

Valencia, a Colombian, said more change is in store for Ecopetrol and Colombia's oil industry, but it will come slowly so as to create as little economic, political, and social turmoil as possible.

Valencia allowed that recent changes in Colombian law have enabled Ecopetrol to retain firm control of upstream oil and gas activity as well as its role as sole transporter of gas. But at least the government has initiated structural changes in the oil sector likely to lead to greater participation by private companies.

"Changes as radical as total divesting of something that through tradition became an important state enterprise is not that easy to do," he said. "It will happen slowly. But the direction, I think, is clear."

Appeal to investors

Citing Colombia's economic stability, vibrant private sector, and export diversity, Valencia said he is optimistic about the country's ability to manage change while sustaining its appeal to foreign investors.

He noted that the country has a range of prospects and terms attractive to large multinational companies such as BP, Total, Amoco, Texaco, and Chevron; to large international pipeline companies such as Canada's Trans Canada PipeLines and IPL Energy; to large independents like Enron; and to smaller companies like Triton Energy and Garnet Resources Corp.

"You know what that indicates about the future," he said.

That perspective of Colombia's investment climate is echoed by Enron officials closely involved in the company's growing activity in the country. They said the types of companies working on the different pipeline segments reflect "the overall stability of the economic face of Colombia."

From Enron's point of view, Colombia has a realistic regulatory climate and an enforceable legal system, in which "the rule of law is sacrosanct and not changeable from one administration to the next." In addition, the Colombian government and Ecopetrol have some of best credit standings in Latin America, having never defaulted on debt payments or contracts.

Randy Maffett, director of Latin American energy services for Enron Capital & Trade Resources, said Colombia's national gas plan is a very well-conceived, efficient way of creating an integrated grid. Planners avoided requiring competitors to develop parallel projects involving the same resources and markets and, instead, mapped out what infrastructure base was needed then sought competitive bids on each component.

"The Colombians are well-informed about the need for a transparent and well-developed regulatory environment to develop the gas market with private investment," Maffett said. "The evolving regulatory regime is advanced, compared to regulatory regimes in other emerging markets. That combination is why Enron and others have been willing to invest heavily in Colombia's gas infrastructure expansion."

Noting Colombia's longstanding economic stability, Jim Bannantine, a principal in Latin America for Enron Development Corp., said some observers predict the country's economy will grow steadily in the next 5-10 years at rates as high as 6-8%/year.

"Enron, by nature, is a company that tries to manage risk and hedge volatility," Bannantine said. "We see Colombia as being a very stable investment climate.

"There are other risks involved in Colombia, obviously. But from an investment perspective, we see long term historical evidence of economic stability and a positive economic outlook far into the future."

Copyright 1996 Oil & Gas Journal. All Rights Reserved.