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Document of The World Bank e' . FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 5084-CO Public Disclosure Authorized STAFF APPRAISAL REPORT COLOMBIA PETROLEUM PROJECT Public Disclosure Authorized October 19, 1984 Public Disclosure Authorized Energy Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Colombian Peso (C$) C$ 1 = 100 centavos (ctv) C$ 106.46 = US$1.00 (Sept. 21, 1984) C$ 1 =US$0.094 (Sept. 21, 1984) C$ 1,000 = US$9.4 (Sept. 21, 1984) AVERAGE EXCHANGE RATES USED (C$/US$1.00) 1980 1981 1982 1983 47.28 54.49 64.10 79.53 WEIGHTS AND MEASURES I Metric Ton (m ton) = 1,000 Kilograms (kg) 1 Metric ton (m ton) = 2,204 Pounds (lb) 1 Meter (m) = 3.28 Feet (ft) 1 Kilometer (km) = 0.62 Miles (mi) 1 Cubic Meter (mi) = 35.3 Cubic Feet (cu ft) 1 Barrel (Bbl) = 0.159 Cubic Meter 1 Barrel (Bbl) = Barrels of 42 gallons 1 Metric Ton of Oil (API 30) = 7.19 Barrels 1 Kilocalorie (kcal) = 3.97 British thermal units (BTU) 1 Ton of Oil Equivalent (t.o.e.) 10 million kcal (39.7 million BTU) GLOSSARY OF ABBREVIATIONS "M" preceeding any unit indicates thousand "RM" preceeding any unit indicates million lt,"4II preceeding any unit indicates billion BD = Barrels per day MBD Thousand barrels per day MMB = Million barrels gal CGallon kW = kilowatt MCF TThousand cubic feet TCF Trillion cubic feet MMCFD = Million cubic feet per day MW - Megawatt GW = Gigawatt TOE = Ton of Oil Equivalent CONPES - National Economic and Social Policy Council DNP - National Planning Department ECOPETROL - Empresa Colombiana de Petroleos ENE - National Energy Study EOR - Enhanced Oil Recovery FEN - National Electricity Development Bank FRG - Federal Republic of Germany COGC - Government of Colombia OAS - Organization of American States UNDP - United Nations Development Program GOVERNMENT OF COLOMBIA AND ECOPETROL FISCAL YEAR January 1 to December 31 FOR OFFICIALUSE ONLY COLOMBIA PETROLEUM PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. The Energy Sector ................. ................1 Energy Resources and Policies @ .. 1 National Energy Study ....................... 2 Financing of the Energy Sector . 3 II. The Hydrocarbon Sector ....................... 5 Overview ....................... 5 Institutional Aspects ....................... 5 Petroleum Geology and Exploration . 6 Contractual Aspects of Oil Exploration .. 6 Exploration and Production Strategy . 8 Production and Consumption of Crude Oil ... i0 Refineries and Products Consumption . 11 The Pipeline System ................ 11 Consumer Prices of Oil Products. 12 Natural Gas . .13 Government Strategy and Role of the Bank .. 13 III. The Borrower .............................. 16 Background and Scope of Activities .16 Organization, Management and Staff.16 Budgets, Procurement, Accounts, Audit and Insurance .17 Financial Performance .19 Past Performance .20 Sector Investment Strategy .22 IV. The Project .. 27 Project Objectives ................ 27 Project Description . 27 Project Preparation . 29 Project Implementation . 30 Implementation Schedule. .....................32 Cost Estimate . .32 Financing Plan . .33 Procurement . .34 Items Proposed for Bank Financing and Disbursements .35 Ecology and Safety.36 Project Risks .36 Reporting Requirements .37 This report was prepared following an appraisal mission to Colombia in February 1984, by Messrs. W. Schaefer, C. Khelil, R. Leiva, J. Ristorcelli, and M. Heitner (Consultant). This documenthas a restricteddistribution and may be used by recipientsonly in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Table of Contents (Continued) V. Future Financial Performance . ....................38 ECOPETROL's Projected Financial Statements . .....................38 Assumptions ... 42 Major Features and Sensitivity of Financial Projections . 44 Financial Covenants ... 45 Financial Rate of Return . 46 VI. Economic Justification General ...................................... 47 Casabe EOR Scheme ............................ 47 Association Field Development Schemes ........ 48 ConcLusion ................................... 48 VII. Agreements ........................................ 49 Text Tables 1.1 Estimated Energy Reserves and Consumption .... 1 2.1 Investments in Oil Exploration ............... 8 2.2 Crude Oil and Gas Reserves and Production .... 9 2.3 Volume of Production, Consumption, Imports and Exports....................... 10 2.4 January 1984 Retail Prices of Oil Products ... 12 2.5 January 1984 Retail Gas Prices ............... 13 3.1 Income Statements .................... 