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| 2/12/2009 12:00:00 AM

Glencore-Ecopetrol: A deal in jeopardy

The expansion of the Cartagena refinery, the most important oil industry infrastructure project of the country, at a cost of three billion dollars, has got off track.

On January 28th, taking advantage of his trip to Switzerland (where he attended the World Economic Forum at Davos), President Álvaro Uribe met with the heads of the multinational Glencore. In contrast to other occasions in which Uribe was effusive with foreign investors, this time he was upset.

“Investors cannot defraud Colombia,” he said. “We have been very clear about demanding that they begin work at the refinery in Cartagena. This cannot continue with delay upon delay.”

These words said by the president are yet another chapter in the story of tensions between the Colombian government and the Swiss multinational about a crucial infrastructure project for the country: the modernization of the Cartagena refinery. The project seeks to produce 150,000 barrels of petroleum products each day, double what it currently produces. The new refinery should be ready in 2011.

Nevertheless, at the rate things are going, that will not happen. Glencore has not begun work, as it claims difficulties in getting credit in the international market. This was like a bucket of cold water for the oil sector and for the government. Even though the reality that the world has changed in the past few months should be recognized, without anyone being able to prevent it, there are those who are beginning to speak of a breach of contract by Glencore.

The situation is very delicate and was an object of an exhaustive analysis by the board of directors of Ecopetrol last Friday, when there was a firm position to demand the fulfillment of the contract.

There are too many doubts about the future of this project, which is very important for the country. It is not only about making the refinery more efficient, but also improving the quality of the fuels sold in Colombia. In addition, the government is in a hurry this year to push projects that produce jobs. At the Casa de Nariño presidential palace they are concerned that in Cartagena, a city with enormous problems to solve, will not be able to generate more than 5,000 jobs related to the modernization of the refinery.

The outlook is not very promising. Glencore could be correct in its arguments. The refinery is a business project and that is why the numbers have to match up. Otherwise, then there are not sufficient reasons to accelerate the project. The uncertainty about the financing is a reality at this time.

But the Colombian government and the country also have their reasons. A modern refinery that produces more and better petroleum derivatives is necessary even more so if the future of the most important national comapany, Ecopetrol, depends on it. The final decision will be made on February 16th during a “summit” between the two companies in Bogotá. Glencore president Ivan Glasenberg will come to Colombia to state his arguments in person.

What are the paths to a solution? Some have proposed that they turn once more to Petrobras. This could be a good solution. The Brazilian firm did its part when it tried to negotiate with Glencore and really had made some progress. Thus, they won’t have to start from scratch.

Here the problem is of a legal nature, because Glencore cannot be dismissed through the back door and the contract given to Petrobras. It is very likely that it will be necessary to find a way to allow for the participation of Petrobras.

The other option is that Ecopetrol develops the project on its own. That is what has been proposed by Minister of Mines Hernán Martínez. This is a good option. The company has financial muscle and an ambitious investment plan which could give it momentum to meet this challenge. But that means re-purchasing the 51 percent that
 
Glencore has. In this way, the Swiss firm would have struck a great deal. Almost without lifting a finger, they would have gained an important return from its investment in 2006.
The fact is that Glencore’s situation seems more complicated that what is believed. The fall in the price of commodities has affected this Swiss company, one of the largest companies in the world. In December there were layoffs in their operations in Bolivia and in Peru. In Paraguay, according to the daily ABC Digitial, they are not fulfilling their fuel supplies.

Mix-up from the past

Since the beginning, this deal regarding the Cartagena refinery was surrounded by questions. Glencore bet hard to win the most important hydrocarbons project in the country. It was so interested, that in 2006, it beat Petrobras, another market giant. During an auction, it offered 630 million dollars to acquire 51 percent of the refinery shares. With that offer it won this big prize.

Although at first there was a lot of optimism, questions began to be raised after the dust settled. The first question was how Glencore, a mining company, would modernize an oil refinery. It was evident that it did not have experience in the sector. That is why there was speculation that Ecopetrol was not very pleased with its new partner.

But the controversy grew when it was learned that Glencore had begun to negotiate with Petrobras, so that the Brazilian firm would undertake the construction. It left a very bitter taste in their mouth. Glencore had won the project and wanted “to rent it out” to the company that it defeated during the auction. It is a valid way of doing business. If you don’t have expertise, then you pay. But that idea was not very well-liked in the Colombian oil world, because the modernization project had to start immediately in order to guarantee that it would be ready by the deadline. That attempt with Petrobras did not succeed and the bad environment got worse.

But that was not the only tension. Last year, the issue was gas subsidies. The national government is obliged to pay Ecopetrol and the Cartagena refinery the value of the gas subsidies. Glencore expected that those payments would arrive each month. However, the government did not pay a single peso during the whole year and only paid it in January 2009. This amounted to more than 360 million dollars. Now Glencore argues that that uncertainty about the payment of the subsidy is putting in doubt the finances of the refinery.

Without a doubt, the last straw was the request by Glencore to Ecopetrol to delay several investments of the project, because today getting financing in the international markets is very difficult. It was then that Uribe stated that the modernization of the Cartagena refinery could not be reversed. That issue is important. At center stage are the interests of Ecopetrol, the largest company in the country that today has over 500,000 Colombian co-owners thanks to its successful stock offer.

Definitely this could be the biggest backlash that the international financial crisis will have on Colombia. The problem is that it might not be the last and many other infrastructure projects could be left in limbo.


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