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OUR CONTEXT

Economic Context

In late 2019, worldwide economic activity showed signs of stabilizing, due to better prospects in the manufacturing sector and for world trade. The international context was favorable, because the first phase of the trade agreement between the United States and China had been signed and the likelihood of a no-deal Brexit had receded because Boris Johnson had been elected Prime Minister in the United Kingdom. However, as a result of the COVID-19 pandemic, the global economy was faced with adverse conditions in 2020 when it became clear that there would be substantial downturns in the principal world economies, due to the measures that were being adopted to stop the virus spreading. The international environment was marked by uncertainty as to how the pandemic would evolve, and this resulted in increased market volatility and a generalized strengthening of the dollar, because of an increased aversion to risk, in view of all the uncertainty.

The US economy contracted by 3.5 per cent in 2020. On the one hand, household consumption continued to grow, as it had been doing year on year, house sales continued to boom, manufacturing was constantly strengthening, and rising share prices reflected confidence in the market. At the same time, however, the employment market was struggling to cope with millions of unemployed people and a resurgent pandemic was hurting consumers, service providers and economic activity. As far as US monetary policy was concerned, the Federal Reserve continued to cut its intervention rate to a range of 0%-0.25% in response to the risks that the pandemic posed for the country’s economy. Additionally, packages were launched from the time when compulsory lockdowns were enforced, containing stimuli to support the US economy and prevent a hardening of financial conditions.

The average international price of Brent crude fell by 35 per cent in 2020 against the average for 2019, a reflection of the fears associated with the pandemic and the impact it would have on the worldwide demand for oil.

At the same time, the first few months of 2020 saw the effects of the price war between Saudi Arabia and Russia which resulted, when no agreement was reached at OPEC meetings, in these countries suspending the agreements to cut crude production, and this, in turn, saw prices plummet to around 20 dollars per barrel.

Against this international background, the Colombian peso averaged 3,690 to the dollar, which represented a devaluation of 13 per cent against the average for 2019. The Representative Market Exchange Rate (TRM) on March 20, 2020 was COP 4,153.91, the highest peso-dollar exchange rate in history. This behavior was set against a background of uncertainty caused by the pandemic, the deceleration in the world economy, investors’ reduced appetite for risk and the consequent fall in oil prices, and the result was historic maxima being recorded for depreciation of the Colombian peso, given the increased demand for safe assets.

In line with the above, the Colombian economy contracted by seven per cent in 2020, principally due to the decline in domestic demand, construction, entertainment activities, and exports. These latter were affected by reduced growth by our principal trading partners, contraction in coal and oil production, and plummeting commodities prices in general.

The twelve-month inflation figure for 2020 was 1.61 per cent, below the Banco de la República target range of 2 to 4 per cent. This can be explained, particularly, by the drop in domestic demand caused by the economic downturn and the lockdown measures imposed by the government. As far as monetary policy is concerned, Banco de la República cut the intervention rate seven times and this stood at 1.75 per cent at the year end, 250 down on the 2019 year-end rate. An expansionist policy that sets out to support economic recovery and domestic consumption.

In the fiscal sphere, public finances were affected in 2020 by both the fall in oil prices and the arrival of COVID-19 in the country. The measures adopted by the national government to flatten the contagion curve had a negative impact on the rhythm of production activities and, in turn, on the generation of tax revenues. The fall in collections and the increased expenditure deriving from the economic and social needs in the country were reflected in a big increase in public debt. In view of this, a decision was made to suspend the fiscal rule until 2022, so as to give the government more room to maneuver when dealing with the social and economic emergency.

Prospects for 2021

COVID-19, the world economy appears to be emerging from one of its deepest recessions and starting a moderate recovery. Although the recent approvals of vaccines have led to hopes of a radical change in how the pandemic is handled, the new waves and the new variants of the virus pose new challenges for recovery.

At the same time, countries are facing huge challenges in terms of public health, debt management and fiscal and monetary policy if they are to achieve a balance without hindering economic recovery. It will therefore be fundamental that difficult action is taken, with a view to creating conditions that will prevent yet more companies from folding while generating new investments, accompanied by structural changes that will provide debt holders and rating agencies with certainty that public coffers will be managed properly.

