Department of State Report to Congress on Caño Limón Pipeline, December 2002

Department of State Report to Congress on Caño Limón Pipeline, December 2002

Report to Congress
Colombia: Cano Limon Pipeline

Submitted to the Congress
by the Secretary of State
Pursuant to Title I, Chapter Six
2002 Supplemental Appropriations Act
P.L. 107-206

Prepared by the United States Department of State

Colombia: Cano Limon Pipeline

The 2002 Supplemental Appropriations Act (P.L. 107-206) in Title I, Chapter 6, provides that up to $6 million may be made available for assistance to the Colombian Armed Forces for purposes of protecting the Cano Limon pipeline, and that prior

to the obligation of funds, the Secretary of State shall submit

a report describing:

the estimated oil revenues collected by the Government of Colombia from the Cano Limon pipeline for the preceding 12 months;
the amounts expended during such period by the Government of Colombia and private companies owning a financial interest in the pipeline for primary health care, basic education, micro-enterprise and other programs and activities to improve the lives of the people of Arauca department;
steps that are being taken to increase and expand support for these programs and activities; and
mechanisms that are being established to adequately monitor such funds.

Introduction

Social and economic development programs in violence-wracked areas of Colombia, including Arauca Department, face often insurmountable obstacles to their successful implementation unless adequate security can be provided. Development is made even more difficult when insufficient infrastructure and often weak or corrupt institutions add to the challenges.

In order to maintain its plans for social and economic development, the Government of Colombia identified 338 key infrastructure locations or installations that required improved protection as a result of sharply increased guerrilla attacks. It designated the Cano Limon pipeline as requiring the most pressing attention. Under a multi-phased infrastructure security plan, Colombia has asked the United States Government for training and equipment assistance for its Armed Forces to begin the Cano Limon pipeline protection program.

Security for the Cano Limon pipeline is provided by the Colombian Army’s 18^th Brigade, recently augmented by the newly established 5^th Mobile Brigade, as well as other military and police units.

Despite the presence of these forces, the Cano Limon pipeline was the principal infrastructure target of the FARC and ELN in 2001 with 170 attacks, the vast majority of which took place in Arauca Department.

The pipeline’s shutdown for almost seven months in 2001 cost Colombia approximately $500 million in lost revenues and royalties (1/2% of GDP) and the attacks spilled 400,000 barrels of oil (about one and one-half times the amount discharged by the Exxon Valdez).
The shutdown of the pipeline also crippled the government of the Department of Arauca, as 90% of its revenue base comes from oil royalties.

Since 1986 the pipeline has been hit over 940 times, with over 11 million barrels of oil spilled – causing serious ecological damages and an estimated $2 billion in lost revenue.

Background: The Cano Limon Oilfield and Pipeline

The Cano Limon oilfield accounts for approximately 20% of Colombia’s oil production. It is located in north-central Arauca department, straddling Colombia’s northeast border with Venezuela. The field runs north/south approximately 8,000 feet beneath the Arauca River and is covered by hot and humid flatlands which, for the most part, are sparsely populated by small-scale farmers and ranchers. Total population of Arauca department is 250,000, of which 20,000 live in the department’s municipality of the same name.

The Cano Limon production facility is approximately 10 kilometers from the Venezuelan border. From Cano Limon the pipeline carries oil northwest 770 kilometers through the departments of Boyaca, Norte de Santander, Cesar, Magdalena and Bolivar to the Caribbean port of Covenas in Sucre department.

Oil production at the Cano Limon oilfield is undertaken by the Cravo Norte Association (CNA), a for-profit joint venture between Colombia’s state-owned oil company, Ecopetrol, and Occidental Petroleum Corporation (Oxy), a United States private company.

The CNA owns the production facilities, pipeline and Covenas terminal. According to its contract, Oxy manages oilfield production, while Ecopetrol operates the pipeline.

CNA membership is: 1) 50 percent Ecopetrol; 2) 25 percent Occidental Petroleumcol, [which is 75 percent owned by Oxy, 25 percent owned by a Spanish oil concern, Repsol] and 3) 25 percent Occidental Petroleumandina, Shell Oil Company’s former share in the operation, but which was purchased entirely by Oxy. Thus, 7/16 of CNA is owned by Oxy, 1/16 by Repsol and 8/16 by Ecopetrol.

