Economic and Ecological Reasons to Rationalize the Volume of Oil Extraction in Colombia

(Translated by Susan Tritten, a CSN volunteer translator)

Juan Felipe Harman, Master’s Degree in Ecology and Development
Proyecto Gramalote (Gramalote Project)

A million barrels a day has become the goal of the national energy economy, not only encouraged by the hydrocarbon sector but with the full governmental backing of recent administrations. This has led to the politico-institutional transformation of the hydrocarbon sector in Colombia.

Proof of this is the creation of the Agencia Nacional de Hidrocarburos—ANH (National Hydrocarbon Agency) and, beginning in 2003, the new regulation of a concession contract, eliminating obligatory participation by the Colombian state under the partnership contract. In addition there has been an easing of environmental requirements as shown in issuing a global license and terminating the environmental license for seismic exploration.

Is it economically and environmentally sustainable for the nation to add, even force, petroleum extraction in Colombia in order to maintain production at one million barrels per day? We are going to approach the response to this question from two angles; one, the fundamentally classical economic rationale of Hotelling’s approach, and the other, an environmental rationale and a multicriteria evaluation proposed in ecological economics.

The rate of extraction and reserves

Hotelling’s approach considers three criteria for the regulation of extraction of a non-renewable resource:

a. the optimal time period to depletion
b. the optimal rate for extraction of a natural resource
c. demand, tecnology, and reserve
It takes as given the following conditions:
a. Mineral reserves are extracted without cost, there are no new additional reserves, and demand remains constant.
b. The quantity extracted does not affect the price.
c. And as there are no costs, the benefit is equal to revenues from the sale of the product.
Hotelling’s method assumes that the marginal benefit is equal to the revenues realized through the sale of the petroleum, which not only implies discounting the cost of production, but does not include any type of social or environmental externality; it is based on the margin of net gains as the determining factor of decisions within the economy of nonrenewable natural resources. In order to calculate the optimal period to depletion, as well as the ideal rate of extraction, one must consider a discount rate assuming an undervaluing of the natural resource owing to its preservation for extraction in the future. This generates wide discussion in terms of economic theory considering that the price of nonrenewable natural resources historically demonstrates fluctuations that at least in part result from other factors such as the organization of monopolies, geopolitical tensions, and informational restrictions, among others. In this sense one must keep in mind that in the period from 2000 to 2013 various factors have come together that demonstrate imbalances in Colombia’s petroleum economy.

We can see that, for 13 years, the international petroleum price has generally continued to rise. In turn, the relation between reserves and the number of years to depletion has been decreasing considerably, so that in 2000 we had a petroleum supply for 7.9 years and by 2013, we see that the petroleum supply will last for 6.6 years. During this time the rate of extraction has been constantly increasing.
A large proportion of oil deposits has been explored and discovering new reserves is now becoming more difficult and is more related to the processes of secondary and tertiary recovery in mature fields such as Campo Rubiales, Campo Castilla and Campo Cravo Norte. The production record fluctuates historically in relation to the million barrel goal, but the capacity to incorporate new reserves in relation to production volume continues to be insufficient.

The nation must consider opportunity cost in its calculations on the macroeconomic implications of importing petroleum to supply its refineries. It must also consider an economic imbalance implied by a loss of surplus production that would not generate revenues from petroleum exports on which the public budget relies today.

Moreover, keeping in mind that Colombia only consumes 300 thousand barrels of oil per day and has a surplus of 700 thousand barrels per day, that surplus now represents 56% of the non-traditional exports the nation produces, mostly by private companies rather that the state. . According to the current contractual model, the nation’s share of oil revenues fluctuates between 25% and 33% of income due to the decrease in the percentage of royalties and income taxes, but also to discounting royalties such as the cost of production from the liquid taxable base. For example, according to the comptroller’s calculations, for every 100 pesos that companies pay in royalties, they receive a discount of 118 pesos in income taxes.

From the multicriteria evaluation

The oil industry has a high environmental impact that demands going beyond a simple environmental economic appraisal to integrate an interdisciplinary and holistic view of the interaction between society and the ecosystem in space and time.

The restrictions on the economic quantification of hydrocarbon’s environmental liabilities come about because there are no defined markets for many of the externalities and therefore no mechanism exists that permits the companies to include, avoid, or mitigate them. As Larrea (2011) states, many of the externalities are impossible to quantify economically; they are immeasurable. What is the value of the loss of human life? the disappearance of an indigenous culture, or the extinction of a species? In spite of this, it is important at least to estimate the economic value of some of the petroleum industry’s negative impact. For example, is it possible to know the negative cost of global warming and of each ton of CO2 emitted, or the cost of eliminating it from the atmosphere? And can one measure the value of goods and services other than timber in the rainforest, and the jobs and revenues that we lose when we do not develop activities such as ecotourism? While imperfect, criteria do exist to estimate the loss.

