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Cablegate: Colombia Showcases Potential As Strategic Energy

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DE RUEHBO #3017/01 2311409
ZNR UUUUU ZZH
P 181409Z AUG 08 ZDK
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC PRIORITY 4204
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS PRIORITY
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEHC/DEPT OF LABOR WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 03 BOGOTA 003017

SENSITIVE
SIPDIS

WHA/EPSC CORNEILLE; EEB/ESC MCMANUS; DOE FOR LEINSTEIN AND
GWARD

E.O. 12958: N/A
TAGS: ENRG ECON EPET EAGR PGOV ETRD CO
SUBJECT: COLOMBIA SHOWCASES POTENTIAL AS STRATEGIC ENERGY
PARTNER TO DOE DEPSEC KUPFER

REF: 07 BOGOTA 7088

1. (SBU) SUMMARY. Acting Deputy Secretary of Energy Jeffrey
Kupfer led a DOE delegation to Cartagena, Colombia August
7-9, which met with a wide array of government and private
sector leaders from across the energy sector. They told the
delegation that Colombia's business climate was excellent and
noted Colombia's tremendous energy sector potential in areas
ranging from natural gas to biofuels. Deputy Secretary
Kupfer gave remarks at the annual General Assembly of
Colombia's major business association (ANDI). The delegation
also visited the second largest coal mine in Colombia, La
Loma, operated by Alabama-based Drummond Ltd. END SUMMARY.

National Industries Association: Energy Outlook Bright
--------------------------------------------- ---------

2. (SBU) The energy sector principals of the National
Industries Association of Colombia (ANDI) explained how
Colombia's self-sufficiency and growing export potential in
the energy sector position the country well to serve as a
strategic energy ally to the U.S. According to ANDI Energy
Committee Director Daniel Romero, about 65 percent of
Colombia's electricity comes from hydroelectric generation,
and short-term expansion plans will likely push the figure to
70 percent. Colombia is the world's fifth largest producer
of coal, which is mostly exported to the U.S. and Europe.
Production is expected to increase from 70 million tons in
2007 to 120 million tons in 2012. On natural gas, Romero
noted that Colombia has tremendous on-shore potential that
has only recently become viable due to the improved security
situation in the country. On biofuels, ANDI Board Chairman
Sergio Restrepo noted the efficiency of sugar cane and palm
(Colombia's chief inputs) in producing ethanol and biodiesel,
respectively, and stated that, for this reason, Colombia had
not had to deal with the "food versus fuel" dilemma to the
degree that other countries had. Deputy Secretary Kupfer
cautioned that while there were some downsides to corn-based
ethanol, it served neither country's interest to make public
remarks over the superiority of one type of ethanol over
another, as this only emboldened those seeking to undermine
biofuels altogether. In response to the Deputy Secretary's
question of how the U.S. could be helpful to Colombia's
efforts to develop its biofuels industry, the group responded
that its biggest needs were in the areas of technology,
investment, infrastructure, and government regulation.

Zamora: Colombia a Potential Substitute for Venezuelan Crude
--------------------------------------------- ----------------

3. (SBU) Armando Zamora heads the Colombian hydrocarbons
regulatory agency (ANH). He told Kupfer that only 22% of
Colombian territory has been explored for oil and gas,
including the estimated 1 million kilometers of Colombian
territorial waters off the Pacific and Caribbean coasts.
Zamora stated that due to security gains, almost all of
Colombian territory is now safe for exploration, noting
however that the GOC would not authorize exploration in the
Colombian Amazon due to environmental sensitivities. He
cited a Halliburton study estimating that there are 20
million barrels of recoverable oil yet to be found in
Colombian territory. Zamora noted that Colombia will produce
600,000 b/d by the end of 2008, a figure that could jump as
high as 1 million b/d by 2020. FDI for hydrocarbon
exploration continues to pour in, reaching $3.5 billion (out
of a total of $9 billion) in 2007, increasing to an estimated
$5 billion for 2008. Zamora concluded the meeting by
mentioning an MOU that Colombia plans to sign with Jamaica to
explore for gas in joint waters in the Caribbean. Zamora
believes that Colombian gas -- as well as its heavy crude --
should be looked at as a substitute for Venezuelan oil, and
could be delivered to states throughout the Gulf and
Caribbean as a means to counter Chavez's petro-diplomacy.


