Institute of the Americas:
The other side of the river:
enviroment and communities
In the decade since opening its energy sector, Colombia has earned a reputation for stability and success. The country has won plaudits across the hemisphere from its neighbors and investors. Colombia’s energy reforms of 2003 were studied closely by Mexican authorities as they rewrote their own energy laws this year. However, as oil and gas production has dipped below targets and exploration has fallen short of expectations, the country is struggling to meet its immediate energy needs as well as attract the investment necessary to sustain the energy sector into the future. Importantly, as participants at the Colombia Energy Roundtable in Bogotá underscored, Colombia has realized that both community engagement and environmental stewardship are critical to achieving that goal.
The Colombian Ministry of Mines and Energy reports that oil production has dropped to an estimated 40,000 barrels per day (bpd) under its 1 million bpd target; around half of the shortfall can be attributed to social conflicts and insecurity. The government is expected to make up the financial loss by raising taxes, an increasingly polemic topic and one that may still fall short of covering the nation’s budget gap.
Beyond the economic impact, Colombia has an obligation to protect its biodiversity and indigenous heritage. Issues of community engagement and environmental protection have arisen at all stages of the project cycle and across the value chain, from exploration and production, to infrastructure, to power generation and transmission projects.
Colombia’s challenges are not unique. Indeed, social responsibility in the energy sector has become an intrinsic element of policies – and conflicts – across Latin America. Still, the national government is taking these concerns seriously. As the Ministry of Mines and Energy focuses its efforts on increasing exploration and production, particularly in the offshore and unconventional areas, the accompanying regulatory framework aims to incorporate best practices in social responsibility. Colombia is looking closely at the experience of other nations, such as the United States for approaches to a host of concerns, including “consulta previa” or prior consultation.
Balancing investment with community engagement and environmental protection
The struggle to balance investment and economic growth with social responsibility is not a new concern. Colombia’s indigenous
peoples are recognized in the Constitution of 1991 but in many ways government and private sector engagement with local
communities has had mixed results. In the energy sector in particular, it is widely agreed that building a better relationship with local communities from the outset leads to fewer problems in the long run. Given that large swaths of Colombia’s territory overlap with indigenous lands – many of which contain oil and gas reserves – the involvement of indigenous peoples is essential.
Instruments to guide indigenous participation, however patchy, are already in place in Colombia, including prior consultation and
planning processes. For many indigenous and community advocates, however, these efforts must go further to ensure the
participation of local people in the design and implementation of development plans, in particular zoning regulations in Colombia.
These plans should also be aligned with local initiatives such as “planes de vida” or life plans – an effort carried out by several
indigenous communities as a way to articulate local development goals – as well as prior consultation processes.
Critics of prior consultation in its present form argue that a lack of financial resources at the office responsible for its impelemnetation has limited the efficacy of the process. The recent closure of the President’s program for indigenous development (Programa Presidencial para la Formulación de Estrategias y Acciones para el Desarrollo Integral de los Pueblos Indígenas de Colombia) is also seen as undermining the government’s commitment to indigenous communities in Colombia.
On the industry side, although several companies are now incorporating best practices in community participation, there is more to be done. One panelist recounted a case study from Peru in which the company had worked closely with the community most immediately affected by the project but had neglected the group on the other side of the river. Activities were halted for several weeks when conflict later arose. A broader notion of community stakeholder engagement could have avoided the clash in this case.
The significant financial cost of inadequate community and environmental responsibility, while rarely quantified by energy companies, frequently runs into millions of dollars. One panelist calculated that interruptions at the exploration stage could cost up to $70,000 per day, while stoppage at an oil production site could easily run to $20 million. A better understanding of the impact on a company’s bottom line would help make the case for social and environmental accountability throughout the project cycle.
Rising costs and environmental permitting delays are frequently cited as factors undermining Colombia’s exploration and production targets. The Colombian government is making efforts to reduce the permitting time to six months, which would go some way towards easing the consternation felt by many of Colombia’s energy investors, particularly in the upstream.
Nonetheless, it is a long way from nations such as Canada that can turn around an environmental permit in a matter of weeks.
There is also a growing fear among some foreign operators that the rising costs will lure investors away. If petroleum prices drop – and they have hovered below $100 per barrel in recent weeks – producers may find cheaper operating costs in other markets. However, there is no consensus on how real the threat or at what price point it could come about.
