US embassy cable - 04BOGOTA11571

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. 
 
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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. 
 
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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. 
 
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Windfall Profits 
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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. 
 
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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