Applicable Regulatory Regime for Oil Transportation by Pipeline in Colombia

By Alvaro Sabbagh

Posted: 6th February 2018 09:06

The legal framework for crude oil transportation by pipelines in Colombia dates from 1953, the year in which the Petroleum Code was issued in Decree 1056/1953. Since then, there have been no major legal modifications, with the exception of certain regulations issued by the Ministry of Mines and Energy (MME) in 2010 and 2014, which mainly aim to specify certain rules for the transportation activity itself, and to the tariff determinations.
 
The Petroleum Code clearly establishes that the transportation of crude oil is an activity of public convenience and a priority interest to the Colombian nation. As such, this activity is considered to be a public utility that must be exercised according to the rules that regulate this class of services.
 
One of the most important characteristics to be considered in the applicable regulations to pipeline transportation is the distinction between those pipelines that are of “private use” and those that are of “public use”.
 
Private use pipelines are those built and benefited by E&P companies or oil refineries, for their exclusive use and that of their affiliates. On the contrary, public use pipelines are those destined to the provision of the public service of oil transportation and, in general, all pipelines that cannot be characterised as of private use.
 
The distinction is especially relevant when determining the access rights and priorities to pipelines. For public use pipes, priority is granted to those shippers who have long or mid-term contracted capacity (contracted capacity), followed by shippers with “spot” contracts. In private use systems the first order is granted, logically, to the owners of the system (owner’s capacity) and its affiliates, and the excess capacity of the pipeline shall be used to satisfy transportation requirements from third parties.
 
It is important to clarify that in both public and private use pipelines, the Colombian nation has a priority right for transportation of its crude oil, accounting up to 20% of the design capacity of the pipeline.
 
Access to Pipelines and Modernisation Efforts to Develop Transportation Infrastructure
 
Based on the antiquity of the Petroleum Code (1953) and the obsolescence of some of its provisions, the MME issued specific regulations, the most recent being Resolutions 72145 and 72146 of 2014, which in general terms arise from the need for the oil industry to expand its existing infrastructure for the transportation of crude oil.
 
In such way, these regulations are intended to encourage carriers to build new pipelines and expand existing ones, and as well to improve the conditions of access for shippers. The interests of shippers and carriers, however, are not always easy to align.
 
Some of the innovations of the referred regulations, are that it introduced concepts such as “released capacity”, and provided the existence of a “secondary market of capacity” in pipelines, which are clear mechanisms to encourage investment in pipelines, in particular, to encourage the execution of ship or pay type transportation agreements by shippers which enable financing for construction or expansion of pipelines.
 
The released capacity is the portion of contracted capacity or owner capacity (the latter applies only in the case of private use pipelines), which shippers or owners are willing to assign to the secondary market. This implies that from 2014, it is expressly permitted that those shippers with contracted capacity or owner’s capacity, who are not going to use the full capacity to which they are entitled, are allowed to assign it to other agents under independent commercial agreements, which can be for a complete or partial assignment of the capacity.
 
As it can be observed, all these regulations are intended to provide risk mitigation mechanisms for those shippers who are bound under long-term or mid-term transport contracts under ship or pay mode, that is, contracts in which the payment of the tariff is mandatory, independently of the use of the transportation service by the shipper. This, since the shipper is allowed to market its unused capacity, generating revenues that can be used to comply with its payment obligations under the ship or pay contract.
 
The released capacity on which no assignment agreement was entered into, will become part of the excess capacity of the pipeline, and it will be available for the carrier to grant access to third parties and other shippers in accordance with the principle of free access to oil pipelines.
 
According to the abovementioned, available capacity in the pipelines will be allocated in the following terms:
  1. Capacity for priority rights of the Colombian nation.
  2. Contracted capacity by shippers.
  3. Excess capacity.
  1. Capacity for priority rights of the Colombian nation.
  2. Owner’s capacity.
  3. Contracted capacity by other shippers.
  4. Excess capacity.
 
Transportation Tariffs or Rates:
 
The determination of transportation tariffs have traditionally been determined taking into account the following items:
  1. The amortization of the capital invested in the construction.
  2. The costs and expenses administration and exploitation.
  3. An equitable profit for the carrier, which shall be agreed with the Government, on the basis of the profits of pipeline companies in other countries.
 
Based on the Petroleum Code, transportation tariffs are determined for “tariff periods” of four years, after which tariffs are reviewed and adjusted considering the three factors outlined above. Tariff periods apply to all pipelines on a uniform matter, and the first period began on 1 July 2011 (until 30 June 2015), whilst the second period goes from 1 July 2015 and will be in force until 30 June 2019.
 
Since the issuance of the Petroleum Code in 1953, the Colombian government – by means of the MME – has approved transportation rates for pipelines. Furthermore, regulations provide that no pipeline would be allowed to initiate operations without the tariff approval given by the government, which has traditionally be reflected on a very strict tariff regime, which has certainly not favoured the construction of new or expanded pipeline infrastructure.
 
Based on these difficulties, Resolution 72146 of 2014 classified pipelines in three types of segments: (i) existing segments; (ii) new segments; and (iii) expended segments. Each type of segments has particular rules in order to determine the applicable tariff, and in the case of new and expanded segments, regulations try to encourage their construction by means of allowing the carrier and shippers to freely agree the applicable tariff, for a single term of 10 years counted as from the date indicated in the administrative act of commencement of operations.
 
The above clearly favours the possibilities of financing new and expanded pipelines, now that the transportation tariff is the main source of payment of such financial obligations by the carrier, and the possibility for agreeing tariffs with shippers is opened for the referred 10 year period without having to apply the tariff formulas provided under current regulations.

Alvaro Sabbagh, a bachelor in Law graduated from the University of the Basque Country (2008) and Lawyer graduated from the Pontificia Universidad Javeriana (2009). He has a specialization in Commercial Law from the same university (2010), a specialization in Mining Energy Law from the Externado University (2012), and a specialization in Taxation from the Universidad de los Andes (2014).

Associate Director of the practice areas Infrastructure, Mines and Petróleos.Member of: Godoy & Hoyos Abogados

Álvaro can be contacted on +6348533 Ext: 114 or by email at asabbagh@godoyhoyos.com 

 

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