COLCOCA Case

Colombia Oil Exports (COLOMOIL)



CASE NUMBER:137
CASE MNEMONIC:COLOMOIL
CASE NAME:Colombia Oil Exports


A. IDENTIFICATION

1. The Issue
The Andes mountains in Colombia have become the newest oil hot spot with several international companies drilling in the region. Oil drilling is a profitable business for the exploring corporation as well as the Colombian government which receives a large sum of money for each barrel of oil recovered. However, the process is not without violence nor criticism from environmental groups. The Marxist guerrillas repeatedly interrupt production through the use of terrorist tactics including bombings and kidnappings. Environmental groups challenge Colombian laws regarding environmental degradation due to the methods of oil exploration and extraction primarily caused by foreign corporations.

2. Description
Ten years ago, Colombia was an importer of oil. Today, it is Latin America's third-largest exporter of oil to the United States following Venezuela and Mexico. Eleven of the eighteen foreign oil companies drilling in Colombia are U.S. owned corporations. Private investment has financed the exploration of one third of Colombia's territory. With the majority of the country's known oil reserves "having been discovered by private companies, private investment will be essential both to maintain future exports and to explore the two-thirds of the country not yet explored for oil."

In 1993, British Petroleum and its partners located oil beneath the eastern plains in the Andes Mountains. The company predicted "it could be worth $3 billion a year in exports -- the government hopes for $5 billion -- by 1997." The Colombian government also "commissioned British Petroleum to continue exploring for oil in its frontier areas" in 1995.

Heavy taxes have caused foreign oil companies to shy away from Colombia. According to Byron Grote, the Latin America Director for British Petroleum, "the Colombian Government takes up to 90% of the value of each barrel pumped by his company. The Government's revenue comes from Ecopetrol's production-sharing agreements and from corporate income and other taxes." In fact, a recent report published by the Colombian Oil Association, which represents the major Western companies, concluded that Colombia "is not internationally competitive to attract risk investments."

3. Related Cases

Keyword Clusters

(1): Trade Product = OIL
(2): Bio-geography = TROPical
(3): Domain = South America [SAMER]
4. Draft Author: Keri Cooper

B. LEGAL Clusters

5. Discourse and Status: AGReement and COMPlete

6. Forum and Scope: COLOMbia and UNILATeral

7. Decision Breadth: 1 (Colombia)

8. Legal Standing: LAW
The Colombian government is the rule-making body on the issue of oil and oil exploration. The Environment Ministry conducts hearings and investigations to determine the costs associated with the process as well as the economic benefits. Colombian legislation requires an "environmental assessment of any area proposed for oil or mineral exploration. The environmental inventory, which catalogues all plant and animal species in the proposed exploration area, is then reviewed by the Environment Ministry." According to Colombian environmental law, all petroleum exploration project must submit the following studies before beginning operations: "an assessment of the existing environmental situation, including a plant and animal life inventory; an evaluation of the possible environmental impacts of exploration and extraction; a report on the company's environmental contingency plans and plans for air and water control; and a projection of long-term environmental impacts once the company has finished its operations in the area." Based on these reports, the Ministry approves/disapproves the site, the extractable amounts to be drilled and the rate at which the extraction occurs are determined.

C. GEOGRAPHIC Clusters

9. Geographic Locations
Geographic domain: South America [SAMER]
Geographic site: ANDES
Geographic impact: COLOMbia
10. Sub-National Factors: YES
Not everyone in Colombia is pleased that the oil companies are drilling more and more in their country. The drug cartels, peasant groups and paramilitary groups have wrecked havoc on the oil- pumping stations. Many of the oil wells are located in the "stomping ground" of the Medellin drug cartel as well as its competitors. The area is also the home to "the less publicized `emerald wars' (Colombia produces 60 percent of the world emerald supply), to three separate groups of Marxist guerrillas and to an increasingly terroristic national police force seeking to quell the turmoil."

