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Value Chain Analysis of the Energy in Colombia.

Commercial Relationships

The energy value chain in Colombia is characterized by a series of interconnected commercial relationships, primarily involving contracts for the sale and purchase of energy resources and related services at each stage. These relationships are shaped by market dynamics, regulatory frameworks, and the strategic positions of key players like Ecopetrol in hydrocarbons and major integrated utilities and transmission companies in the power sector.

In the hydrocarbon sector, the relationships begin in the Exploration and Production (E&P) phase. E&P companies, including the dominant state-owned Ecopetrol, International Oil Companies (IOCs), and independent players, extract crude oil and natural gas. The primary commercial relationship at this stage is the sale of raw hydrocarbons. Ecopetrol, being integrated, often transfers crude oil directly to its refining segment or natural gas to its processing units. However, independent E&P companies and IOCs sell their production, often under long-term contracts, to midstream players or directly to Ecopetrol for aggregation and further transportation/processing. These sales can be based on international benchmarks (like Brent crude) for oil, adjusted for quality and transportation costs, and on regulated or negotiated prices for natural gas, depending on the contract type and buyer.

Moving to the Midstream segment for hydrocarbons, specialized companies, including a significant portion owned or operated by Ecopetrol, provide transportation and storage services. E&P companies, refining companies, and sometimes large industrial consumers contract for the use of pipelines, terminals, and storage facilities. The commercial relationship here is service-based: the midstream operator charges tariffs (often regulated) for transporting specified volumes of crude oil, natural gas, or refined products over a defined period or distance. Long-term capacity reservation contracts are common to ensure stable revenue for infrastructure operators and guaranteed transport for producers and refiners.

In the Downstream hydrocarbon segment, refining companies (predominantly Ecopetrol) purchase crude oil from E&P players (including their own upstream division and others) and process it into various fuels and petrochemicals. The commercial relationship is a bulk purchase of feedstock. Once refined, these products (gasoline, diesel, jet fuel, etc.) are sold to large-scale distributors and commercializers like Organización Terpel and Biomax. These are typically wholesale transactions, often under supply agreements that specify volumes, delivery points, and pricing formulas linked to international refined product benchmarks.

For the electricity sector, the value chain starts with Generation. Power generation companies (including hydro, thermal, solar, and wind operators like Celsia, EPM's generation arm, and Tebsa) produce electricity. They sell this electricity primarily through two main types of commercial relationships: long-term Power Purchase Agreements (PPAs) and sales in the Wholesale Energy Market (Mercado de Energía Mayorista - MEM). PPAs are bilateral contracts, often for several years, between generators and large consumers or commercialization companies, providing price and volume stability. In the MEM, generators offer electricity on a spot basis, and commercializers and large consumers purchase it to meet real-time demand. The MEM price fluctuates based on supply, demand, hydrological conditions (for hydro power), and fuel costs (for thermal plants). Generators also participate in the reliability charge mechanism, receiving payments for making capacity available to ensure grid stability, a form of commercial relationship with the system operator managed through regulated auctions.

From generation, electricity moves to the Transmission segment, dominated by companies like ISA. Transmission companies provide the service of transporting high-voltage electricity from generation plants to regional substations. Their commercial relationship is primarily with generators and distribution companies, and sometimes large consumers, based on regulated tariffs for using the national transmission grid. These tariffs are set by the regulatory authority (CREG) and are based on the cost of building, operating, and maintaining the transmission infrastructure.

The next step is Distribution, handled by companies like EPM, Air-e, and Afinia. Distribution companies take high-voltage power from the transmission grid and transform and distribute it through medium and low-voltage networks to homes, businesses, and industries within their franchised service territories. Their commercial relationship is twofold: they pay transmission companies for bulk power delivery and charge end consumers for the electricity delivered and the use of the distribution network. The charges to end consumers are regulated tariffs set by CREG, which include components for generation, transmission, distribution, commercialization, and losses.

Finally, Commercialization companies (often integrated with distribution companies like EPM, Air-e, Afinia, but also including specialized retailers) are the interface with the end consumer. They purchase electricity from generators (via PPAs or the MEM) and sell it to residential, commercial, and industrial users. The commercial relationship is a retail energy supply contract. For regulated users (most residential and small commercial), the price components are set by regulation. For non-regulated users (large industrial and commercial), prices are negotiated, offering more flexibility in contract terms. Commercializers are responsible for billing, collection, and customer service. In the hydrocarbon downstream, commercialization is also the final step, where companies like Terpel sell fuels and natural gas directly to vehicles, homes, and businesses, primarily through retail networks (service stations) and direct supply contracts.

Cross-cutting commercial relationships include the supply of fuels to thermal power plants (purchasing natural gas, coal, or liquid fuels from producers or traders), and the provision of various services like maintenance, engineering, technology, and financial services across all segments of the value chain.

Products and Services Exchanged

Along the energy value chain in Colombia, a diverse range of products and services are exchanged at each step, forming the basis of the commercial interactions.

In the Exploration and Production (E&P) stage, the primary products exchanged are crude oil of various grades and raw natural gas. These are the raw materials extracted from the earth. Services exchanged at this stage include specialized technical services like geological surveys, seismic testing, drilling services, well completion services, and reservoir engineering provided by service companies to E&P operators.