Thousands of wells extract and transfer oil from the field to two nearby production facilities for separation of the oil from other liquids (primarily water). Oil is temporarily stored until sent to the pumping station for transport through the pipeline to Covenas. There is seven days storage capacity at Cano Limon, allowing extraction to continue even when the pipeline is temporarily shut down because of armed attacks against it. However, the increased attacks on the pipeline in 2001 overwhelmed the facility’s storage capacity and oil pumping had to be suspended for more than 240 days last year.

Oil production at Cano Limon began in 1985. Daily average production has fallen from approximately 125,000 barrels per day in 1999 to 99,000 in 2000 and 54,000 in 2001, due primarily to pipeline attacks. Annual production at Cano Limon in 2001 was 19.5 million barrels. Proven oil reserves are an estimated 170 million barrels, but the field’s oil production potential is estimated at 300 million barrels. Approximately 55% of oil produced at Cano Limon in 2001 was exported to the United States.

Revenues generated from oil production at Cano Limon are collected by the CNA in a joint account, which is then disbursed with 20 percent dedicated to royalties and the remainder divided between Ecopetrol, Occidental, and Repsol (through Occidental Petroleumcol and Occidental Petroleumandina) in accordance with their ownership portions.

Estimated oil revenues collected by the Government of Colombia from the Cano Limon pipeline for the preceding 12 months

To comply with the Congressional requirement to show oil revenues for the preceding 12 month period, the period from July 1, 2001 to June 30, 2002 was selected. Total revenues from that period were $500 million.

During the 12-month period of CY 2001, the CNA earned total revenues of approximately $331 million, down from a projected $840 million if the pipeline had been operational for the entire year. (It should be noted that the Government of Colombia’s fiscal year coincides with the calendar year.)

With revenues, royalties, and taxes combined, the Government of Colombia (through Ecopetrol remittances and taxes, the National Royalty Fund, and the state and municipal funds) retains approximately 85% of the gross revenue from Cano Limon. In 2001 it collected approximately $280 million. At increased 2001 prices, we estimate Colombia lost $509 million (or ½% of GDP) in foregone revenue and royalties because of pipeline shutdowns.

Ecopetrol, Colombia’s state-owned oil company, earned gross revenues of approximately $169 million in 2001 from Cano Limon, falling from about $400 million in 2000. Ecopetrol uses this revenue for operating costs, materials, investment and remittances to its owner, the Government of Colombia.

Oxy earned gross revenues of about $162 million in 2001, used to pay for new oil and gas projects, dividends to shareholders, and to cover costs such as taxes, and investments in Colombia. The $7 million difference in revenues between Ecopetrol and Oxy in 2001 is due to variations in selling prices during the year.

In 2001 Oxy (through Occidental Petroleumcol, including Repsol, and Occidental Petroleumandina), transferred to Colombia about $110 million in the form of royalties, taxes (income, transportation and remittance) and obligatory special contributions or “war taxes”, which are a variable percentage of the income tax.

Royalties are assessed in barrels at the wellhead and amount to 20 percent of extracted oil. They are distributed as follows: 8 percent to the “National Royalty Fund”; 9.5 percent to Arauca department; and 2.5 percent divided between the municipalities of Arauca and Arauquita.

In 2001 the “National Royalty Fund” received approximately $30 million from Arauca royalties, according to Ecopetrol. Total royalties (national, departmental, and municipal) generated by

Cano Limon in 2001 were approximately $66 million. For the 12-month period ending June 30, 2002, these are estimated to have been $75 million.

In 2001, losses from attacks reduced royalties provided by the Cano Limon pipeline significantly below expectations. "National Royalty Fund" royalties were lower than expected by $32.6 million, royalties to Arauca Department were lower by nearly $38.7 million, and royalties to the municipalities were about $10.2 million below expectations.
Royalties increased somewhat in the first six months of 2002 due to the previously noted temporary lull in the number and intensity of pipeline attacks as well as an increase in international oil prices.

National royalties are maintained in the country’s national budget under a distinct line-item, the “National Royalty Fund" which includes earnings from all active fields. It is managed by a 13-member National Royalty Commission, in the National Planning Department (similar to the Office of Management and Budget), which meets monthly to review the “National Royalty Fund” balances. Members are the National Planning Department Director; the Ministers of Mines and Energy, Transportation, Economic Development, and the Environment; the Governors of the six oil producing departments; the Mayor of Bogota; and one representative of municipalities with ports.