Ecopetrol: Privatization Spurring Expansion
-------------------------------------------

4. (SBU) Javier Gutierrez, President of Colombia's parastatal
oil company Ecopetrol, characterized the operating
environment in Colombia as excellent. The GOC sold 10.1
percent of Ecopetrol's shares in November, 2007 (reftel) and
plans to sell another 9.9 percent, although Gutierrez said no
decision had been made yet as to when. Despite the

BOGOTA 00003017 002 OF 003


government's large stake in Ecopetrol, Gutierrez made clear
that the company has no advantages over any other oil company
when it comes to doing business. Ecopetrol currently
produces 450,000 of Colombia's 570,000 barrels per day, and
Gutierrez said Ecopetrol's goal was to produce one million
barrels per day in ten years, partly through international
expansion into Brazil, Peru, the Gulf of Mexico, and
elsewhere. Gutierrez noted the tremendous on-shore
exploration potential that has opened up in Colombia with
increased security. The number of new exploration wells has
increased each year since 2004, when there were 10, to 2007
when there were 73. This year, Gutierrez said there may be
more than 100. In response to Deputy Secretary Kupfer's
question about the GOC's take on newly awarded projects being
linked to the price of oil, Gutierrez said that this was
common throughout the world and that a trigger of $90 per
barrel was quite reasonable. Gutierrez noted that Ecopetrol
was seeking strategic partnerships with organizations with
agricultural expertise in sugar and palm to expand its
involvement in the biofuels sector. When asked about the
major challenges Ecopetrol faces, Gutierrez noted natural gas
production and transportation infrastructure, as well as
retention of human capital. Gutierrez said, however, that
with recent salary reforms at the company, the latter has
become less of a problem. Acting Assistant Secretary Slutz
encouraged Ecopetrol specifically, and Colombia generally, to
take a more active role in the Carbon Sequestration
Leadership Forum, a suggestion Gutierrez welcomed.

Biofuels: Growing Industry to Fuel Employment
---------------------------------------------

5. (SBU) Members of the National Biofuels Federation outlined
how Colombia's regulatory framework -- through a combination
of fuel blending mandates, price floors, and tax benefits --
is designed to incentivize the creation of a robust national
biofuels industry. The domestic ethanol industry was started
five years ago, and the biodiesel industry, just one year
ago. Today, 70 percent of Colombia's gasoline is E10 (10
percent ethanol), with the goal to have 100 percent E10 by
the end of 2009. Under the current requirements, the
blending mandates will increase gradually up to E20. There
is even draft legislation under consideration that would
require all vehicles produced or imported as of 2012 to be
flex-fuel (able to run on E-100). Arturo Infante, the GOC's
National Biofuels Coordinator, noted that Colombia had not
decided to establish a biofuels industry for the sake of
energy, since Colombia is already self-sufficient. Rather, a
biofuels industry will allow Colombia to reclaim land that
has previously been controlled by illegal armed groups and
put it to productive use, which will in turn create jobs and
viable alternatives for demobilized individuals. Infante
also stressed the need for life cycle analysis studies
currently under way (of both sugar-based ethanol and
palm-based bio-diesel) to help answer biofuel critics from
the environmental and labor angles. Infante also stressed
Colombia's desire to be part of the Global Bioenergy
Partnership (GBEP) in order to move forward with some form of
environmental and labor standards, which would help Colombia
differentiate its biofuels from those of cheaper suppliers,
such as Indonesia and Malaysia. In response to Deputy
Secretary Kupfer's question about how the U.S. could be
helpful to the biofuel industry, Luis Fernando Lodono,
President of the Sugar Growers' Association noted that with
entry into force of the Free Trade Agreement, Colombian
ethanol and biodiesel will enter the U.S. duty free.

Minister Explains New Contract Model
------------------------------------

6. (SBU) Minister of Mines and Energy Hernan Martinez
explained the GOC's proposed new contract for hydrocarbon
exploration, emphasizing that changes would only apply to new
contracts--there will be no retroactive application to
existing arrangements. The GOC wants to encourage continued
foreign investment, he emphasized, but also finds itself
politically vulnerable if it were to do nothing to increase
the government's take in an era of growing energy prices,
particularly given the confiscatory activities of Colombia's
neighbors. The new policy -- which has yet to be formally
adopted -- calls for the GOC's 30% royalty take to increase
when oil exceeds $90/barrel. It would jump by 5% for every
$30 price increase (i.e., 35% from $90-$120; 40% from
$120-150.) There would be a maximum royalty of 50%.

BOGOTA 00003017 003 OF 003


Martinez emphasized that the GOC has consulted extensively
with the private sector, and that his read is that they are
comfortable with the proposal (a point confirmed by U.S.
energy companies during their dinner meeting with Kupfer).
Martinez welcomed Kupfer's offer of DOE assistance in
critical infrastructure protection, predicting disastrous
consequences if an incident were to shut down Colombia's
inland refinery in Barrancabermeja. Colombia -- with only 5
days of reserves -- would have no means to supply the capital
of Bogota and the inland population centers from its
remaining refinery in Cartagena. During the discussion,
Minister Martinez noted that Carbon Capture and Storage
technologies are not a priority for Colombia due to the
country's limited use of its coal resources. He also said
that it was not economical to use CO2 injection technologies
for enhanced oil recovery in Colombia's declining fields, as
the distance between its oil fields and coal centers is too
far.

7. (U) DOE delegation cleared this cable.
BROWNFIELD

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