One reporter described a British Petroleum drilling site in the eastern foothills of the Andes as "an armed camp, swarming with khaki-clad, rifle-toting guards and surrounded by machine gun emplacements and two rows of flood-lit razor wire." The fortress is necessary in order to quell some of the violence caused by the Marxist guerrillas in the region who are protesting the eradication of coca crops. As it is difficult to halt the coca eradication process, the guerrillas attack the oil sites and pipelines as a demonstration of their dissatisfaction with the government's actions (see COLCOCA case). One of BP's sites is located in Yopal, in the Casanare region of Colombia about ninety miles northeast of Bogota, in the eastern foothills of the Andes Mountains (see COCA case). The town has grown in five years "from a quiet state capital of 20,000 to a boom town of 60,000." But the residents are not pleased with the growth spurt. The town has gained many things from the oil companies including: newly paved roads, electricity as well as a construction boom. All of these things are wonderful for the residents. The residents do not complain about these advancements. It is the increase in crime, poverty, and the guerrillas that bothers the residents. The regional Governor of Yopal, Oscar Leonides Wilches, made an insightful comment. "We were all better off here 20 years ago, when there was no electricity, no running water, and we were all poor. Now we all live in a perpetual state of insecurity....Oil has destroyed our way of life. It's a pestilence." Although the efforts of BP are appreciated and welcomed by the locals including the governor, many residents claim they would be happier if the company had never come.

The Marxist guerrillas of the National Liberation Army (ELN) and the Revolutionary Armed Forces of Colombia (FARC), which have made the nearby Cusiana and Cupiagua oil fields their prime target, are often blamed for the increase in violence. The groups "regularly blow up pipelines, kidnap foreign oil executives and kill local politicians in an attempt to force out multinational corporations and destabilize the Colombian economy." During the last nine years, "leftist guerrilla squads have dynamited Colombia's main oil pipeline 346 times, spilling slightly more than 1.2 million barrels of crude oil....The guerrillas seek publicity, rural development, and nationalization of the oil industry." The guerrillas also demand increased spending "for social programs in areas where the oil is produced."

Colombia's Environment Minister said that "no one has ever calculated how much the FARC owes" due to fears that the calculation would encourage the guerrillas to increase their destructive actions. During the past ten years, pipeline attacks by the guerrillas are estimated to have cost Colombia "about $1 billion in lost oil sales." Ministry studies examining the years 1989 through 1991 "found that guerrilla pipeline bombings polluted 375 miles of creeks and rivers and fouled 12,500 acres, ranging from tropical wetlands to Andean watersheds."

The dramatic increase in crime is attributed to the increasing numbers of migrants from across Colombia who "have flooded in to work in the oil fields at salaries that are three to four times the minimum wage." Six years ago in Yopal, for example, the town had "five hotels, three banks, about 60 prostitutes and no electricity. Today, there are 54 hotels, 22 banks, and nearly 700 prostitutes." Progress is not always for the best as seen in this city and throughout the oil-producing region.

Finally, infrastructure and the cost of living are dramatically different than in the pre-oil discovery years. The cost of living as demonstrated by rents charged has tripled. Available infrastructure is also at risk as sewage systems and water pipes were not constructed to serve the large numbers of people who now require the services. At times, the towns even complain of not enough water for all of the residents.

11. Type of Habitat: TEMPerate

D. TRADE Clusters

12. Type of Measure: Regulatory Ban [REGBAN]

13. Direct vs. Indirect Impacts: INDirect

14. Relation of Trade Measure to Resource Impact
Directly Related: YES OIL
Indirectly Related: NO
Not Related: NO
Process Related: YES HABITat Loss
15. Trade Product Identification: Oil

16. Economic Data
Oil represents twenty-two percent of Colombia's export revenue and as much as half of its foreign investment earnings. By 1997, "when the Cusiana-Cupiagua fields are scheduled to reach full production of 500,000 barrels a day, earnings are expected to reach $2.5 billion a year."

However, oil does not always provide the cure-all predicted. One only need to examine the cases of Nigeria, Mexico, and Venezuela to see the possible negative benefits of oil. "Over- dependence on oil often leads to an inflated and indebted public sector and a narrow tax base. The inflow of foreign currency raises the exchange rate, damaging non-oil businesses. If the oil boom turns to bust, many people end up worse off than before the bonanza."

17. Impact of Trade Restriction: LOW

18. Industry Sector: OILGAS (Oil and Gas)

19. Exporters and Importers: COLOMbia and USA
Ecopetrol, the state-owned petroleum company, expects to export "500,000 barrels per day of crude oil from Colombia's supergiant Cusiana oil field to the U.S....Apart from Cusiana, Colombia currently exports about 200,000 barrels per day to the United States."

The United States is a major importer of Colombian low-sulfur crude oil because of the steady decline in U.S. production. In 1994, the United States imported an average of "8.9 million barrels a day or 45 percent, compared with about 30 percent in 1984. Even at moderate oil prices, the U.S. spent about $45 billion last year to pay for imported oil, making it a major contributor to the trade deficit." Production in the United States is at its lowest level in four decades. United States domestic crude oil production "fell to 6.6 million barrels a day last year, the lowest level since 1954. Domestic production of low-sulfur crude, the variety from which gasoline is most easily derived, is expected to decline by nearly 750,000 barrels a day during the 1990s."