The “National Royalty Fund” has a mandate to promote mining, preserve the environment, and finance regional investment identified as priorities in the development plans of the requesting regions. All territorial entities can request “National Royalty Funds” including departments, municipalities and regional development corporations. The military cannot directly request “National Royalty Fund” financing.

Departmental and municipal royalties received from the CNA are kept in bank accounts in the cities of Arauca (departmental and municipal) and Arauquita (municipal). The Governor of Arauca manages the departmental royalties; and the Arauca and Arauquita Mayors manage the municipal royalties. The National Royalty Commission oversees budgeting and expenditures and the Arauca Assembly approves budgets submitted annually by the Governor and Mayors.

Ninety percent of Arauca’s total budget comes from royalties. Of that, ninety percent is reported to be targeted for social investment according to the department’s development plan, with half of this focused on reducing infant mortality and improving social infrastructure (health, education and water resources). The remaining 10 percent is spent on oversight and administration.

Like the departmental royalties, 90 percent of municipal royalties are dedicated to social investment according to the municipality’s development plan, with three-quarters targeted for construction and maintenance of social infrastructure, and the remaining 10 percent is for oversight and administration.

Amounts expended during such period by the Government of Colombia and private companies owning a financial interest in the pipeline for primary health care, basic education, micro-enterprise and other programs and activities to improve the lives of the people of Arauca department

Expenditures for primary health care, basic education, micro-enterprise and other programs and activities to improve the lives of the people in Arauca Department are drawn from national, departmental and municipal royalties as well as additional social programs undertaken by the Cravo Norte Association, Ecopetrol and Oxy. Such expenditures for the 12-month period ending June 30, 2002, are estimated to have been $3 million.

In addition to royalties payments, the CNA has provided approximately $40 million for social investment in Arauca department between 1986 and 2001, with $2.8 million in 2001. CNA program expenses are divided between Ecopetrol and Oxy, including Repsol.

The CNA programs have benefited an estimated 20,000 Araucans directly and 80,000 indirectly, or 6.7 percent and 26.7 percent of the department’s residents, respectively.

Thirty-three new schools were built along the pipeline’s path as were 11 medical clinics.
The hospital at the Cano Limon field has been open to the neighboring community since its creation and the vast majority of local newborns since 1986 have been born there.

Ecopetrol, separately from CNA, also spent an additional $1.5 million in complementary social programs during 2001.

Oxy established the Alcaravan Foundation, named for an indigenous bird of the Arauca area, to implement community development projects, which are supported by CNA. The foundation undertakes urban and rural development projects, including an experimental farm where techniques for developing non-traditional crops, as well as animal husbandry are taught.

The primary goal is to first raise participating families to subsistence levels and then through micro-credit grants help them form cooperatives that will develop small businesses.
The cooperatives are also encouraged to diversify, for example, complementing sugar cane production by raising cattle that can consume the excess sugar cane and to develop value-added businesses, such as refining cacao and selling finished chocolate.
There are roughly 1400 families participating in these projects. The average family raised its monthly income from $74 per month in 2000 to $105 per month in 2001, which is above the Colombian poverty line.

The Alcaravan Foundation supports urban training and job creation projects.

In Arauca, a community center that provides courses and micro-credits to small businesses has been established, as well as a small sewing facility that trains women heads of households in small business development.
The facility also provides after school training to girls from a local orphanage.

Steps that are being taken to increase and expand support for these programs and activities

In a letter dated June 4, 2002, former-Finance Minister Juan Manuel Santos informed the United States Ambassador that he had instructed the President of Ecopetrol “to study the ways in which it can increase the resources which it devotes to security in Arauca, as well as to vital social and economic development projects, particularly in health care and education, to help the population of this area.”

Minister Santos’ letter stated that he envisioned “as much as $50 million a year, over a multi-year period, could be dedicated to these purposes. While achieving better security is of the most immediate importance, it is my [Santos’] hope that as the security situation in Arauca stabilizes, ever more of these funds could be devoted to development projects.”

