Regional Studies

index

Chapter 7
The case of Colombia

The institutions

The institutional structure of the Colombian energy sector is changing. A redefinition of the role of the state is under way. The state will be involved in planning, regulation and control; the private sector and public companies will take over the entrepreneurial activities..

The Ministry of Mining and Energy, responsible for energy policy, deals with planning, supervising, financing and control of the energy sector through several specialized agencies. An inter-ministerial Regulating Commission of Energy and Gas (CREG) regulates energy markets, controls monopolies, determines transport tolls and tariffs and sets criteria for business management.

The Superintendency of Public Services is in charge of consumer protection. It is, however, difficult to protect consumers and guarantee their rights. In a free market economy, enterprises exert pressure to establish and maintain their advantages, so defining regulations for each energy sector is very complex.

Several public electric utilities (ISA, ISAGEN, etc.), Ecopetrol (oil and gas), Ecocarbon and others (coal) are the main business actors and belong to the state. The present policy is oriented toward more autonomy for public enterprises, giving them the character of private companies.

Meanwhile, new areas are being opened to private investment through privatization and the granting of concessions. To reduce risks, increase profitability and hence make the energy sector more attractive to private investment, the government is altering contract modalities. Among other mechanisms, it has signed energy purchase agreements for 10 to 25 year periods.

Colombian energy sources

Colombian energy production grew 68% between 1980 and 1995—17% in per capita terms. Oil derivatives are the most important energy source in Colombia (50% of domestic consumption). Oil and mineral coal—both exported—are Colombia's main energy products and those with the most dynamic growth. Colombia exports 51% of its total oil production and 82% of its mineral coal—accounting for 10% of coal sales worldwide.

A high percentage of domestic oil consumption is industrial. Because of government promotion and its low price, dense oil (which is high in sulfur and nitrogen) is used in industrial boilers. Despite the large availability of oil, there is not enough refining capacity to ensure domestic gasoline supply, so Colombia imports this fuel for transportation. In 1996, US$4.008 billion were allotted for fuel and lubricant imports. Colombia exports its energy resources and imports their derivatives, which constitute its real energy sources. No state policies are pursued to radically enhance the refining capacity and ensure self-reliance. The country's reserves of mineral coal are far greater than domestic demand.

Natural gas accounts for six percent of energy consumption. It is used mainly for electric power generation and in the industrial sector. Fuelwood accounts for 13% of the national energy consumption and is employed almost totally in rural households for cooking. In rural areas, fuelwood is available at no monetary cost.

Hydroelectric power is less significant in Colombia. Up to the end of the 1980s, power generation doubled from decade to decade, but in the 1990s, a slowdown in growth coincides with a shift in the MDBs' policies from power infrastructure construction to sectorial adjustment programs and electricity market development.

Another significant source in the Colombian energy matrix is sugar cane waste (used by sugar mills and the agrarian sector).

The new regulatory frameworks

The role of the state changed in 1994 with new laws on public services and electricity. The state's entrepreneurial profile was softened while its planning, regulating, controlling and monitoring functions were stressed. Free competition was stressed and state interference in management of energy companies was halted.

A policy for fostering private sector investments was explicitly formulated in the National Constitution whereby all public or private agents can freely participate in energy operations, except those excluded by law such as power transmission in the interconnected system.The new rules give greater managerial autonomy to public utilities in the energy sector, granting them the character of legal entities under private law that have to operate in competitive markets.

In the electric power sector, the regulatory framework separates generation and distribution functions, which led to the splitting of the state-owned power utility Interconexion Electrica Nacional (ISA) into two independent entities: ISA (transmission) and ISAGEN (generation). The electricity market comprises two categories: regulated and wholesale. The regulated market deals with small and medium-size consumers. The wholesale market covers transactions among enterprises and between them and big consumers, under free supply and demand conditions, and it offers two operative forms: on-spot transactions in the Power Stock Exchange and long term contracts.

The Power Stock Exchange, under the management of ISA, deals hourly with electricity transactions whose quantities and prices are determined by free supply and demand according to pre-determined trade rules. Power is transported through the transmission grids of the National Interconnected System.

In the oil sector, Colombia adopted the model of a state-owned company that negotiates several forms of participation in production, leaving exploration risk to private investors. Strictly private participation is not excluded from some phases of the industry, however. The prevailing feature is a scheme of compulsory association with Ecopetrol.

The new mechanisms for oil exploration and extraction are:

1. Association Contracts

Exploration: the explorer carries out all the exploration activities at its own risk (under a minimal investment plan agreed upon by the association). The contract lasts three or six years.

