COLOMBIA

1. COLOMBIA Agencia Nacional de Hidrocarburos Ministerio de Minas y Energía Bogota Conference (December 9-10, 2004) RELIABILITY OF PETROLEUM SUPPLES Marc L. Heitner The World Bank

2. Outline of Presentation • Main Features of International Petroleum Markets • What have Governments done? • What works and what doesn’t? • Externalities • Ongoing Activities in the World Bank

4. USG Spot Prices ($/bbl)

5. USG Prices vs WTI

7. International Petroleum Markets • Crude Oil and Oil Products are the most widely traded commodities • Since 1980’s, international petroleum products prices are as close to “perfect markets” as can be • What is a shortage?

8. Forms of Government Intervention • Government to Government Contracts • Political in Nature • Execution in hands of Commercial Firms (Government companies) • Prices often set by exporter • Prices above market • In the late 1990s, practice mostly disappeared

9. Forms of Government Intervention (contd) B. National Oil Companies • Ideally • Protect National Interest • Guarantee security of supply • Develop national capabilities • Ensure that national resources are not exploited by foreign parties • Give priority to investments in the country

10. Forms of Government Intervention (contd) • B. Government Companies (cont’d) • In reality • Decision making process flawed • Cannot compete with IOCs with respect to technology, skills, resources,experience • Some have become “State within the State” • Excessive levels of staff

11. Forms of Government Intervention (contd) B. Government Companies (end) • Reality • Difficult to control (compared to IOCs) • Inefficient (for the benefit of IOCs) • Tend to create monopolies and create barriers to entry • Little if any culture of service to consumers • In many countries, NOCs privatized again, sometimes after restructuring • Argentina Example

12. Forms of Government Intervention (cont’d) C. Price Controls • Perceptions • Consumer Protection • Protection for the poor • Limits profits of IOCs • Uniform pricing across regions • Political gains

13. Forms of Government Intervention (cont’d) C. Price Controls (cont’d) • Reality • Prices are higher when controls are in effect; • Prices meet requirements of NOC – excess profits resulting in higher profits for IOCs; • “Stabilization” Funds • Distortions in pricing/Adulteration • Little/No transparency (tax revenues) • No signal to consumers/revisions not automatic • Easier to knock on the door than compete

14. Regulating Through the Market • Petroleum Downstream Activity is not a natural monopoly; • Many players and potential players • IOCs, Local firms, Independents • Newcomers innovative, creative • Consumer Oriented • Transparent pricing • Measurement of efficiency -- netbacks

16. Licensing Up-front obligation to invest, Guarantees Industry to vet new entrants Access to infrastructure Regional service obligations Restrictions on supply sourcing (local refinery) Collusive practices against new entrants Barriers to Entry

17. Benefits of Market Pricing • Integration with international oil markets • Transparency of retail prices • Little, if any, scope for subsidies • Service-based competition • System depoliticized -- market trends • Predictable tax revenues • Government focuses on policy!

18. Risks of Market Pricing • Price fixing/collusion • Vertical Integration? • Market Power /product/region • Illicit trade practices • Unserved areas

19. Competition/Third Party Access Environment Products Specifications Safety Weights and Measures Strategic Stocks Legal Basis Norms and Standards Implementing Agency Enforcement powers Penalties Externalities

20. Competition (anti-trust) Law/TPA • Policy Formulation • Legal Basis • Agency, Autonomy • Skills • Enforcement Powers • Question – within or outside ANH?

21. Environment/Specifications • Applies to all aspects of industry operations (products specs, ports, terminals, storages, pipelines, road tankers, retail outlets) • Need to adopt standards national/borrowed? • If borrowed, legalize their enforcement • Set in place enforcement procedures (private/public) • Within or outside ANH?

22. Safety/Weights and Measures • Adoption of Local or borrowed standards • Cause standards to be legally enforceable • Enforcement Agency • Enforcement mechanism (private/public) • Penalties

23. Strategic Oil Reserves • Companies’ stock levels consistent with their requirements • State may require additional stocks on the basis of security of supply considerations (referred to as strategic stocks) • Level is political/strategic decision • Strategic Stocks Cost Money! Paid for through fee

24. Ownership of Strategic Stocks

25. Level of Strategic Oil Reserves • US SPR: Capacity = 40 days • Importing Countries = 90 days • Producing Countries = 60 days -------------------------------- Up to policy makers to decide level, crude or products, location etc.

26. World Bank Role in Extractive Industries • Strong questioning by NGOs of contribution to development of these industries • Academic “resource curse” literature • Examples of apparent notable failures of resource riches to contribute to development. • Environmental concerns: • Local level – hazardous materials, bio-diversity protection • Contribution of green house gases from fossil fuels to global warming. • Some high profile, controversial WBG projects (e.g. Chad Cameroon pipeline) • Model of WBG in dams and World Commission on Large Dams that was then reporting.

27. Key Issuesin Extractive Industries • Governance • Governance • Revenue Transparency • Communities • Ensuring communities benefit • Protecting the rights of people • Disclosure • Mitigating local and global environmental and social risks • Organizational and other issues

31. Thank you