Therefore there is a need for a "nearby source of clean burning oil for Americans." The U.S. currently imports "slightly more than half of its crude oil needs." Due to Colombia's close proximity, it takes only four to five days to "transport the oil by tanker to the major refining centers on the U.S. Gulf Coast and the East Coast. This ensures a predictable oil supply for U.S. refineries and saves as much as $2 a barrel in transportation costs as compared to shipments from the Middle East."

E. ENVIRONMENT Clusters
20. Environmental Problem Types: Pollution Land [POLL]
Environmental problems also include air and water pollution 21. Name, Type, and Diversity of Species
Name: Many
Type: Many
Diversity: 51,220 higher plants per 10,000 km/sq (Colombia)
One environmental impact study conducted by British Petroleum conducted in the Cusiana region found "280 plant species, 423 species of aquatic invertebrates, 98 species of fish, and 112 species of microscopic algae in the area bounded by three rivers. The study took twenty-five company biologists sixteen months to complete."

22. Impact and Effect: LOW and PRODuct
Obviously, there is a limit to the amount of oil which can be pumped from the different wells but exact statistics are not available due to the uncertainty surrounding the wells. It is difficult to determine how much oil will be pumped out until there is no more oil to pump out from the well. However, the Cusiana and Cupiagua fields, cover a thinly populated area the size of Connecticut, "hold 2.1 billion barrels in proven oil and gas reserves. Ecopetrol announced in late February that probable and possible oil and gas reserves in the area totaled a further 3.9 billion barrels."

23. Urgency and Lifetime: MEDIUM and 100s of years
The Colombian Environment Ministry often fines companies who damage natural resources. Resolution 300, approved in September 1994, demonstrated that the Environment Ministry is "prepared to tackle even projects considered economically important to the country in contrast to the previous enforcement agency, Inderena, which was often criticized for not confronting large companies over environmental violations."

In August 1994, the Environment Ministry fined British Petroleum approximately $267,000 for damaging natural resources in the state of Casanare during 1991. "The fine was the largest for environmental damage in Colombia's history." Some of the company's activities in Casanare were carried out "without complying with existing requirements established under Colombian environmental legislation, which resulted in damage to renewable natural resources and contamination of the environment."

On April 11, 1995, the Environment Ministry issued another Resolution which suspended the operations of the Sociedad Petroleos del Norte petroleum company in the Cucuta-Norte de Santander municipality after "finding excessive levels of crude oil, hydrocarbons, and mercury in the Caso Mono watershed located near the company's Rio Zulia oil field."

24. Substitutes: ALTERnative Energy

VI. OTHER Factors

25. Culture: NO

26. Human Rights: NO

27. Trans-Boundary Issues: NO

28. Relevant Literature
"And Now Oil."  The Economist. 31 July 31, 1993, 38-39.
"British Petroleum Presents Ecological Inventory for Exploration
     Zone." Environment Watch Latin America, August, 1993, 7.
Brooke, James. "Colombia Becoming an Oil Power in Spite of
Itself." 
     The New York Times (March 29, 1995), 2.
Brooke, James. "Colombia Oil Spills Net Fines for All but
Rebels."
     The New York Times (March 6, 1995), A2.
"Colombia Courts Oil Interests."  Chicago Tribune
     (March 27, 1995), 3B.
"Colombia's Environment Ministry Fines British Petroleum." 
     Environment Watch Latin America (September,) 1994, 14.
"Colombian Government Threatens to Close Ecopetrol Pipeline." 
     Environment Watch Latin America (November, 1994), 17.
"Environment Ministry Halts Petroleos del Norte Project."
     Environment Watch Latin America (May, 1995), 5.
"Oil and Gas Newsletter."  Oil and Gas Journal.  27 March 1995,
3.
Salpukas, Agis. "Ideas and Trends: Still Looking to the Persian
     Gulf." The New York Times (March 26, 1995), D5.
Sullivan, Allanna. "BP to Continue Search for Oil in Colombia."
     The Houston Chronicle (April 2, 1995), 9.
Tirschwell, Peter. "Falling U.S. Oil Production Creates Opening
for
     Colombia."  The Houston Chronicle (March 26, 1995), 9.
Vincent, Isabel. "Colombia's Oil Boom Backfires."  World Press
     Review (December, 1994), 43.
Zipser, Andy.  "Trials of Triton: Big Payoff Awaits Oil Explorer,
     But First...." Barron's (July 26, 1993), 14-15.

                           References



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