Extraction: The first stage of the contract lasts six years. After field feasibility is demonstrated, there follows a 22-year exploitation period. Five years before its maturity date the contract can be extended for another period of 28 years in the case of liquid hydrocarbons and 40 years for gases. If Ecopetrol does not recognize the field, the associate can exploit it at its own risk and cost.

2. Contracts with R Factor

The royalty on productive fields is 20% of the extracted volume valued at the outlet. The remaining 80% (in the case of Association Agreements) is allotted in equal shares to the members. Costs are undertaken half and half. For more than 60 million barrels, after deducting royalties, distribution will depend on the accumulated income and outlay account of the company.

3. Contracts for Gas Finding

These contracts include a 30-year period for exploitation, with a maximum of 40 years, a six-year exploration period and a four-year retention period. The state enterprise's costs for exploration are 100% reimbursed.. The rights and the participation in the operation are shared equally by the associates. Development investments are covered by, and belong to, Ecopetrol and the associate company in equal shares, and operational expenses are paid for by both in the same proportion set for distribution of production.

This regulatory framework pursues:

* Competition (in order to lower market prices);
* More guarantees for the exploration of reliable fields;
* A change in extracting conditions with larger profit margins for the investors.

The problems with this kind of contract include:

* The non-renewable nature of resources as well as the environmental impact are disregarded;
* Resource exploitation is given a monetarist approach;
* Colombia is forced to export its raw material;
* Extraction is accelerated by the associate company.

The "oil" experience shows that benefits in terms of employment are of little quantitative significance; there is a marginal sharing in royalties and, by the end of concessions, residual fields that are difficult and expensive to operate are left behind.

(Table: Colombia: Structure of domestic energy supply under construction)

PRIVATIZATION STATE OF COLOMBIAN ENERGY SECTOR

(*) predominant sector Source: Otero, Diego. Experiencias del actual proceso de participación privada en el sector energetico. Un analisis critico. 1996

The above chart shows a summary of the current state of privatization of the Colombian energy sector.

In spite of the establishment of a Superintendency of Public Services for the protection of consumers, some degree of difficulty has been acknowledged in guaranteeing their rights.

The energy policy. Energy sources

Even though the National Development Plan promotes the expansion of the several energy subsectors to ensure domestic supply, special emphasis is placed on export of oil and coal. The goals are to intensify and optimize the contribution of energy exports to Colombian economic growth and to generate financial surplus for new investment projects. To this end, efforts are concentrated on two fronts:

* increase of oil reserves, fostering exploration and exploring new basins—with limited participation of Ecopetrol;
* promotion of coal investments, strengthening Ecocarbon and promoting special exploration/exploitation agreements with private agents; at the same time, the state is ready to play an active role in opening and maintaining foreign markets.

The National Development Plan also seeks the construction of a central gas pipeline network to increase natural gas availability, and electric power generation and transmission expansion. It likewise seeks to provide energy to rural areas by extending energy supply using appropriate energy resources, which entails the participation of local communities. Energy supply is not equivalent to electrification. In fact, the proposal is to save and replace commercial fuelwood. This is complemented by a multipurpose reforestation program and a plan to improve rural electrification management and coverage.

Business and market restructuring

The current policy modifies the role of the state in the energy sector. The state will be less entrepreneurial and more involved in planning, regulation, control and monitoring. The entry of new private agents is encouraged, either through the sale of state assets or the opening of new areas for private investment (exploitation concessions, etc.) Public utilities will continue to play a major role, but they will tend to operate as private law actors in competitive markets.

Investments, prices and rates financing

Traditionally, tariff policies in the Colombian energy sector were designed along political and social lines, with economic considerations being of lesser importance. Energy consumption was subsidized, which led to the inefficient use of energy and provided no incentive for saving.

In search for mechanisms to rationalize demand—especially through tariffs reflecting real production costs—a tariff restructuring was planned. This plan later had to be curbed and applied gradually in view of its social costs and contribution to inflation, and for fear of violent responses from the population. Some regions have reacted harshly to tariff increases. In the last few years, there has been a great increase in the number of enterprises that have defaulted on energy bills, particularly in the electricity subsector.

Because the Colombian government did not dismantle energy subsidies rapidly enough for the World Bank, the Bank canceled the last disbursement of its adjustment loan for the electric power sector (US$75 million out of a US$300 million total).

In the major cities, the poorest 10% of the population spends up to 11% of its income on energy, while the global population averages two to three percent. The highest energy consumption is for cooking. The unequal impact of energy costs on home budgets is manifest in the different degrees of access to electricity: in the richest 20% of the population, 98% of families have electric power service; in the poorest 20%, 18.7% of families do not have grid access.