It is for this reason that we must use methodologies such as multicriteria evaluations in which the economic is just one form of appraisal, but not the only one. This involves evaluating the complex interrelationships among social, cultural, and ecosystemic functions in the territory.

Professor Nohra León (2006) compiles the principal characteristics of multicriteria evaluation:

o Consider a large quantity of current information, relationships, and objectives in specific problems of the real world.
o Work with a variety of information (qualitative and quantitative, together with diverse sources and difuse information) in attempting to incorporate a plurality of viewpoints by all involved actors.
o Bring tools to the decision maker to advance the resolution of problems in which one must evaluate different viewpoints, including conflicts among economic, social, cultural, juridical, and environmental goals.
o It should be based on weak comensurability and strong comparability.
o Use aggregation methods.
For the multicriteria evaluation that supported the conservation project in Yasuní, Ecuador, they considered seven aspects:
a. economic
b. sustainability analyzed through growth and diversified productivity
c. environmental
d. social
e. cultural
f. governability and social cohesion
g. international policy
Using these categories as a basis for decision making, it is worth describing general considerations that impinge on Colombia’s oil industry keeping in mind the following points:

1. The expansion of Colombia’s petroleum frontier depends mainly on the exploitation of the Llanos and Caguán-Putumayo basins, keeping in mind that the rest of the geologic basins have been completely explored.
2. To force an increase in production volume involves new exploitation tecniques such as fracking, in situ combustion, and other tertiary techniques.
3. And the possibility of discovering new reserves depends mainly on finding fields of heavy and extra-heavy crude as well as unconventional hydrocarbons, which leave a greater ecological footprint than conventional forms of crude.
A and B. The economic and sustainability aspects as amply described in the previous point demonstrate the economic instability that forced oil production growth involves to the detriment of reserves as a source of wealth for future generations.

C. In ecosystemic terms in the Orinoco and Amazon basins, there are limits to analysis due to the lack of environmental base lines on a scale that permits quantification. A large number of reservoirs do not figure in the Planes de Ordenamiento y Manejo de Cuencas Hidrográficas–POMCHS (river basin development and management plans); detailed information does not exist on hydrogeologic behavior in alluvial plains nor how hydric regulation works in groundwater recharge zones. Therefore institutional ability to prevent a heavy environmental impact associated with the oil industry does not exist. The savanna’s environmental system, as well as distinct rainforest ecosystems, still have not been fully studied which means there exists some lack of knowledge about diverse interactions of biological communities with their environment.

D.These are the areas hardest hit by the domestic armed conflict that has brought on phenomena associated with forced displacement and where low intensity conflict continues, a situation that increases the sensitivity of the social fabric and the possibility that the extractive industry may not be uninvolved in power relations in those territories.
E. Mindful of the threat of ethnic extermination that exists for indigenous cultures, the the Corte Constitucional (constitutional court) supervised the writing of the Planes de Salvaguarda–PdS (protection plans) for the survival of 35 indigenous pueblos, mostly in the Orinoco and Amazon basins. This has led to a lack of legal recognition for many refuge areas that are indigenous settlements today. There have been no advances in the PdS, although preparatory discussions are in progress with indigenous communities, especially in the Colombian high plains, achieved through the influence of the Ministerio de Interior.

F. Development of new oil projects is causing conflicts over land use in agricultural areas due to the imposition of easements as well as microeconomic impact related to an increase in local inflation.
G. New production techniques as well as unconventional hydrocarbons do not have sufficient technical basis. This may bring on socioenvironmental problems in fragile ecosystems such as those of the Orinoco and Amazon valleys.
These types of criteria are not used in methods of ecological evaluations promoted by the Ministerio de Medio Ambiente–MdMA and the Autoridad de Licencias Ambientales–AdLA (department of the enviornment and the enviornmental licenses authority). These reduce studies of environmental impact to a general description of effects without analyzing systematically the interrelationships of societies and ecosystems.

This situation explains the level of social conflictivity that the presence of the oil industry is causing in production areas. There have been more than 90 protests that have become permanent complaints against the Asociación Colombiana de Petroleo–ACP, a professional association of oil companies.

It is time to stop and restructure the petroleum policies in Colombia in order to respond to the principles of social development and economic sustainability that the country needs. If the state and the ACP do not take this responsibility, the communities will do it as a defense mechanism against the usurpation of their territory.

(This translation may be reprinted as long as its content remains unaltered and the source, author and translator are cited.)

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