Capitalising on Colombia’s recent natural resource boom

Pacific Infrastructure has recognised the economic value of greater control over midstream logistics in Colombia’s oil and gas sector, and is leveraging opportunities to invest through the country’s growth

 

Pacific Infrastructure was born in 2008 with a clear objective in mind – to ascertain the growth opportunities of investing in Colombian infrastructure – particularly in the oil and gas sector.

The timing of this venture coincided with a key juncture in the country’s economic and political environment. Following decades of unrest, eroded security, and lacking investor confidence, Colombia has been able to emerge strong
within the region.

In 2009 it was catalogued as a CIVET country; an acronym attributed to the Economist Intelligence Unit used to describe promising emerging markets, and in 2011 its credit rating on sovereign debt was raised to Investment Grade by Standard and Poor’s, Moody’s Investors Service, and Fitch Ratings.

Exploration following results
The favourable combination of these variables is easily observed in FDI statistics, where Colombia’s growth was recorded from $2.2bn in 2002, to $15.8bn in 2012. A significant percentage of these funds have been directed at oil and mining, where at times, it was the recipient of over 80 percent of total inflows.

The development of Puerto Bahía and Olecar will capitalise on the robust outlook for crude oil production in Colombia

With these figures it is no surprise to see a boom in independent exploration and production activity, which can be best depicted by Pacific Rubiales Energy (TSX:PRE). PRE is currently the largest independent oil and gas exploration and production company in Colombia, growing from 24,800 boepd in 2007 to 247,000 boepd in 2012 in average gross field production, or roughly 30 percent of national output. National production as a whole has grown from an average of 531,000 bpd in 2007, to 1m boepd in May 2013. This number is expected to continue to grow as a result of the significant increase in exploration activity.

PRE’s production assets are mainly located in the central and south-eastern parts of Colombia, and like all other exploration and production players in the market, PRE relies on the existing pipeline network for mid and downstream logistics.

The network’s capacity will be materially enhanced with the construction of the Bicentennial pipeline, a $4.2bn initiative that will add a projected transportation capacity of 450,000 bbl/d once fully executed. All major lines, including the Bicentennial pipeline, converge at the Port of Coveñas on the Caribbean coast of Colombia, which currently handles 95 percent of all crude oil exports.

Pole position
Placed at the crossroads of this phenomenon, Pacific Infrastructure recognises the financial value and strategic importance of greater control over oil and gas midstream logistics, and the importance of diversification from the country’s dependence on a single large-scale export terminal.

As of August this year, Pacific Infrastructure’s shareholders include PRE with 56.9 percent, and PRE founding partners and other shareholders with minority positions. It currently has two main assets under development via wholly owned subsidiaries:

Sociedad Portuaria Puerto Bahía S.A. (Puerto Bahía)
Large-scale liquids import-export terminal on the bay of Cartagena, designed for an initial storage capacity of 3.3 million bbl of crude oil and hydrocarbon products. The port will have two berthing positions capable of handling Post Panamax and Suezmax class vessels of up to 150,000 DWT.

It will also include facilities for the loading and unloading of tanker trucks and barge convoys. The total facility comprises 140 hectares, which will also include a general and break bulk cargo handling area. The port has received Free Trade Zone status from the Colombian National Tax and Customs Authority, allowing for significant tax benefits and customs duties exemptions.

Oleoducto del Caribe – Olecar S.A.S
A 130km, 30 inch diameter, crude oil pipeline that will connect Puerto Bahía’s facilities with Colombia’s principal crude export terminal in Coveñas. It will also include a bi-directional connection between Puerto Bahía and Refinería de Cartagena – Reficar (Colombia’s second-largest refinery, currently undergoing a $6.5bn expansion). These projects represent a combined total capex of approximately $900m, and are being funded via project finance. Both initiatives are scheduled to be in operation during the second half of 2014.

The development of Puerto Bahía and Olecar will capitalise on the robust outlook for crude oil production in Colombia, and the need for better facilities in transportation and export.

Puerto Bahía is being structured as a large-scale facility available for public use which will be the first of its kind in Colombia. Nowhere else in the country can a customer lease storage capacity for exclusive use and have control over its logistics and commercialisation process to such an extent. The liquids facility will be operated and maintained by Oiltanking International, a leading operator of port terminals currently present in 73 terminals across 23 countries. Oiltanking’s participation will ensure the efficient allocation of port resources, as well as the application of world-class capabilities for terminal safety and reliability.

The value proposition presented by Puerto Bahía is not limited to its design. It has a privileged location in the bay of Cartagena, which is already one of the largest trade hubs in Latin America. Cartagena is in a protected bay area with a natural water depth that eliminates the need for dredging, and also ensures minimal tide impact inside the maritime operations area. Puerto Bahía is at close proximity to the industrial/commercial hub in the city of Cartagena, major national highways, and will also have fluvial access to the Magdalena river (main river system in Colombia) via Canal del Dique, adjacent to the port’s facilities.

The competitive advantages that Puerto Bahía presents have been evident in its commercialisation strategy. In addition to volume commitments from Pacific Rubiales, several international crude oil traders have also expressed interest in leasing storage capacity.

There has also been interest from smaller E&P players who wish to take advantage of tanker truck and barge handling facilities. At the current rate of negotiations, the company expects that Puerto Bahía will have 100 percent of its liquids storage capacity under contract by the time of its operations start date. Never have the economics of our business model and the size of the opportunity been more evident, than with the recent equity transaction closed with the International Finance Corporation – IFC, a member of the World Bank Group, and two funds managed by the IFC Asset Management Company, the IFC African, Latin American and Caribbean Fund, L.P, and the IFC Global Infrastructure Fund, L.P. The agreement signed in July 31st, 2013 is for the investment of $150m in equity of Pacific Infrastructure, which will be used for the development of Puerto Bahía and Olecar.

This is IFC’s largest-ever equity investment in Colombia’s infrastructure, and globally it represents IFC’s largest equity investment in support of a new infrastructure project. IFC’s investment completes the required equity commitment for the structuring of the Project Finance package for Puerto Bahía and Olecar. The company has signed a mandate to finance the indebtedness of both projects with Itau BBA, to cover the debt component of the project financing package.

Pacific Infrastructure has gained important momentum with the development of its projects. The short-term outlook is entirely focused on completing Puerto Bahía and Olecar. In the medium to long term, the company seeks to specialise in the development and administration of other port, storage, and transportation assets, initially in Colombia but also looking abroad for opportunities.

We receive World Finance’s award to Pacific Infrastructure/Puerto Bahía, as Best Oil and Gas Project in Latin America 2013 with great honour. It is recognition to our team’s work in executing this project, and to the sponsors and investors who continue to believe in our company. This award is for them.

Colombia's oil and gas transportation and export infrastructure
Colombia’s oil and gas transportation and export infrastructure