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Foreign investment in Colombia's oil sector has fallen by 45 percent since 2012. (Photo: Minminas)
Monday, September 26, 2016

Colombia Energy: Problems Beyond Peace

Local protests, adverse judicial rulings now biggest threat to Colombia oil.  

Inter-American Dialogue

Colombia’s government and the FARC rebels on Aug. 24 announced they had reached final agreement on historic peace accords following nearly four years of talks in Havana. Although Colombian voters must approve the deal in a nationwide referendum set for Oct. 2, the government says a “peace dividend” could add a percentage point or more to the country’s gross domestic product. How would Colombia’s peace process change the outlook for the country’s energy sector and chances for production gains? Will foreign investors make big bets on Colombia’s oil and gas opportunities, or, in a period of low oil prices, will they seek to invest in more predictable environments elsewhere in the world? Will the energy sector, long a target of pipeline sabotage and severe harassment of its employees, see a more favorable security situation as a result of the accords?

Walter Pesenti, managing director at Berkeley Research Group: The peace agreement between the Colombian government and the FARC was overdue. Colombia’s economy is highly dependent on oil and gas funds, which represent about 20 percent of the country’s fiscal revenues. Due to low oil prices, Colombia has considerably slowed investments in oil and gas over the last three years, which has reduced output by nearly 12 percent. The reincorporation of the FARC into Colombian society has a high cost and comes when the price of oil is low. The FARC’s security risk will be mitigated soon, and that should be noticed and considered by investors. Colombia is dealing with challenging logistics and higher costs associated with heavy oil, which makes it more appealing for companies to invest in other regions of the world. One big risk that is still present involves the blockades of oil and gas installations by peasants and indigenous groups. Companies have complained that in recent years the blockades have been more damaging to production than the FARC rebels have been. Presently, over a month-long blockage by indigenous groups of a natural gas processing plant in the town of Gibraltar in northeast Colombia has caused an approximately 30 percent increase in gas prices for residents of nearby Bucaramanga. A year ago, groups blocked repair crews from fixing the Caño Limón pipeline for two months, costing the country millions in oil revenue. The news about the FARC is good for Colombia. However, indigenous group blockages, logistics and lifting costs will still affect oil and gas investment decisions.

John Padilla, managing director, and Sergio Torres, consultant, at IPD Latin America: Terrorist attacks against oil infrastructure have plummeted as a result of periodic and unilateral cease-fires that the FARC has declared since peace talks began four years ago. The impact on production has been positive, but not enough to reverse an overall downward spiral. Oil prices have played their role, but other, more worrisome, issues have taken a greater toll: recent judicial and political rulings that have harmed contract sanctity, permitting delays and community issues. The results? Production fell to 928,000 barrels per day in the first half of this year after reaching 1 million barrels per day in 2013. Proven reserves have fallen 18 percent since 2013, and drilling has screeched to a halt—nine wells drilled this year as of July, and 25 last year vs. approximately 100 annually in previous years. