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
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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
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
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.
--------------------------------
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
isacson@ciponline.org
http://www.ciponline.org/demilita.htm