In the Midstream (Hydrocarbons) segment, the main service is transportation of crude oil, natural gas, and refined products via pipelines, trucks, and tankers. This involves the physical movement of hydrocarbons from production fields or import terminals to refineries, processing plants, or distribution hubs. Another key service is storage of these products in tanks or underground facilities. Basic processing services, like gas conditioning (removing impurities) to meet pipeline specifications, are also exchanged. The product being moved is the hydrocarbon itself, but the commercial exchange is for the transportation and storage service.

In the Transmission (Electricity) segment, the core service is the bulk transmission of high-voltage electricity from generation hubs to major load centers or distribution substations. This service ensures the reliable and efficient long-distance movement of power across the national grid. The product being transmitted is electrical energy (measured in kWh or MWh), but the commercial transaction is for the transmission service.

In the Downstream (Hydrocarbons) segment, the main products are refined petroleum products such as gasoline, diesel fuel, jet fuel, LPG, fuel oil, and asphalt, produced from crude oil. Petrochemical products, used as building blocks for plastics and other chemicals, are also exchanged here. For natural gas, processed natural gas (meeting quality standards for distribution and use) and Natural Gas Liquids (NGLs) are the key products. Services include refining services and gas processing services.

In the Generation (Electricity) segment, the main product is electrical energy itself, produced from various sources (water, fossil fuels, sun, wind). Generators also effectively exchange firm energy obligations or capacity in mechanisms designed to ensure supply reliability, a service related to guaranteeing availability of power.

In the Distribution (Energy) segment (both hydrocarbons and electricity), the primary service is the local delivery of natural gas through pipelines or electricity through medium and low-voltage lines to the final consumer's premises. This involves managing the local network, maintaining infrastructure, and ensuring safe delivery. While the product (gas or electricity) is being delivered, the core commercial exchange covers the distribution service.

In the Commercialization (Energy) segment (hydrocarbons and electricity), the main product exchanged is the energy commodity itself (refined fuels, natural gas, electricity) sold at retail or wholesale levels to end consumers or large industrial clients. Alongside the energy product, commercialization companies provide essential customer services, including billing, meter reading, payment processing, customer inquiries, and contract management. For regulated customers, the energy is sold as a bundled product including generation, transmission, distribution, and commercialization costs. For non-regulated customers, the energy commodity price might be negotiated separately from the regulated network charges.

In summary, the value chain involves the exchange of raw resources, transportation and storage services, processed fuels and energy, delivery services, and associated customer care services.

Business Models

The energy industry in Colombia employs a variety of business models across its value chain, often influenced by regulatory frameworks, the nature of the asset, and market structure.

In the Exploration and Production (E&P) segment, the dominant business model is based on resource extraction and sales. Companies invest significant capital in exploration and drilling activities with the goal of discovering and producing hydrocarbons. Revenue is generated from the sale of extracted crude oil and natural gas to refiners, processors, or midstream operators. This model is characterized by high upfront capital expenditure, significant geological risk during exploration, and revenue tied to volatile global commodity prices (though gas prices might have specific contractual arrangements). Ecopetrol operates under this model, integrating it with subsequent stages. IOCs and independent E&P companies also follow this model, either selling to the integrated national player or for export/domestic market.

The Midstream (Hydrocarbons) business model is primarily based on tollgate or service provision. Companies build and operate essential infrastructure like pipelines, storage tanks, and terminals. Their revenue comes from charging fees or tariffs for the volume of product transported or stored. This model is typically less exposed to commodity price volatility than E&P or downstream refining, as revenue is volume or capacity-based. Tariffs for significant national infrastructure like main pipelines are often regulated to ensure fair access and pricing. Long-term contracts securing capacity are crucial for the financial stability of midstream operators.

The Transmission (Electricity) segment also operates under a regulated asset base or service provision model. Companies like ISA invest in and maintain high-voltage transmission lines and substations. Their revenue is derived from regulated tariffs approved by CREG. These tariffs are designed to cover the operational costs, maintenance, and a regulated return on the invested capital. This model is characterized by stable, predictable revenue streams, low market risk (as it's a regulated monopoly service), but high capital intensity and dependence on regulatory decisions for tariff adjustments and investment approval.

In the Downstream (Hydrocarbons) segment, the primary business model for refining is processing and margin capture. Refiners purchase crude oil and transform it into higher-value refined products. Their profitability (refining margin) depends on the difference between the cost of crude oil and the selling price of the refined products, minus operating costs. This margin is influenced by global supply/demand dynamics for both crude and products. Ecopetrol's refining arm operates under this model. For petrochemicals and gas processing, the model is similar, based on processing raw hydrocarbons into more valuable chemical or purified gas products.