At local level, the start of the year will be noted for expectations that the national economy will begin to recover and that the National Vaccination Plan will be carried out, under which it is envisaged that 35 million Colombians will be vaccinated in 2021.

Another challenge facing the government during the year will be to implement policies aimed at improving the employment rate and making exports more dynamic, since these latter have been affected, among other things, by the biggest worldwide recession in history and the oil price war between Saudi Arabia and Russia. Despite all this, Colombia is still one of the region’s promising economies, and this is a view that is shared by the rating agencies that have maintained the country’s investment rating. Assuming that social lockdown measures are progressively lifted and that the numbers of people in work recovers to pre-pandemic levels, economic dynamics are expected to be boosted by private consumption in 2021. Construction is also expected to pick up, along with a reactivation of trade, transportation and hotels.

However, a number of external factors could affect the reactivation of the Colombian economy, such as high financial market volatility due to the over-valuation of assets, the repeated trade disputes between the major powers, and instability in raw materials prices.

As far as the average exchange rate is concerned, this is envisaged to be very close to COP 3,500, although it will not be exempt from periods of volatility caused by uncertainty on international markets. The 2021 year-end inflation figure is expected to be 2.8 per cent, close to the Banco de la República target of 3.0 per cent. If it is to achieve this goal, Banco de la República will probably have to increase the interest rate once during 2021, in order to continue to boost the economic recovery. As far as fiscal policy is concerned, there is a need for a tax reform in 2021, so as to increase fiscal revenue and to review the level of public expenditure in the country, especially in areas where there have been high levels of inflexibility in recent decades. This would serve the dual purpose of bringing the debt level down to sustainable levels in coming years and preserving the investment rating the country currently holds.

Sector context

Natural gas consumption in Colombia

The sectors with the highest consumption figures were non-regulated industrial, with a 45 per cent share of the market, thermoelectric with 26 per cent, regulated with 24 per cent, and VNG with 5 per cent. The thermoelectric sector was up by 23 per cent, due to increased thermal dispatches from the coast in the first half of 2020 because hydroelectric generation was lower, and this caused an increase in energy prices. .

Similarly, residential sector consumption rose by 1 per cent due to vegetation growth and penetration into new population sectors in recent years.

However, industrial sector and GNVC consumption were 10 and 22 per cent down, respectively, due to the spread of COVID-19 and the compulsory preventive lockdown measures adopted by the national government. A figure of 9.9 million regulated users was reached in 2020. 80 per cent of these users are in the interior, 17 per cent are on the coast, and the remaining 3 per cent in isolated areas. The number of users increased by 285,708 in the year from November 2019 to November 2020, a 3 per cent increase on the previous year.

Note: Source: Consumo de Gas Nacional-COGNOS Analytics and

November 2020 “Number of Regulated Subscribers Report” (Concentra).

Regulatory Context

CREG and the Ministry of Mines and Energy issued the following regulations during the lockdown caused by the COVID-19 pandemic, aimed at reducing the impact on final users.

Gas transportation

Modification of contractual conditions due to COVID-19

Modification of contractual conditions due to COVID-19. Because of the COVID-19 emergency, transitory measures were introduced in CREG Resolution 042 of 2020 to modify prices and quantities established in supply and transportation contracts by mutual agreement. Promigas and its affiliated transportation companies held negotiations aimed at achieving more flexible contractual conditions, with a view to protecting both remitters and companies financially and guaranteeing service continuity.

Consultation for modifying the discount rate for regulated activities

In Resolution 155 of September 2020, CREG published, for comment, the procedure for calculating the regulated discount rate for gas transportation and distribution, and for other activities in the electricity chain regulated by the Commission (WACC). Promigas and its affiliated companies continue to play an active role in discussing the percentage to be agreed on with the various entities involved in determining this, such as the Regulation Commission, the Ministry of Mines and Energy, and the Treasury Ministry.