The cost of access to electricity and natural gas differs according to the social and economic characteristics of the several regions of the country. The new policy aims at organizing a cross-subsidy system so that the highest income segments of the population pay a share of the subsidy to the poorest segments. In previous years, this subsidy has been entirely undertaken by the government.

Efficient use of energy

Colombian energy policy has no provision for sustainable use of energy resources—through conservation and transformation—as the basis for national development. Colombia makes inefficient use of its energy resources and domestic demand exerts a high pressure on renewable and non renewable natural resources alike.

Energy conservation and energy source substitution by less costly fuels are goals of the National Development Plan. The strategy focuses on two fronts: demand-side knowledge improvement and demand-side management adjustment. Two kinds of tools are advanced for the latter: appropriate price and tariff signals, and specific programs for fuel efficient use supported by research and development activities.

There are also programs for substitution of some low-efficient fuels such as fuelwood. Fuelwood has a high share of national demand (more than 13.12%), of which 96% corresponds to residential consumption, mainly in the rural sector and for cooking. Losses from fuelwood consumption are very high. Programs for reducing its use have been implemented without much success since they were, in several cases, not in tune with fuelwood users' realities. In general, rural people access fuelwood for free and have to pay for other fuels. Hence, penetration of substitutes (coal in briquettes and LG) is slow and, where replacement of commercial fuelwood is involved, affects mainly the affluent sectors who used fuelwood for simple enjoyment (in fireplaces, for example). Therefore, there is a gap between goals and results.

Electricity, especially in homes, is used inefficiently. For cooking and water heating, electricity could be replaced by more efficient fuels. That is precisely the idea of the Plan for Mass Use of Natural Gas, but there are two basic problems with its implementation: cultural patterns and the cost of new stoves and installations required for the shift from electricity to gas. Culturally, the use of electricity for cooking and water heating is a status indicator in Colombia. Also, installation of new gas networks, inside and outside of buildings, is done without aesthetic considerations, which are important especially in high socio-economic sectors. There are also important losses, and thus low efficiency, in the consumption of sugar cane waste.

In the case of oil, there is a contradiction. Discussions focused mainly on how to attract foreign investors by reducing oil taxes and royalties (which are currently higher than anywhere else worldwide), taking a short-term approach that did not consider the non-renewable nature of oil resources and hence the need for rational use. This is mainly because the so-called oil rent is a major source of state revenue on which the country is heavily dependent.

The Ministry of Mining and Energy regards environmental licensing by the Ministry of Environment as a barrier (a bureaucratic hindrance) rather than as a necessary planning tool and restriction on decision-making.

Environmental and Social Impacts

The environmental and social impacts of energy sector projects occur at two stages:

* Exploration, construction, exploitation and transportation, where impacts are concentrated in rural areas.
* Use of energy fuels, where impacts are concentrated in urban areas.

Environmental impacts

The main environmental impacts of natural gas and oil exploitation, production and transportation are:

* Soil degradation, manifest in erosion processes, arising from the construction of access railroads and camping sites, and from soil-leveling for well drilling, hydrocarbon production and transportation;
* Alteration of water quality as a result of liquid discharge and underground or surface water pollution caused by oil spills and dangerous waste pollution;
* Atmospheric pollution produced by gas burning in some fields;
* Increasing deforestation and depredation of unique ecosystems, many of which are strategic;
* Loss of biodiversity;
* Disruption of delicate food chains with slow recovery capacity (mainly in the Amazon basin);
* Contamination through tank infiltration as well as through oil and solvent discharge.

Oil refining is identified as one of the most environmentally harmful activities because it pollutes the air and generates large amounts of chemical wastes with varying toxicity levels. In Colombia, oil is still used in boilers because of its low cost and "Castilla crude"—a very dense oil with high levels of aromatics and unusually high percentages of sulfur and nitrogen—is promoted by the government for this purpose. Since this oil was very difficult to sell abroad, it was promoted in the domestic market as industrial fuel, even though it has severe environmental consequences due to emission of sulfur and nitrogen oxides.

In coal extraction and transportation (opencast) the main environment impacts are:

* On the air: high levels of coal dust both inside and outside the mines;
* On the water: pollution of rivers near to the exploitation site by solid particles and soluble minerals;
* On biota: deforestation of the forest cover (6,000 ha for medium-size and small mines) with subsequent loss of wildlife.

