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Running on empty: Colombia has to move fast to modernize its state-run oil sector.

Declining oil reserves in Colombia is changing the way Ecopetrol, the country's largest company, does business. Until 2003, the state-run oil company, with revenues of US$6.79 billion, not only produced, transported, refined and sold oil and gas, as well as coordinated exploration, it was also the country's oil regulator.

Looking to shake up the state-run company, the government created National Hydrocarbons Agency (ANH) to oversee the industry, which took charge three years ago of regulatory functions once run by Ecopetrol. The aim was to make Colombia more attractive to foreign and to domestic investors.

"The main threat to Ecopetrol and to the Colombian oil sector without a doubt is declining proven reserves," says Isaac Yanovich, at the close of this edition president of Ecopetrol. "Starting a couple of years ago there was a big increase in oil exploration. The exploration budget went from $60 million in 2003 to $160 million in 2006."

According to Yanovich--who is recognized in the Colombian private sector for having put Ecopetrol onto a more competitive and efficient footing--the country has a positive exploration outlook but does not have reserves like that of neighboring countries. Nevertheless, Yanovich says that between 70% and 75% of the country hasn't been explored for oil. "We have made finds but until now they have been relatively small," he says. "The important thing is that exploration that had fallen behind in Colombia in the past few years has been reactivated."

The fact that crude oil prices have risen so much allows projects that were stalled for lack of viability to start again. "We are investing in some areas that probably we would not have when prices were low, prospects that are not very big or places where it is very expensive to produce," says Yanovich. The government has no plans to privatize Ecopetrol, he says, but change is coming. "What we are doing is taking steps each day that permit Ecopetrol to manage itself more like a private company," he says.

Private oil majors have welcomed the changes in the Colombian oil business. Despite the fact that oil giants like BP and Occidental Petroleum have big joint ventures with Ecopetrol, it's Brazil's Petrobras that has become the biggest oil exploration outfit in Colombia, says Dirceu Abrahao, a geologist and president of Petrobras in Colombia. "In 2006 we quadrupled investments in exploration. We alone will invest $90 million," he says.

For Abrahao, who oversees 400 employees in the country, the creation of the new regulatory body has improved conditions for contracts offered to international oil firms. Although before the reforms Ecopetrol had to have a big role in various projects, it was in any case still a good environment for foreign investors. "The country's economic stability and improving security conditions make it possible to convince the home office to take part in more projects," he says.

Mature, Petrobras first came to Colombia in 1972 but left in 1979 after the sector fell apart, and came back again in 1986. "I would say there is a very high degree of maturity in the potentially productive basins in Colombia," says Abrahao. Yet, he says, geologists often find new reserves when they look in unexplored areas and by looking deeper.

Jorge Canizares is head of Colombia's oil distributors trade group, Federacion Nacional de Distribuidores de Combustibles, which has 1,900 members and represents the 2,300 gas stations in the country. He says that Ecopetrol's monopoly on production and distribution is not good for the sector. "In Colombia, we have a very unusual pricing system compared to other countries, because it's a mix of regulations and free market," he says. Premium gas is sold at market prices. Ecopetrol sets the price and sells it to wholesalers, who also fix a price and then sell it to retailers. Regular gasoline and diesel prices are set by the state.

"Since Ecopetrol is a monopoly there's no competition," says Canizares. "It would be much better if there were more companies competing in the market."

According to the trade group, the only product Colombia is importing at the moment is 4,000 barrels a day of a fuel known as ACPM. Unlike in countries like Chile and Uruguay, the rest is produced in Colombia. "Fifteen years ago we had a self-sufficiency problem, then we found wells like Cusiana," Canizares says. "According to estimates by the [regulator] and Ecopetrol, if no significant reserves are found in the next three or four years, we could lose self-sufficiency in oil by 2011."

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Title Annotation:OIL & GAS
Comment:Running on empty: Colombia has to move fast to modernize its state-run oil sector.(OIL & GAS)
Author:Velazquez, Andres F.
Publication:Latin Trade
Geographic Code:3COLO
Date:Jul 1, 2006
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