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.



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

18th Brigade, recently augmented by the newly established 5th 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



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



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



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



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



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


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



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



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



This support, worth over $650,000 a year, consists of assistance with

building or obtaining office space and assistance with travel costs and


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


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.





Adam Isacson

Senior Associate, Demilitarization Program

Center for International Policy

1755 Massachusetts Ave NW, Suite 312

Washington DC 20036

+202-232-3317 fax 232-3440