Colombia’s Petroleum Producers & Labor Union United In Decrying Oil Transport Rate Inflexibility

After the precipitous drop in petroleum pricing, The Colombian petroleum sector represented by its gremio or industry trade group, Colombian Petroleum Association (ACP) called on the government, which sets petroleum transportation pricing via the National Hydrocarbons Agency (ANH) to react to market forces and allow a reduction in the price of pipeline transportation within Colombia, which according to ACP accounts for 45% of the cost of petroleum delivered to the refinery.

Oil transportation provider Cenit (Spanish for Zenith), the pipeline operator owned by government controlled Ecopetrol announced last week “relief of up to 50% on pipeline transportation fees for oil producers” according to the headline of a printed statement released by Cenit. Reading the details however, the transporter is only offering delayed terms.

“Producers can pay only 50% of their rates during May and June, and the remaining balance will be due in 2 months,” said the statement.

“Even though this conjuncture also impacts the midstream segment due to the lower volumes transported through the systems due to the drop in demand, we are convinced that it is necessary to support producers and senders in general with financing initiatives so that the industry of hydrocarbons in Colombia continues to be a lever for the country’s economic and social development,” said Héctor Manosalva Rojas, president of Cenit.

Petroleum producers are not impressed

ACP had a very direct response to the initiative, saying that it does practically nothing to address the situation, but is little more than public relations. In a written public response, the ACP said:

1. The proposal of the transporters does not reduce the rates. It is not a 50% decrease in rates, but an offer of financing (for two months) with interest charged on this percentage. The measure does not supply the financial requirements of the senders against the current value of the rates, which, as indicated, are excessively high. This would only increase transportation costs, since after two months the same rate would have to be paid with interest (1.5% annual cash).
2. The financing offered by the carriers does not take into account the reality of the price crisis that the sector is experiencing, the duration of which is not clear. This price situation is leading private companies to close fields and therefore reduce their production. To date, production has been reduced by about 52,000 barrels per day and a further cut of 30,000 barrels per day is expected, starting next month. This not only affects the production of crude with consequences for the energy self-sufficiency of the country, but also reduces important resources of royalties, taxes and economic rights, considerably impacting the finances of the Nation and the contributions to the regions.
3. Regarding specific rate reductions, the real proposal of Ocensa (the pipeline that transports the largest volume of oil in the country) is to decrease rates by only 0.6%. In other words, it goes from a rate of $7.75 USD to $7.70 per barrel; a minimum adjustment when oil prices have fallen 71% since January and 42% in the last two months, and more, if one takes into account that in July 2019 the company increased tariffs by 10%.
4. Considering that the crude oil pipeline transportation rates have an operating cost weight of around 45%, what the industry requires and has requested is a 60% reduction when the Brent reference price is below US $ 45 a barrel.
5. The stage of negotiation between carriers and senders has been exhausted without success, taking into account that the offers presented by the carriers have not been the product of a negotiation, but rather unilateral announcements.
6. It is for this reason that the ACP has requested the Ministry of Mines and Energy to intervene in oil pipeline transportation tariffs, using its powers provided by the Petroleum Code, issuing a resolution that restores an economic balance in the hydrocarbon sector in this period of low prices, as a measure to help mitigate the current crisis.

Finance Colombia was able to reach Alejandro Ospina Angarrita, the president of UTIPEC, Colombia’s principal petroleum workers’ union, who generally is in agreement with the industry association on this topic.

Alejandro Ospina Angarrita is president of UTIPEC, Colombia’s principal petroleum workers’ union

Finance Colombia: What is UTIPEC’s proposal to solve the crisis?

Ospina: An immediate reduction of the pipeline transportation rates that are approved by the Ministry of Mines and Energy, and not just a financing of these costs as the transporters have proposed, in order to make production possible in the fields that are closed today and thus recovering the job that is being destroyed due to the low competitiveness of the Colombian oil industry.

The measure must be adopted immediately, and must be maintained until a revision of the tariff methodology is made, which overcompensates the investments made in these systems, so that it has brought us to the current situation which although in the past was bearable at high oil prices, it clearly does not reflect the reality of the business when compared to nearby competitors, such as in Ecuador, where a system of similar length, which must cross the Andes mountain range, offers rates of less than 30% of those collected in Colombia.

Finance Colombia: What should the administration of Ivan Duque and the ANH do?

Ospina: Pipeline tariffs are currently defined and approved by the Ministry of Mines and Energy, so it must be the national government that takes the exceptional measure, making the temporary adjustments and this same entity, which must carry out a review of the methodology with all market agents, to harmonize it with the reasonable remuneration of the investments.

The ANH, as administrator of the country’s hydrocarbon resource, and therefore promoter of the development of the industry in Colombia, must support producers, both the state controlled Ecopetrol and private companies, in the search for a competitive scheme to keep viable the oil activity. It is important to explain that Ecopetrol is the main entity affected by the current pipeline tariffs and consequently the Colombian state as the main shareholder of the company, since although Ecopetrol it is true, benefits from midstream activity, it is also true that there it only acts as operator of some of the systems, and co-owner of most of them, so in this business, there are other external beneficiaries; meanwhile the adverse impact of the tariffs affects Ecopetrol as the main producer and user of the same.