Cablegate: Biofuels in Colombia

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FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 0464
INFO RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS BOGOTA 010235

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PASS TO FAITH CORNIELLE WHA/EPSC, JEFFERY IZZO EB/ESC/IECS

E.O. 12958: N/A
TAGS: ENRG PREL ECON PGOV CO
SUBJECT: BIOFUELS IN COLOMBIA

REF: SECSTATE 164558

1. Summary: To conserve domestic petroleum resources and
provide a boost to Colombia's sugar sector, Colombian law
mandates that 10/90 ethanol be made available for purchase in
Colombia's five largest cities by the end of 2006, and
throughout the country by 2012. Colombia's sugar industry
produces nearly 100 million gallons of ethanol per year, and
plans to double this amount by the end of 2008. Currently,
domestic production of ethanol slightly exceeds demand, while
the industry's planned expansion should allow sufficient
supply to convert all gasoline sales in Colombia to 10
percent ethanol by 2012. It is unclear how much excess
capacity will be available for export as ethanol capacity is
limited given the relative profitability of raw sugar. Other
Colombian producers are experimenting with biodiesel created
from yucca and palm oil for domestic use or export to the
United States. Colombia's investment climate is improving,
as new laws, regulations, and tax incentives are making
ethanol production an economically viable energy alternative.
Colombia's geography and poor physical infrastructure are
limiting factors in the efficient distribution of fuel,
including ethanol. End Summary.

Colombia Law Requires Ethanol Use

2. As a means to extend Colombia's status as a net oil
exporter, and to support its well developed sugar industry,
Law 693 of September 2001 requires the Colombian government
to develop a comprehensive biofuels program. Law 693
requires gasoline providers in cities with populations
greater than 500,000 to offer a 10/90 ethanol mix by the end
of 2006, with a gradual phase-in of the requirements to
smaller cities and rural areas by 2012. The GOC's ethanol
roll-out began in 2005 in the southwest and Colombia's coffee
region in late 2005, and now includes the departments of
Cundinamarca, Meta, Casanare, and Boyaca. Bogota joined the
program in February 2006, while Medellin, Bucaramanga,
Cartagena, Cucuta, and Pereira will begin offering 10/90 by
the end of 2006.

Big Sugar in Colombia

3. Colombia's sugar growers produce 2.4 million tons of
sugar per year. The Cauca River Valley is home to 197,000
hectares of sugarcane and 14 sugar mills. The mills are
technologically advanced, and electrically self-sufficient
via secondary co-generation, which allow sugar mills the
opportunity to sell excess power to the local grid.
Sugarcane burning is generally permitted. Mechanical
harvesting is not yet a common practice in Colombia. The
industry employs 27,000 people directly and supports 141,000
workers indirectly through associated relationships. While
the industry exports 400,000 tons of sugar a year, ethanol
exports have been limited due to domestic consumption
requirements and delays in bringing new ethanol plants on
line. It is unclear if Colombia's sugar industry is prepared
to alter its raw sugar to ethanol production ratio to
accommodate ethanol exports, especially given the increased
sugar quota (75,000 tons) that producers plan to fill under
the free trade agreement (FTA) with the U.S. Colombian
ethanol is currently allowed to enter the U.S. duty-free
under the Andean Trade Preference and Drug Eradication Act
(ATPDEA), and duty-free treatment will continue for ethanol
with the FTA.

Other Sources of Biofuel

4. In addition to ethanol from sugarcane, Colombian
agricultural producers are evaluating the possibility of
supplying ethanol made from yucca root. Two plants are
currently under construction with a combined capacity of
32,000 gallons, and should be on line in mid-2007. In
addition to ethanol, the GOC is also promoting the use of
biodiesel, with most attention focused on African Palm oil.
Although Colombia currently has no domestic capacity to
produce diesel fuel from palm oil, the GOC hopes to begin
production by 2008.

Tax Incentives for Biofuels

5. Ethanol is exempt from federal and state taxes in
Colombia. In addition, in 2006 the GOC provided over USD 40
million in tax incentives for businesses involved in biofuel
production. In 2007, in addition to tax incentives, the GOC
has earmarked USD 30 million USD for special grants to
promote locating ethanol plants in less developed areas (such
as the Pacific Coast).

140,000 Vehicles Run on Natural Gas

6. The Colombian government promotes natural gas automobile,
bus, and taxi fleets. According to GOC statistics, nearly
140,000 vehicles use natural gas, including the new Bus Rapid
Transit (BRT) systems found in major cities throughout
Colombia. Natural gas fueling stations are now common in
larger cities, and over 4,000 gasoline to natural gas
conversions are made to vehicles each month.

Investment Climate, Energy Infrastructure, and Industrial
Infrastructure

7. The Uribe administration stepped up the economic
liberalization begun in the early 1990's and is committed to
an open investment regime. There are few general
restrictions on land or other property ownership, and the
Colombian constitution guarantees the rights of private
property holders. Colombia is privatizing its state-owned
natural gas distribution company and some of its electrical
power and transmission companies. American energy companies
such as ExxonMobil, Occidental Oil and Drummond Coal have
multi-million dollar investments in the exploration and
extraction of Colombian energy. With the improving security
situation, many more American companies are exploring
investment opportunities in the Colombian energy market.

8. Colombia generates two thirds of its electrical power from
hydro-electric sources. The other third is from
thermo-electric sources such as gas or coal . Colombia is
actively trying to increase its thermo-electric capacity by
50 percent by 2010 due to continuing drought issues that have
resulted in electrical rationing or shortages in many parts
of Colombia.

9. Colombia uses three types of gasoline for fuel
consumption; regular, diesel, and a special high octane fuel
for certain trucks. Regular gas is used by 46 percent of all
motor vehicles, diesel by 37 percent, and special high octane
gas by 4 percent.

10. Gasoline for domestic consumption in Colombia is refined
by Ecopetrol at refineries in Cartagena and Barrancaberjama
along with very small refineries (less than 2000 barrels a
day) in Orito, Putumayo and in Tibu, Norte de Santander.
Energy is currently exported out of Covenas, Barranquilla,
Cartagena and Santa Marta, all on the Atlantic/Caribbean
coast. Despite two major ports (Buenaventura and Tumaco) on
the Pacific coast, no energy products are exported from the
Pacific. The biggest challenge to energy exportation and
domestic distribution is the complicated geography of
Colombia and lack of suitable land transport infrastructure.
Energy is currently being transported via pipelines, one-lane
highways, or in the case of coal, railroads.

11. Colombia's four major industrial cities include Bogota,
Barranquilla, Cali, and Medellin. Manufactured goods include
clothing and textiles, leather products, chemicals and
petrochemicals, processed food and beverages, cement and
steel products. Domestic industrial infrastructure is
adequate for the further development of biofuel alternatives.
DRUCKER

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