Colombia announces 20% privatization of state oil company

As populist leaders in Bolivia and Venezuela are determined to nationalize their oil industries, Colombia’s government is insisting on a privatization plan for its state-run oil company. By selling off 20% of Ecopetrol, Colombia hopes to net some $5 billion and finance new exploration to boost production, according to Armando Zamora, president of the National Hydrocarbon agency. He warns that if more crude isn’t discovered soon, Colombia will begin importing oil in 2011, with devastating results for the government’s finances, which depended on Ecopetrol for 7% of last year’s $41 billion budget. In 2005, Ecopetrol had sales of close to $6.5 billion. The Colombian government is expected to release details of the sale in the coming weeks.

The plan is meeting dissent within the country. “Not one country in the world wants to sell off part of an oil company that has created so much wealth like Ecopetrol. Colombia is the only exception,” said Sen. Hugo Serrano.

BP, Chevron and ExxonMobil, as well as smaller companies from India, China and Canada, are prospecting for oil in Colombia, investing close to $1.5 billion last year. The hydrocarbon agency, in charge of allocating exploration contracts, said these multi-nationals pay royalties of between 5 and 25 percent.

Leftist guerillas also pose a challenge for production. In 2005, Colombia’s oil pipelines were attacked 146 times, the Defense Ministry reported.

Colombia has an estimated 1.4 billion barrels of oil in reserves that are rapidly being consumed. In 2005, production fell to just 526,000 barrels per day from a record 815,000 in 1999. In contrast, Venezuela exports 2 million barrels of oil a day.

In 2006, Ecopetrol plans to spend $350 million exploring for new oil from a total investment budget of $1.4 billion. Most of the rest will go to extracting more oil from wells already drying up.

“It’s necessary to give more freedom to the company, but not to privatize it,” said Serrano, a former oil engineer and member of the opposition Liberal party. “When oil is found, the country will lose 20% of that income.” But former minister of energy and mines Carlos Caballero said state control is bottlenecking production. “Ecopetrol suffers from all types of restrictions that prevent it from competing and makes it more difficult to find more oil,” he said.

The oil workers’ union, representing a third of Ecopetrol’s 6,000 employees, is “ready to take all the necessary measures to prevent this sale,” union President Jorge Gamboa said. (AP, Sept. 9)

See our last post on Colombia.

  1. An analysis
    From Colombia Journal, July 31:

    Uribe’s New Economic Reforms Benefit Corporations, Not Colombians

    by Garry Leech

    The Uribe administration recently announced its intention to implement three reforms that will lead to millions of dollars in additional profits for multinational corporations while promising increased economic hardships for Colombia’s poor majority. In a devastating one-two-three punch, the Uribe government first announced that it intends to partially-privatize the state-owned oil company Ecopetrol and then declared its intentions to slash corporate income taxes while simultaneously increasing the Value Added Tax (VAT) on food basics such as rice, potatoes and chicken.

    On July 25, President Uribe announced that the government would sell a 20 percent share in Ecopetrol, despite having promised not to do so during his first term in office. While Uribe did not privatize the company during his first four years, he did restructure Ecopetrol in 2003 in order to meet conditions attached to a $2.1 billion loan from the International Monetary Fund (IMF). The Uribe administration then implemented reforms the following year that no longer required foreign oil companies to enter into partnership with Ecopetrol. While the state oil company had to begin competing with foreign firms for production contracts, it still remained 100 percent state owned.

    The proposed sale of a 20 percent stake in Ecopetrol is likely the first step in the complete privatization of the national oil company. The sale of Ecopetrol is just the latest in a series of sales of state assets by the Uribe administration, following on the heels of the privatization of the state telecommunications company Telecom and the state mining company Minercol. However, the partial-privatization of Ecopetrol is not an attempt by the Uribe government to unload a financial burden. To the contrary, Ecopetrol is a significant revenue generator for the government. In 2005, the state-owned oil company earned a record net profit of $1.29 billion after supplying the state’s coffers with $3.23 billion in revenues.

    According to Alberto Bernal, associate director at investment banking firm Bear Stearns, the Colombian government will likely earn just over $1 billion from the sale. The one-time payoff, however, will amount to far less than the 20 percent share of future profits that the government will forfeit due to the partial-privatization. Consequently, at a time when high global oil prices have made Ecopetrol a significant financial asset, the Uribe administration intends to hand over this revenue generator to the private sector.

    The government is justifying the proposed sale by claiming that it is necessary to prevent the country from becoming a net importer of oil. This argument is fundamentally flawed because previous restructuring and the proposed privatization have ensured that Colombia will purchase increasing amounts of its own oil at global market prices from foreign companies operating in the country. Therefore, whether or not the country remains a net exporter or not is irrelevant from a financial perspective if the government is forced to pay global prices for oil regardless of whether it is produced domestically or overseas.