The Generation (Electricity) segment utilizes several business models depending on the technology and market structure. Generators operate power plants and sell electricity. Business models include: * Merchant Generation: Selling electricity purely on the spot market (MEM), exposed to real-time price volatility. * Contracted Generation: Selling electricity under long-term PPAs, providing stable revenue streams and price certainty. * Capacity Market Model: Receiving payments for making generation capacity available, regardless of actual energy dispatched, enhancing revenue stability and grid reliability. Hydro generators often benefit from low operating costs once built, while thermal generators have variable fuel costs. Renewable generators (solar, wind) have high upfront costs but very low marginal operating costs, relying heavily on long-term PPAs or government incentives (like auctions for new capacity).

The Distribution (Energy) segment (both gas and electricity) operates under a regulated utility model. Companies are granted exclusive territories to build and maintain the local distribution network. Their revenue comes from regulated tariffs charged to consumers, designed to recover the costs of infrastructure, operations, maintenance, and a regulated return on investment. This model provides stable, regulated returns but requires significant ongoing investment in infrastructure and is subject to regulatory oversight on service quality and pricing.

The Commercialization (Energy) segment operates under a retail margin model. Commercializers buy energy (electricity from generators/MEM, fuels from refiners/importers, gas from producers/processors) at wholesale prices and sell it to end consumers at retail prices. For regulated consumers, the retail price components are set by regulation, and the commercializer earns a regulated margin. For non-regulated consumers, prices and contract terms are negotiated, allowing for potentially higher margins but also exposing the commercializer to market price risk if not effectively hedged. This model is customer-facing, requiring strong billing, collection, and customer service capabilities. Fuel commercializers like Terpel operate extensive retail networks (service stations) under franchise or ownership models, adding retail property management and associated product sales (convenience stores) to their business model.

Overall, the Colombian energy value chain features a mix of integrated business models (like Ecopetrol's upstream-to-downstream presence), regulated monopolies (transmission, distribution), service-based models (midstream transport), and market-exposed models (E&P, refining, merchant generation, non-regulated commercialization).

Bottlenecks and Challenges

Despite its established energy sector, the Colombian energy value chain faces several significant bottlenecks and challenges that impact efficiency, reliability, investment, and future development.

A major bottleneck in the Hydrocarbon sector is the maturity of existing reserves and the challenge of replacing reserves through new exploration. While Ecopetrol dominates production, declining reserves necessitate continuous exploration efforts. Delays or reduced success in exploration, potentially exacerbated by shifts in government policy or social and environmental concerns, can threaten future supply stability, impacting both domestic consumption and export revenues. The decision against further hydraulic fracturing pilot projects, mentioned in the context, highlights the influence of non-technical factors on E&P activity.

Another significant challenge, particularly in the Midstream hydrocarbon sector, is infrastructure security and capacity. Pipelines are vulnerable to attacks, theft (illegal tapping), and environmental risks, leading to operational disruptions, volume losses, and increased security costs. While Ecopetrol transports over 1.1 million bpd, maintaining and expanding this network to meet future needs requires substantial investment and faces social and environmental challenges in securing land rights and permits.

For the Electricity sector, a key challenge lies in transmission infrastructure limitations and delays. While ISA operates the high-voltage grid, connecting new, often remotely located, renewable energy projects (solar and wind, particularly in the Caribbean region where resources are abundant) to the national grid faces significant delays due to complex permitting processes, social opposition, and technical integration challenges. These transmission bottlenecks hinder the evacuation of generated power, slowing down the energy transition and potentially leading to curtailment of renewable output.

In Distribution, especially in certain regions like the Caribbean coast served by Air-e and Afinia, significant challenges include high technical and non-technical losses. Technical losses are due to the state of the infrastructure, while non-technical losses (illegal connections, fraud) significantly impact the financial viability of distribution companies and necessitate higher tariffs for paying customers. Addressing these losses requires substantial investment in network upgrades and robust anti-fraud measures, often in challenging socioeconomic environments.

Across multiple segments, regulatory uncertainty and complexity pose a significant challenge. Frequent changes or unclear interpretations of regulations related to tariffs, licensing, environmental permits, and market rules can deter investment. The balance between ensuring affordable energy for consumers and providing sufficient return for companies to invest in infrastructure and maintenance is a constant tension within the regulated segments (Transmission, Distribution, regulated Commercialization).

Social and environmental opposition represents a growing challenge across the value chain. New E&P projects, pipeline routes, transmission lines, and even renewable energy farms can face resistance from local communities concerned about environmental impacts, land use, and benefit sharing. This opposition can lead to project delays, increased costs, and even cancellation.

The ongoing energy transition presents both opportunities and challenges. While there is a push towards incorporating more renewable energy, integrating variable renewable sources (solar, wind) into a grid historically reliant on hydro and thermal power requires significant investment in grid modernization, flexibility (storage, demand response), and market design adjustments. Managing the phase-out or transition of fossil fuel assets also presents economic and social challenges for companies like Ecopetrol and communities dependent on these activities.

Finally, access to capital for large-scale infrastructure projects and new energy technologies remains a challenge. While major players like Ecopetrol and EPM have significant financial capacity, smaller players or new ventures may face difficulties securing financing, especially given perceived regulatory or project risks.

In summary, the Colombian energy value chain grapples with challenges related to resource depletion, infrastructure security and capacity, regulatory hurdles, social license, and the complex transition to a cleaner energy future.

References

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