Colombia’s current Finance Minister, Roberto Junguito, has publicly stated that social programs are a priority for the Uribe administration. In his first few weeks in office, President Uribe has traveled extensively throughout the country and his repeated message has been that his administration plans to increase not only security in the country, but also the provision of social and government services. For example, the Colombian government is considering ending the government subsidy for gasoline, with the approximately $1 billion saved to be applied to educational programs.

The CNA has sought USAID technical assistance to help identify, design and develop –- in conjunction with local governments and communities – social and productive infrastructure projects that better meet the socioeconomic needs of local residents, generate employment and income, strengthen local governance and combat corruption, and generally will help raise local living standards.

USAID has named a local NGO to serve as the principal point of contact with Oxy and the CNA. As a result of this commitment, Occidental has pledged additional funds in the out years beyond the royalties and monies already pledged. The new program, which is currently in the design phase, will aim to provide more direct social and educational benefits to the citizens of Arauca.

Under this initiative, an additional $500,000 has already been budgeted for the second half of 2002 to fund new educational programs and the construction and development of a training center in Arauca city. USAID is providing $250,000 of the funds and Oxy will supply the remainder. This facility will promote adult education, computer skills, cloth manufacturing abilities and small business creation.

The CNA is also spending $150,000 in the second half of 2002 in expanding existing adult literacy programs.

Mechanisms that are being established to adequately monitor such funds

It is clear that after many years of little central government presence, the oil royalties and other income that could have helped to improve the region have not been adequately monitored or employed. Chronic public and private sector corruption, a traditionally weak central government presence, and poor local infrastructure, make this a continuing and major challenge. Over the past fifteen years, per capita spending on social infrastructure has been the highest in Colombia ($600 per inhabitant). Yet the lack of an effective state presence has made it impossible to ensure that these funds were efficiently monitored and spent.

Oversight and control of these funds has been identified as a serious concern by the incoming administration and new legislative initiatives, including a fiscal responsibility law, are being contemplated to increase the accountability of those receiving the royalties. President Uribe has told U.S. officials he is considering other measures to improve delivery of social and economic development programs to the area and to monitor spending. This may include taking more direct control of the royalties generated in Arauca Department.

The national Prosecutor General’s office (Fiscalia) and the national Inspector General’s office (Procuradoria) are also opening more investigations into the misuse of royalty funds. In the second half of 2001, 20 investigations involving misuse of over 400 million pesos have been begun by these agencies.

Regarding infrastructure protection, the Vice Minister for Defense and the Deputy Chief of Mission of the U.S. Embassy co-chair a bilateral working group that has oversight over all aspects of the infrastructure protection program. Subgroups meet regularly at the working level to coordinate training, the re-establishment of a police presence, social action and civil-military relations, an expanded state presence and communications.

The fundamental goal of the infrastructure protection program is to complement President Uribe’s goal of promoting “democratic security” throughout the country by establishing an effective state presence in the region. Protecting infrastructure and the Cano Limon pipeline is not only important in itself, but may be even more significant as a means to assist the Colombian government’s ability to reassert control over its territory and to limit the depredations of illegal armed groups to affect the democratic, economic and social life of the country.

To this end, the CNA has also entered into agreements with the Fiscalia and the Procuraduria to provide assistance in support of their presence in the Department.

This support, worth over $650,000 a year, consists of assistance with building or obtaining office space and assistance with travel costs and subsistence.
The CNA is also in discussions with the national Comptroller General’s office (Contraloria) provision of a similar assistance program.

By supporting these offices, immediate and substantial.

Successful instances in safeguarding funds available for social and economic projects have already been achieved.

In the first six months of 2002, the investigator tasked with investigating attacks on the pipeline arrested 39 suspected terrorists. This is in stark contrast with only 3 arrested in the first 15 years of the pipeline’s existence.
It is expected that the provision of security will enable offices such as the Contraloria to better investigate malfeasance regarding the use of royalty funds and the Fiscalia and Procuraduria to better monitor human rights compliance on the part of the military and police.

At the same time, once better security is achieved, programs, such as the USAID-sponsored Justice Centers (Casas de Justicia), can be established which will begin to offer access to legal remedies and the rule of law to all Araucans.

Protection of the infrastructure will allow small businesses fostered by the various social investment programs to benefit by being better able to bring their products to market. Further, when the Colombian government establishes an effective presence, it will be better able to provide the education, health care and other programs needed in Arauca.