Transportation rate methodology

In October 2020, the Commission issued draft CREG Resolution 160, which contains a new proposal for establishing the methodology for calculating the natural gas transportation tariff. This proposal retains the current price cap scheme and tariffs based on distance, but includes certain modifications, such as remuneration for investments in pesos. Promigas and its affiliated companies continue to play an active role in constructing the methodology with the various entities involved, such as the Regulation Commission and the Ministry of Mines and Energy. According to the CREG regulatory agenda for 2021, the definitive resolution is expected to be issued in the first half of the year.

Marketing the natural gas wholesale market.

CREG issued the definitive version of Resolution 185 in November. This adjusts the transportation capacity marketing process and promotes a wider dissemination of available capacity, swifter auction processes, and the possibility of signing shorter contracts, which are viewed as favorable for the transportation activity. The first marketing processes under these new rules will commence in the first half of 2021.

Remuneration for assets that have reached the end of their regulatory useful life.

Useful life processes continued in 2020 for assets belonging to Promigas and its transportation companies. CREG is expected to issue a Resolution in the first half of 2021 approving the corresponding costs of replacement to as new condition and keeping in operation for the following assets:

Promigas, useful life 2016
Loop La Mami-Bureche loop and two branch gas pipelines
Promigas, useful life 2017
13 branch gas pipelines
Promigas, useful life 2018
Loop Dibulla-Palomino loop, Palomino compressor,
Termoflores gas pipeline and 15 branch gas pipelines
Transoccidente, useful life 2016
Yumbo-Cali gas pipeline
Promioriente, useful life 2017
Bucaramanga-Payoa 8” gas pipeline ”.
Transmetano, useful life 2017
Sebastopol-Medellín gas pipeline.

Additionally, a request was made in December 2020 for administrative action to commence with respect to 11 Promigas assets that will reach the end of their useful life in 2021. These include the trunk gas pipelines from Jobo to Cartagena, the compressors at Sahagún station, the El Dique Canal and River Magdalena crossings, and five branch gas pipelines.

Natural gas supply plan de Gas Natural

UPME issued the definitive Natural Gas Supply Plan in a document entitled “Technical Study for the Natural Gas Supply Plan” in October 2020. This was taken on board by the Ministry of Mines and Energy in Resolution 40304 dated October 15, 2020. Similarly, the definitive bid documents were published on October 29 for selecting the Pacific Regasification Infrastructure investor, the award for which will be made in the first half of 2021. During this same period, CREG is expected to adjust certain regulatory aspects relating to execution of the Supply Plan projects and to define and approve the efficient value of investments in the Barranquilla-Ballena Bidirectionality project, which is headed by Promigas.

Natural gas distribution

• Ministry of Mines Decree 517:

This decree determined the 36-month deferral of residential user bills up to subsistence consumption for non-subsidized income brackets 1 and 2. Companies that provide the natural gas and electricity service could have access to a 0 per cent line of credit for adopting these measures. CREG was also granted the power, on a transitory basis, to make special arrangements for deferring payment of bills already issued and, again on a transitory basis, to adopt all special measures, tariff provisions and regulatory regimes that might be deemed necessary.

• CREG Resolution 048:
Definition of the transitory application of the tariff option for residential natural gas users in income brackets 1 and 2.

• CREG Resolutions 058 and 059:
Deferral was permitted for 36 months for users in income brackets 1 and 2 with respect to consumption above subsistence level, and for 2 months for income brackets 3 and 4. A two-month period of grace was also granted. This measure was extended for a further two months.

• CREG Resolutions 060 and 061:

These Resolutions established transitory payment deferral measures for natural gas and energy marketers on other activities in the chain.

• Ministry of Mines Resolution 40236:
A further 10 per cent was added to the subsidy granted for natural gas service users in income brackets 1 and 2.

Impact of the COVID-19 contingency on the natural gas sector

An impact analysis of the pandemic on the main variables in two links in the natural gas sector chain in the country was carried out: transportation and distribution. The pandemic had a negative impact on the transportation business in terms of contract volumes, take or pay contract price flexibilization, and portfolio. The distribution business, meanwhile, suffered a drop in volumes, collections, provisions and subsidies. Bearing in mind the impact that COVID-19 was having on natural gas users, production and transportation companies granted consumers relief by temporarily renegotiating contracts with marketers.