Strengthening upstream opportunities
Colombia’s upstream sector has had a difficult year. Production has dropped below 1 million barrels per day for a variety of reasons, including political instability, social conflict, and insecurity. The most recent auction, Ronda Colombia 2014, attracted bids on just 26 of the 95 blocks on offer, with but one unconventional block awarded. On top of this, an absence of major discoveries to add to the country’s resource base has left Colombia with just 6.6 years of reserves at current production levels.
With President Juan Manuel Santos now entering his second term, there is hope for stability on which to expand exploration and production activities. The National Hydrocarbons Agency (ANH) has set forth a two-part strategy for boosting reserves and production: 1) unconventionals; and 2) offshore. Also important to note is the government’s decision to forego any further bid rounds for the next two years and instead focus on bringing to fruition the long list of pending projects and investments.
After Argentina and Brazil, Colombia contains the third largest shale reserves in South America, lending support to the government’s unconventionals-focused upstream strategy. ANH predicts that unconventional resources – in particular shale – will add 130,000 bpd by 2030. Offshore reserves, the agency argues, have the potential to provide the majority of production in Colombia by 2044. Moreover, a study by the National University of Colombia found that offshore resources could increase crude reserves by a factor of six and natural gas reserves by a factor of three.
Despite such promise in offshore development, the country faces an underlying competitiveness challenge. It will be difficult for Colombia to compete with deepwater developers as the opening of Mexico’s energy sector gives rise to opportunities on the Mexican side of the Gulf of Mexico.
Government officials have acknowledged that without significant discoveries offshore, Colombia presents a higher-risk opportunity by comparison. The Santos administration is considering tax breaks for offshore investment as one way to overcome this issue.
The Colombian government has defended its deliberate approach in the face of criticism of the slow pace of exploration and production in the country.
Contrasting Colombia with the United States, officials have made the case for strict regulation and research from the outset, and a preference for companies with a proven track record to participate. The Colombian government has made explicit its desire to steer clear from the so-called wildcat firms that have dominated the recent shale boom in the United States.
Preparing for El Niño – Colombia’s Electric Sector
Despite concerns around the possible impact of El Niño on the nation’s electricity supply, industry players are optimistic that
Colombia is prepared to meet the challenge. As yet, no El Niño event has been declared although areas of the country have suffered from drought conditions already this year. Colombia’s mature electric market is well equipped to adjust the contribution of thermoelectric generation to account for fluctuations in hydropower capacity. However, even without El Niño, it is likely Colombia will experience lower than average rainfall in 2014, putting pressure on the electric sector in the short and medium term.
Colombia’s dependence on hydropower for up to 80 percent of its electricity generation presents a risk; one that is likely to become more acute under the impact of climate change. In order to close the gap, Colombia must look to domestic and imported natural gas.
This issue is not lost on the current government and has informed efforts to bolster production as well as improve regasification and transport infrastructure for natural gas.
Promoting foreign investment is an important first step in fostering energy security in Colombia’s electric sector. A greater focus on energy efficiency would also go some way to reducing demand pressures where they exist. Another possible approach put forward is to opt into the government’s Projects of National and Strategic Interest (PINES) initiative to prioritize efforts that would bolster the power sector in Colombia.
While much of the debate around social responsibility has centered on the upstream sector, community engagement is also important for power generation and transmission projects. So far, prior consultation and community participation has had mixed results in Colombia’s electric sector. While some older projects have had success, community challenges threaten the next stage of electric infrastructure in the country. Greater clarity and certainty from the government would help to move these projects forward.
US – Colombia Energy Relations
The US energy revolution has implications not just for North America but across the Western Hemisphere. Shale production has helped the United States become the world’s largest producer of oil and natural gas. By the time the US inaugurates its next president in 2017, the country will be importing just 25 percent of its petroleum needs, down from 60 percent in 2005.
In many ways, Colombia has taken a similar approach to energy security as the United States, promoting diversification in its energy portfolio through the so-called “all of the above” strategy. But Colombia’s links to the United States do not end there. Investment between the two countries is evidenced by national oil company Ecopetrol’s operations in the US Gulf of Mexico as well as several US companies investing and operating in Colombia.
Without a national oil company in the United States, energy relationships are primarily negotiated with private entities. The US government’s role is apparent in the regulatory and legal arena, in particular the anti-corruption framework.
