New links should help to dramatically increase competitiveness

Private companies and Ecopetrol have poured money into pipeline construction projects in the last several years to increase capacity, improve distribution throughout the country and decrease transport by road. A mountainous geography and substandard road networks make shipping by truck an expensive and slow proposition. However, many oil companies working in Colombia have been forced to move their production by this method. This situation has arisen because production has grown to the point that many of the country’s pipelines now operate at full capacity, and because of changes in the markets demanding Colombian hydrocarbons. César Ortega, Verano Energy’s chief operating officer and country manager for Colombia, told OBG, “Due to the historic importance of the US as a trade partner, the two most important pipelines lead to the Atlantic Ocean, which has resulted in a large deficiency of infrastructure to the Pacific.”

Many smaller producers have no access to pipelines. Verano, a Canadian company operating exclusively in Colombia, produces about 1100 barrels of crude per day in its blocks in the Llanos basin. The pipeline serving the area, the Oleoducto Central del Los Llanos, operates at capacity, so Verano is forced to transport all of its production by truck. This costs Verano roughly $15 per barrel, according to Zider Carmona, the firm’s vice president of operations, or about five times the cost of transport by pipeline. As a result of this cost premium, increasing the share of Colombian oil and gas transport by pipeline promises to be one of the most effective measures to increase the sector’s competitiveness. To this end, the government, through Ecopetrol pipeline subsidiary Cenit, has initiated pipeline investments worth several billion dollars.

Existing Pipelines

Today, of Colombia’s six most important pipelines, five link oil fields to the Caribbean port of Coveñas. These are pipeline developer Oleoducto Central’s (Ocensa) line, with a capacity of 600,000 barrels per day (bpd); the Caño Limón pipeline, which can carry 220,000 bpd; the Oleoducto de Colombia (ODC), with a capacity of 15,000 bpd; the Alto Magdalena pipeline, which can carry around 9000 bpd; and the Llanos Orientales pipeline, which has a capacity of 340,000 bpd and feeds into Ocensa. The sixth major pipeline, the TransAndino, has a capacity of 190,000 bpd and terminates at the Pacific port of Tumaco. Cenit told OBG that it plans to increase the capacity of several pipelines by the end of 2015. The firm intends to expand capacity of Ocensa, which today carries about 60% of Colombian crude, by 170,000 bpd. Expansions of the TransAndino and ODC are also planned.

New Lines

As of mid-2014, several large-scale pipeline projects are at various stages of planning and development; however, not all of them will advance to completion. The two biggest projects are the Oleoducto del Pacífico (Pacific Pipeline) and the ongoing, multi-phase Oleoducto Bicentenario de Colombia (Bicentennial Pipeline), which was named in recognition of two centuries of Colombian independence. Camilo Marulanda, president of Cenit, told OBG that only one of these two projects is likely to move forward to completion, owing to the scale of each. “Both are billion-dollar projects,” he said, “and we have to be very clear about what is best for the country and the hydrocarbons industry.”

The Pacific Pipeline will be a 760-km line connecting the Llanos basin to the Pacific port of Buenaventura. It would have a capacity of 250,000-400,000 bpd and require an estimated investment of $5bn. The pipeline would be a joint venture between Cenit and Enbridge, a Canadian energy transport company. Marulanda estimates that in a best-case scenario, construction, which has not begun as of mid-2014, would take six years. Some industry executives view the Pacific Pipeline as less feasible than the Bicentennial project. Humberto Calderón Berti, president of Vetra, an exploration and production company that works in Colombia, told OBG, “The Pacific Pipeline project would be quite costly, so it may be more profitable to transport oil to the Pacific via Ecuador’s underutilised pipelines. The pipeline could also face security challenges.”

Bicentenario

The Bicentennial Pipeline began after Ecopetrol announced in November 2010 that it was partnering with a consortium of international companies to develop the project. With an estimated cost of $4.2bn, the Bicentennial project calls for multiple stages of construction to be completed over the course of at least five years. The project’s first pipeline opened in 2013, with a peak capacity of 110,000 bpd, and a line connects the Araguaney and Banadía stations in the east with the Caño Limón pipeline. Future phases of the project will link the pipeline to the port of Coveñas.

