Infrastructure: Monumental backwardness moving forward

The development of unconventional and offshore resources could see Colombia experience huge production increases in the coming years. However, these projections are being met with mixed feelings as the industry comes to the realization that Colombia's already struggling infrastructure will be playing catch up to anticipated production levels. Juan Martín, president of the Colombian Infrastructure Chamber, suggested the “monumental backwardness” of Colombia's transport system as the biggest obstacle to economic growth.

“Over the longer term, the real challenge facing the country is that of infrastructure – transportation costs are very high, and moving equipment around the country is ridiculously expensive, making it difficult to conduct short term projects. As an example, a rig move which would cost $150,000 in North America costs a million dollars for the same distance,” explains Warren Levy, chairman and CEO of Estrella International Energy, now the biggest rig holder in Colombia after its acquisition of San Antonio International Colombia this year.

Current Colombian President, Juan Manuel Santos, has pledged to invest $100 billion to improve infrastructure over the coming decade. At least half of these funds are forecast to come from the private sector. Where and how this money will be spent is still unclear, but the oil and gas sector will be keeping a close eye on the developments.

Undoubtedly the most significant infrastructure project for the oil and gas sector is the 975km Bicentennial Pipeline, the longest and largest in the nation's history. Stage one, near completion, will cover 230km through Colombia's most productive oil fields in the Llanos Basin from Araguaney to Banadía. From Banadía the 30- to 42-inch-diameter pipeline will continue to the port of Coveñas on the Caribbean coast. The project is a significant undertaking and certainly a step in the right direction, but is still some way short of satisfying the sector's demand.

Pipeline development is crucial to any developed oil and gas market, but even more pertinent to a nation without established alternatives. “Petroamerica's operating netback for Q1 2013 was $79 per barrel, which is huge, one of the biggest in the world I believe,” says Nelson Navarrete, president and CEO of Petroamerica Oil. “We sell our crude based on Brent, our royalties are at 8% and our operating costs are very low, $3 per barrel, while transportation costs work out to about $18 per barrel because we still truck the oil some distance. Changing that would make a huge difference.”

Pipelines are the most efficient and cheapest way to transport oil, but rebel groups remain a significant force in many areas of the country, and pipelines have long represented a prime target for their attacks. According to the Colombian government, there were about 31 attacks against pipelines in 2010, and 84 attacks in 2011, and 117 in 2012. This rising trend has continued into 2013.

“There have been a lot of discussions about pipelines and river transport, but not nearly enough about roads,” suggests Warren Levy of Estrella International Energy Services. “Most conventional oilfields really require road access. Colombia badly needs major investments in highways, particularly from the ports to Bogota, and from there to the main fields. This is the missing piece in the puzzle to bring the country up from a million barrels per day to two million; everything else will sort itself out naturally.”

Colombia's rivers represent a realistic medium for oil and equipment transport; one large river barge can move the same amount of cargo as 75 articulated trucks. The Magdalena river stretches from the inland plains near the capital, through the oil fields of the Llanos and Lower Magdalena basins to the port of Barranquilla on the Caribbean coast. The river is navigable by 25,000 barrel barges for 435km from the coast; upstream 4,000 barrel barges can reach as far inland as Barrancabermeja in the heart of oil country and home to Ecopetrol's refining and port facility. The government is said to have been in discussions with Hydro-China over channelizing and dredging from Barrancabermeja to La Dorada, just 113km from Bogotá.

Developments along the Magdalena could increase river traffic by five times and a number of logistics companies are already moving on the opportunity. Grupo Coremar seeks to establish a river port on the stretch between Barrancabermeja and La Dorada, transporting crude to its new oil and gas business cluster and port facility in Barranquilla. Meanwhile Alianza Group's Big River project will utilize large 25,000 barrel barges from their river port in La Gloria to their Atlantic oil terminals, storage and port facility, also in Barranquilla.

Now is the time to push forward with infrastructural improvements, be it road, rail, river or pipeline. With an economy growing at over 4% and foreign capital pouring in, funding these projects should not be a problem. Rather, it is ensuring they are built on time, to budget and with high quality. The legacy of President Álvaro Uribe was crushing the FARC guerrillas and opening up large swathes of land for oil exploration. President Santos's legacy may be helping move that oil efficiently.

This report was prepared by Caroline Stern, Alice Pascoletti, Ramzy Bamieh and Josie Perez of Global Business Reports. For more information contact info@gbreports.com.