by Julio Urdaneta

Blessed with vast expanses of agricultural land and supportive weather, Colombia is becoming a LatAm leader for ethanol and biofuels production. Improvement in the overall business and security climate incentivize formation of companies to tap this growing market.

Colombia was the seventh largest ethanol fuel producer in world in 2007 with total production of approximately 284 million liters, according to the US Renewable Fuels Association, which cites F.O. Licht data. It still has less than 1% of global output, dominated by the US and Brazil, which generate 24 and 18 billion liters, respectively.

Colombia produces fuel from sugar cane, sugar beet and cassava. Ingenio Manuelita, Ingenio Mayaguez, InCauca, Providencia and Risaralda are the five ethanol plants operating, all of them associated with sugar cane farms in the Western, Northern and Central regions, according to Fedebiocombustibles, Colombia’s national federation of biofuels.
“We expect that in 2017 we will have 27 biofuel plants, producing approximately five million liters of biofuels per day,” says Jorge Cárdenas, chairman of Fedebiocombustibles. This compares to 1.05 million liters of ethanol per day in 2007.

The sole processor of biodiesel is expected to produce 175,000 liters per day of biodiesel.
With all its potential, however, foreign and local investments as well as government incentives are urgently needed to further develop Colombian biofuels. A Fedebiocombustibles program to build ethanol plants in several areas of the country on underused or vacant land would require $5.25 billion in investment.

New domestic regulations amplify the need for funds. “Colombia requires a mix of 10% of biofuels in the diesel that is sold in the country. For that, we need to produce 1.2 million liters a day,” says Orlando Polanía, president of local biofuels company Alcohol Carburante Hecho en el Quindío. To cover a large deficit, the government has authorized the import of ethanol through Ecopetrol, he adds. Further pressure comes from the fact that a law passed in 2007 raises the proportion of biofuels in diesel to 20% starting in 2012.

“Without touching any hectares dedicated to food production, we can plant six million hectares of sugar cane producing 120 million of liters [of biofuels] per day” Polanía says, adding that this would make Colombia an exporter.

Financing Bottleneck
Fundraising for the sector is challenging, as Colombian banks still treat it with caution. But smaller transactions are getting done.

Corficolombiana structured a greenfield project with Ecopetrol and a group of African palm producers to finance a 100,000 ton per day biodiesel plant to be built by Ecodiesel, the biofuels arm of Ecopetrol. Financing for the $40 million project was done through a syndicate of local banks. The rate was a spread over DTF with 10-year term and two years’ grace and the deal was well oversubscribed.

The plant is being built near the Barrancabermeja oil refinery, where the biodiesel will be mixed with Ecopetrol’s hydro carbon refined diesel for distribution in the local market. Ecopetrol owns 50% of the biodiesel plant, which is expected to be operational by December.

Financing for biofuels projects in Colombia could be priced in the local market at 600-850 basis points over DTF for a 10-year tenor, says Carlos Sepúlveda, manager of investment banking at Corficolombiana. However, not all companies in Colombia have the technical and financial expertise of Ecopetrol that can guarantee a successful biofuels operation, and locals are cautious depending on how projects are structured.

Implicit risks for this type of financing include infrastructure and access and supply of primary materials, says Carlos Sepúlveda, investment banking manager at Corficolombiana. “There has to be solid contracts in place that guarantee the delivery of primary material or knowledge of harvesting sugar cane or other source crops,” he adds.

But for biofuel projects outside the Cauca valley, access to funds can be a time consuming hassle. “Banks require high guarantees and equity financing,” Juan Manuel Hernández, CEO of local producer Ethanol Consortium Board (ECB). “We found our money abroad,” he adds.

ECB focuses on the northern departments of Bolívar, Sucre and Córdoba. Luxembourg-based equity investment fund Controlsud provided most of the $340 million needed for the development of the plants and the sugar cane plantation through a project financing, in which ECB used as collateral 60% of the company and proceeds from an offtake agreement with Swedish ethanol company Sekab.

Foreign investors are also aware of Colombia’s potential in biofuels. Last year, Israeli investment group Ampal loaned its subsidiary Merhav MNF $10 million to fund the purchase of the 11,000 hectares in Colombia to grow sugarcane and build an ethanol production facility. Others look set to follow. LF