Gas Pipelines

As of early 2014 Colombia had a little over 3000 km of natural gas pipelines, most of which are operated by Empresa Colombiana de Gas. According to the US Energy Information Agency (EIA), the network consists of three main pipelines, including “the Ballena-Barrancabermeja, linking Chevron’s Ballena field on the north-east coast to Barrancabermeja in central Colombia; the Barrancabermeja-Neiva-Bogota line, which connects the Colombian capital to the transmission network; and the Marquita-Cali line through the western Andean foothills”. The Trans-Caribbean Gas Pipeline connects fields in Venezuela with others in Colombia and then Panama. Colombia exports about 200m cu feet per day through the pipeline to Venezuela.

Additional investment in gas pipelines is planned. Pacific Rubiales, which has a contract to supply gas to Russia’s Gazprom for five years beginning in 2015, will spend between $150m and $200m on a pipeline connecting its La Creciente field with the port of Coveñas. The line will help Pacific Rubiales move the 24.4bn cu feet of gas it has agreed to sell Gazprom annually. According to Reuters, Ecopetrol is separately exploring the possibility of building a two-way gas pipeline that would allow for the import and export of gas.

Addressing Security

Guerrilla attacks on pipelines have complicated hydrocarbons transport in Colombia. Security has improved significantly in the last two decades, as a sustained military offensive has diminished the power of the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia, FARC) and the National Liberation Army, the two main guerrilla forces. However, in recent years, there has been an uptick in attacks. The number of annual attacks declined from 155 in 2005 to 31 in 2010. Then, in 2011 the figure jumped to 84 and to 259 in 2013. These attacks have caused transport interruptions ranging from several days to multiple weeks. The EIA estimated that from January to September 2013 “Colombia averaged 35,000 bpd of unplanned production disruption” as a result of attacks. This represented a 115% increase over the same period a year earlier.

Bombings continued into 2014, affecting some of the country’s most important pipelines. In February, the new Bicentennial Pipeline was attacked, leading to its closure for almost two months. In March, an attack shut down the Caño Limón pipeline for more than a month, shaving about 72,000 bpd off domestic output. Nevertheless, the total number of attacks has appears to be decreasing from the high of 2013. In May 2014 Amylkar Acosta, the minister of mines and energy, said there had been 39 attacks so far in that year, half the number for the same period the year before. He said that an additional 70 attacks had been thwarted, for which he gave credit to an elevated military response that has put more boots on the ground and utilised surveillance drones. END IN SIGHT: The increase in attacks seen in recent years is explained by the appointment of a new FARC leader and, paradoxically, by the ongoing peace talks President Juan Manuel Santos has carried out with the rebels. The talks have the potential to permanently decrease or eliminate pipeline attacks, but while negotiations are in progress, attacks may temporarily increase them. Jeremy McDermott, co-director of Medellín-based think tank InSight Crime, which tracks organised crime, told the Los Angeles Times, that the attacks amounted to a “cheap and effective way of pressuring the government at the negotiating table”. Following Santos’ victory in June 2014’s presidential election, the peace talks are expected to continue throughout the year. The negotiations are generally viewed as serious and, although significant challenges remain, the possibility exists that they will succeed in putting an end to decades of armed conflict.

Improving pipeline infrastructure is one of the principal initiatives that may promote production growth in the hydrocarbons sector. It likely represents the second most impactful ongoing project, trailing only the exploitation of shale and offshore reserves. Pedro Prada, the president of the Petroleum Services Group, told OBG, “For large pipe projects to be implemented there is a need to improve installation infrastructure. This would help ideas, such as building connecting pipelines across the country, become a reality.”

Whereas in any country improved access to pipelines would increase competitiveness, in Colombia the effect is magnified because of the country’s complicated topography. The ongoing projects have the potential to significantly improve margins for operators and increase the country’s attractiveness for investors.