Underground mining, because of low technology, the lack of resources and the use of unskilled labor, causes heavy impacts, including:

* Destruction of the vegetation and damage to the soil;
* Activation of erosive processes;
* Destruction of wildlife in exploitation areas;
* Pollution of underground water, which filters into the mines and is pumped into the rivers without treatment;
* Increased methane concentrations from explosions due to methane-oxygen mixtures;
* Air pollution by particles in suspension that cause or contribute to respiratory ailments.
* Increasing sediment load in watercourses;
* High level of accidents.

In hydroelectric generation, impacts on the physical environment are basically related to changes in flow rates of surface and underground watercourses; and in the case of dams, also include soil destabilization. The occurrence of these impacts is highly probable; in the majority of cases, opportunity for mitigation is small or non-existent; and the impacts generally affect a wide range of activities. Some of the impacts are:

* Soil erosion;
* Gradual loss of capacity of dams affected by erosion and sedimentation, which in turn leads to a decrease in the useful life and in generation capacity;
* Downstream erosion;
* In some cases, a decrease in waterflow in shallow parts of rivers and an increased waterflow in recipient channels;
* Production of hydrosulfuric acid in several dams, because of non-removal of the existing vegetation prior to the flooding of the area and the quality of contributing water.

Impacts on the biotic environment are related to alteration of forest and other resources (water and ecosystems) as a consequence of the establishment of dams. The main impacts are:

* Destruction of wildlife due to flooding, break-up of established biological relationships and the loss of biodiversity;
* Removal of covers of primary and secondary forests, stubble fields and grass;
* Destruction of habitats of biotic communities;
* Discontinuation of fish migrations;
* Substitution of aquatic habitats.

The major impacts of thermoelectric generation are:

* Related to fuel storage and domestic transportation: air pollution by particulates and contamination resulting from spillage of hydrocarbons;
* Related to burning: emission of sulfur oxides, nitrogen oxides, unburned hydrocarbons, carbon dioxide and monoxide, ashes and slag production with high emissions of particulates into the atmosphere;
* Water pollution: production of hot water wastes (thermal pollution of water masses) containing fat or oily wastes.
* Other impacts: pollution by oils and fats.

In fuel use, particularly in urban areas, complete and incomplete combustion of fossil fuels for transport and industrial purposes is a key factor in air pollution. The sector accounts for a significant proportion of air pollution by the burning of:

* Gasoline and other derivatives;
* Fuelwood;
* Cane wastes;
* Coal;
* LG and natural gas.

There are high emission levels of CO, SO2, volatile hydrocarbons and NOx from cars due to:

* The types of gasoline used in Colombia in terms of sulfur, olefins and oxygenated compounds, among others;
* Age of the vehicle stock;
* Deficient car maintenance;
* Inadequate burning technologies.

Seventy-five percent of air pollutants come from cars. Thermoelectric units, in turn, emit:

12,000 Tn SO2/year
20,000 Tn NO/year

These emissions are all related to respiratory illnesses, which have a high incidence in Colombia.

Social impacts

The main social impacts of natural gas and oil exploitation, production and transportation are:

* Promotion of colonization due to the opening of railroads, granting of royalties and economic expectations in the energy sector;
* Disruption of native cultures;
* Racial segregation;
* Price increases at the regional level;
* Changes in cultural patterns, rules, traditions and religion;
* A large gap between staff and local wages;
* Introduction of foreign illnesses;
* Change in food habits;
* Problems concerning the coverage of basic public services;
* Increasing prostitution and alcohol consumption.

The Uwa, a native community, have tried to prevent oil exploitation in their habitat for valid cultural reasons, and they have even threatened to commit mass suicide if exploitation begins.

The socio-economic impacts stemming from hydroelectric generation, especially where dams are associated, are severe and affect large areas. It is usually difficult to prevent or even mitigate these impacts. Some of these effects are:

* Conflicts over traditional land use;
* Displacement of populations due to flooding.

Improvement potential: energy efficiency and non-conventional energy sources

Non-conventional energy sources

Alternative forms of energy that are less damaging to the environment have received little promotion. The National Development Plan has established the use of alternative energy sources as a priority whenever they are economically feasible. In practice, however, little effort has gone into making these options more economical.

Institutional support for these sources is concentrated in the INEA, an entity that does not have adequate staff and budget to undertake this task. This shows that good will alone does not transform intention into reality.

Studies on alternative sources are highly inadequate. One study—the Feasibility Study of Project Azufral – Phase 1—is on geothermal potential based on a project financed by the Inter-American Development Bank (IDB). It looks at the country's geothermal potential in the area of Nariño, with a view to improving the reliability of the country's generation system, reducing the region's energy deficit, favoring the future interconnection between Ecuador and Colombia, and encouraging private sector participation in the development of this natural resource.