20 3.2 Balance Sheet as of December 31, 1983.21 3.3 ECOPETROL's Past Investments .22 3.4 Petroleum Sector Investment Program 1984-1988.23 4.1 Summary of Project Cost Estimate .32 4.2 Financing Plan .33 4.3 Procurement and Disbursement .35 5.1 Forecast Income Statements .38 5.2 Balance Sheets.40 5.3 ECOPETROL's Cash Flow .41 5.4 Domestic Demand (MBD).42 5.5 Domestic Production, Exports & Imports.42 5.6 Net Imports.43 5.7 Volumes and Prices of Domestic Crude Oil and Gas Purchases .43 5.8 Inflation and Exchange Rate Variation .44 6.1 Sensitivity Analyses .47 6.2 Economics of Association Field Developments .49 List of Annexes 2.1 Geology of CoLombia 2.2 Petroleum Exploration as of December 31, 1982 2.3 Crude Oil and Gas Proven Reserves 2.4 Past and Forecast Production of Crude Oil 2.5 ECOPETROL's Exploration and Production Strategy 3.1 ECOPETROL's Principal Investments by Company at End of 1983 3.2 ECOPETROL's Organization Chart 3.3 ECOPETROL's Investment Program 4.1 Fields Development in Association with Private Oil Companies 4.2 Implementation Schedule 4.3 Detailed Cost Estimate 4.4 Estimated Disbursement of Bank Loan 5.1 Past and Forecast Income Statements 5.2 Assumptions Underlying the Financial Projections 5.3 Financial and Economic Analysis of Casabe EOR Scheme 6.1 Economic Analyses of Association Field Developments 6.2 Documents Available in Project File IBRD Map No. 18402 COLOMBIA PETROLEUM PROJECT I. THE ENERGY SECTOR Energy Resources and Policies 1.01 Colombia is rich in energy resources,particularly in hydroelectricityand coal. Its reserves of oil and natural gas are modest by internationalstandards, yet significantat the national level. Its recoverablecoal reserves are estimated at 10 billion tons (4,6oo MMTOE). Its hydropower potential is estimated at 100 GW which could yield some 440 TWh (equalingabout 110 MMTOE) per year or 5500 MMTOE over 50 years. Gas reserves of 4.07 TCF (121 MMTOE) representing30 years of present production,are small in comparison,as are the oil reserves of 734 million Bbl (102 MMTOE), representing 13 years of present production: Table 1.1 lltimxted Reserves and Production Reserves Prodaction Reserves/Prod ,-4MOE (%) 4M4E (r) (%) Ws) IVroelectricity 5,500 53 4.6 24.7 Renew. Ccal a/ 4,600 45 2.3 12.4 2,000 NaturalGas a! 121 1 4.0 21.5 30.3 CnudePetroleum a/ 102 1 7.7 41.4 13.2 10,323 100 177 100.0 a/ Recoverable The table shows that there is an imbalancebetween reserves and production for different sources of energy. For example, the huge reserves of hydroelectricityand coal contribute only 25% and 12% respectivelyto annual production while the rather modest gas and oil reserves contribute 22% and 41% respectivelyto annual production. Rational use of Colombia's energy resources would focus on a gradual, long-term shift of production demand from oil to coal and hydroelectricityand it is current governmentpolicy to emphasize further hydropower and coal developments. However, in the medium- and short-termthere is an urgent need to increase recovery rates of existing hydrocarbonreserves and discover new ones. The hydrocarbon sector is discussed in Chapter II. 1.02 Colombia's coal resources are very substantial even on international scale, with recoverable reserves estimated at some 10 billion tons, of which only about 20% can be classified as measured. At present rates of domestic utilization, reserves would last two thousand years. In view of the magnitude of reserves, it is the Government's policy to encourage domestic consumption of coal to substitute for natural gas and for fuel oil, and to promote coal exports, particularlyfrom those deposits located near the Atlantic Coast. Coal production grew at about 7% per annum on average over the 1970s to reach - 2 - a Level of about 5 million tons in 1983. Production came from about 400 small and medium-scale mines, virtually all of which are non-mechanized, run by the private sector and located in Central Colombia. More than half the production and consumption of coal is concentrated in the highlands near Bogota. Sixty percent of all coal is consumed by industry, and most of the rest by the power sector. Residential consumption and exports represent only a small share of total output. A major coal development project under way in the north of the country and 150 km from the shore will increase the production capacity by 15 million tons of coal per annum at the end of this decade; the full output will be exported. 1/ Colombian coal is bituminous, of high calorific value (mostly over 6,000 kcal/kg) and with low sulphur content (mostly less than 1%). All of the coal consumed domestically by the cities in the center of the country is produced in Central Colombia. Some of this coal possesses coking properties. In 1983, domestic coal prices, which are freely set by market forces, typically ranged between US$25 and US$35 per ton delivered to the large consumers in the industrial centers of Bogota, Medellin or Cali. This is below international prices, but high internal transport costs imposed by distance to ports and difficult terrain all but rule out the export potential of coal from the interior of the country. 1.03 Colombia's hydroelectric potential, at about 100 GW, is amongst the largest in the world. The country has made strides in developing this potential (hydroelectric power generation grew at about 10% per annum during the 1970s), and total installed hydro-capacity at present is 4 GW.