At the regional level, the Obama administration has launched several initiatives to foster energy security across the Americas,
including Connecting the Americas 2022, which focuses on electric interconnection, and the Energy and Climate Partnership of the Americas (ECPA), which emphasizes energy’s role in addressing climate change.
Prospects for Natural Gas & LNG
Natural gas has played an important role in the development of Colombia’s energy sector. In the last decade, natural gas demand has grown by over 100 percent. As a result, natural gas now comprises 25 percent of the nation’s energy matrix and reaches over 7 million households across the country. However, a fear that Colombia could face a natural gas shortage as early as 2017 has given rise to a sense of uncertainty over the sustainability of the industry.
To meet growing needs, Colombia must increase both natural gas production and imports. Despite prospects for domestic natural gas production in conventional and unconventional areas, including offshore and shale, in the absence of major discoveries Colombia will continue to be a net natural gas importer in the near term. The construction of a $500 million liquefied natural gas (LNG) terminal on the Caribbean coast is an important step in bolstering security of supply.
One challengegoing forward is Colombia’s capacity to negotiate LNG contracts. Given the small market size, Colombia finds itself in a relatively weak bargaining position. Still, smaller
countries in the region, such as Uruguay, have had success in attracting investment for LNG infrastructure and natural gas supply contracts. Colombia will also need to negotiate supply
flexibility into the contract to account for climate fluctuations, to ensure the country is able to receive more natural gas during
periods of El Niño, for example.
Colombia has also set its sights on exporting natural gas. Both Pacific Rubiales and Promigas have proposed LNG projects on the Caribbean coast. Pacific Rubiales has signed a five-year contract to supply Russia’s Gazprom commencing in 2015. As Colombia increases natural gas production – and improves both transport and infrastructure – it could also become an important supplier to Central America and the Caribbean.
The Colombian government is promoting initiatives to increase the use of LNG in the transport industry. Natural gas, its advocates argue, is cleaner and cheaper than other fuels, particularly diesel. Fueling a fleet of trucks with LNG, for example, could result in cost savings of 35 - 45 percent compared to diesel. Given the government’s current subsidies on diesel fuel, the switch would also save money for treasury. Finally, in a country that has a problem with fuel theft, LNG is more difficult to transport and thus a less attractive prize.
Colombia’s energy challenges will not soon vanish. There are no apparent silver bullets for discovering hydrocarbon reserves to
boost the nation’s portfolio and push out the timeline for production beyond the current 6.6 year estimate. And while the government asserts its commitment to streamline environmental processes and reduce delays for permitting in the oil and gas sector, the issue remains a key hurdle. The decision to forego oil and gas bid rounds in 2015 and 2016 should assist in enabling the development of long-delayed projects and investments, and allow for more attention to exploration and production from government and industry alike.
Additionally, it is evident that both the public and private sectors are taking social and environmental responsibility into account and recognizing that it is critical to the sustainability of the energy sector in Colombia. The impacts on oil production have helped to sharpen this focus. How the Colombian government, civil society, and industry actors further their efforts to address these concerns could shape the future of the nation’s energy sector.
This report is based on discussions during the Colombia Energy Roundtable, held on September 9 in Bogotá, Colombia.
The Institute of the Americas Energy Program works to foster a deeper understanding of the most critical energy issues facing the Western Hemisphere. For more information on upcoming events and publications, follow us on Twitter @IOA_Energy or
The Institute of the Americas has been at the forefront of U.S.-Latin America cooperation, working with the public and private sectors to encourage investment and information-sharing in energy and technology markets. Led by Charles S. Shapiro, a former U.S. Ambassador to Venezuela, the Institute brings together industry leaders, policy makers and academics for frank and open discussions about business opportunities in the Western Hemisphere. Petroleumworld reprint this article in the interest of our readers.
Editor's Note: This commentary was originally published by Institute of the Americas on September, 2014. The report is based on discussions during the Colombia Energy Roundtable, held on September 9 in Bogotá, Colombia. The Institute of the Americas Energy Program works to foster a deeper understanding of the most critical energy issues facing the Western Hemisphere. For more information on upcoming events and publications, follow us on Twitter @IOA_Energy or visit: www.iamericas.org/energy Petroleumworld reprint this article in the interest of our readers.
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