Energy efficiency

To improve energy efficiency and foster non-conventional sources in Colombia, technological research of alternative energies and implementation of energy systems based on indigenous resources are needed. A Rational Use of Energy (URE) program is being implemented within the framework of an IDB financed project.

This program has several strategies:

1. Demand-side orientation: this comprises a set of actions directed toward inducing consumers to improve their consumption habits, including the purchase of energy efficient equipment and processes. This strategy is developed through the following activities:

- Design and implementation of incentive schemes to promote URE: tariff options with a clear signal of energy use will be considered, as will schemes for improving the efficiency of cooking and electrical appliances;
- Identification of substitute processes and evaluation of savings potentials in consumption sectors, to obtain global aggregate numbers for savings potential;
- Training and human resource programs of the URE, through a national or institutional formative plan;
- Educational campaigns for the efficient use of the energy.

2. Optimization of the generation processes.

3. Fuel substitution, including partial substitution of NG or LG for electricity in residential and commercial sectors; alternative fuels (LG or pressurized NG) for gasoline and diesel for public transport; and LG for fuelwood in rural areas. Some specific proposals are:

- Use of heavy oil as asphalt adhesive for paving as an option for use of Castilla crude oil;
- Commercialization and use of coal briquettes in pilot communities to replace part of fuelwood consumption in the rural residential sector. Note that several of these proposals regard fuelwood as a non appropriate fuel without taking into account that it is renewable, unlike LG or coal, the target substitutes. Up to a certain point it can be said that the short, middle or long term environmental effects are not being considered.

The energy sector and the Multilateral Development Banks

Over the last 50 years, the MDBs have developed several projects in Colombia. The energy sector has captured a large proportion of these resources. Nearly 40% of the total amount requested was earmarked for energy projects, with a strong tendency to concentrate loans in the electric power subsector. Hence this subsector is responsible for a significant part of the Colombian foreign debt.

The source of indebtedness in Colombia is shifting from projects to state and sectorial reforms. It is no coincidence that this shift from project to sectorial loans is fostered by the MDBs. Nor is it a coincidence that actions taken by the Colombian government agree with WB and IDB policies, including modernization, privatization of services, and establishment of state agencies for regulation and planning.

In the World Bank Annual Report this is expressly articulated: "Great consideration was given in several projects to the strengthening of regulatory frameworks for specific sectors, mainly for those recently privatized. Such is the case, for instance of the project for the development of an electricity market in Colombia."

MDB investments from 1991 to 1997 were heavily concentrated in the power sector. There were only two loans to the coal sector, one of which also benefits mining for the extraction and transportation of other minerals. In the oil and gas sectors there has been no action by the MDBs.

There are no projects related to the development and use of alternative energies. Only the Rational Use of Energy project includes a feasibility study for a geothermal energy plant, which, being a reimbursable loan from a Japanese institution, will be developed by Japanese consultants. There are no larger studies related to alternative energy sources.

The number of loans granted to state agencies has decreased in favor of loans to the private sector. In the case of the World Bank, these are granted through the International Finance Corporation (IFC), or directly by the IDB. The IFC, for example, is developing Project 7283 with the Colombian company Promigas, which involves a three-year expansion plan for this company. The amount of the loan is unknown. The project qualifies as environmental Category B (those for which the WB requires an Environmental Analysis) and a course of action was suggested in accordance with the potential impacts foreseen in the studies.

It is worrying that objections to these projects may become impossible as a result of their being privately undertaken. For the time being, difficulty in obtaining relevant information about these loans hinders all research on the subject.

The IDB finances the Rational Use of Energy (URE) project. The loan amounts to US$11 million, of which US$10 million is earmarked for program development, and US$1 million will be provided by the Japanese Fund for Consultant Agencies as a non-reimbursable credit. This latter amount is for the feasibility studies of Phase I of Azufral Geothermal Field Project. The total cost of the URE project is US$13.3 million, of which US$2.3 million will be provided locally.

The project does not include significant social considerations. Only in a few cases is reference made to indirect benefits to society. The only environmental consideration seems to be focused on reducing consumption of heavy fuel and its partial replacement with natural gas, which would—according to the Bank—decrease the overall emissions of nitrogen and sulfur oxides and would also reduce carbon dioxide emissions and the associated global warming effect. Positive as this might be, it is clearly insufficient regarding the complexities of the energy problem in Latin American, particularly in Colombia.

Colombia - Energy Sector

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