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Cablegate: Colombia Would Be Further in the Red If Not For

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS BOGOTA 011571

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON ENRG EPET CO
SUBJECT: COLOMBIA WOULD BE FURTHER IN THE RED IF NOT FOR
WINDFALL PROFITS FROM THE STATE OIL COMPANY


Sensitive but unclassified. Please protect accordingly.

1. (SBU) Summary. With oil trading at around USD 50 a
barrel, Ecopetrol's windfall profits continue to rise. GOC
officials have stated privately that were it not for the
record revenues of the state oil company, the GOC would not
make its 2004 deficit target of 2.5 percent of GDP. End
Summary.

----------------------
Increase in oil prices
----------------------

2. (U) Betting conservatively, the GOC estimated that for
2004 oil would sell at an average price of USD 25.1 per
barrel due to the reincorporation of Iraq's oil into the
world market and its predictions of increased oil production
from Algeria, Lybia, Nigeria and the UAE. The GOC thus
estimated that Ecopetrol, the state oil company, would
transfer USD 333 million to government coffers. As oil
prices rose, Ecopetrol recalculated its oil's reference price
at USD 35 per barrel, netting a profit of USD 590 million as
of June 2004. With oil trading in the USD 45-50 range,
Ecopetrol will likely recalculate the reference price once
more before the year is over. As a result, Ecopetrol's
president, Isaac Yanovich, stated 2004 annual net profits
could reach USD 770 million (a 39 percent increase from
2003), depending on the WTI price of oil.

---------------------------------------------
A Sigh of Relief from the Ministry of Finance
---------------------------------------------

3. (U) The Finance Ministry hoped to achieve its
IMF-mandated 2.5 percent of GDP fiscal deficit target through
serious belt-tightening and a series of privatizations The
GOC also obtained the IMF's agreement to a 2.8 percent fiscal
deficit target for 2004, in case its privatization program
did not materialize. The GOC managed to sell only 8 percent
of ISA, the state-owned electric and transmission grid, and
Transelca, another state-owned power distributor. Its first
attempt to sell the state-owned Coffee bank (Bancafe) failed
when no bidders expressed interest. The GOC was thus faced
with severe spending cuts in order to meet the deficit
target. Luckily, Ecopetrol's windfall profits will allow the
GOC to meet its initial target without needing such severe
measures.

----------------
Windfall Profits
----------------

4. (SBU) Econoffs met with Dr. Javier Rondon, Deputy
Director for National Finances, at the Ministry of Finance
and Public Credit to discuss the current fiscal deficit.
Rondon, as well as Dr. Juan Pablo Zarate, the Director for
Macroeconomic Policy, stated categorically that without
Ecopetrol's increase in revenues, primarily due to the
increase in the price of oil, the GOC would not have met its
2.5 percent deficit goal. The GOC's 2004 financial plan
initially estimated that Ecopetrol would contribute 0.3
percent of GDP towards the fiscal deficit, but after revising
Ecopetrol's numbers with the high price of oil, the GOC now
estimates Ecopetrol's contribution at 0.6 percent of GDP.

---------------
Looking Forward
---------------

5. (SBU) Colombia's oil production dropped 2.5 percent in
2004, while Ecopetrol (and the GOC's coffers) were saved by
the dramatic increase in oil prices in 2004. Efforts to
correct the current fiscal situation, through tax and pension
reform, are before Congress but have only begun their lengthy
and treacherous course. The GOC is championing an expansion
of the value added tax (which currently only covers about 60
percent of products), but Congress is not supporting the
effort. The GOC is also attempting pension reform, which is
again very unpopular with the Congress. Business groups are
also protesting the GOC's annual tax reforms (three in three
years) as being bad for the investment climate. Despite a
spate of new oil exploration contracts, Colombia's crude
production could drop to the point where the country will
become a net importer in 2008.
DRUCKER

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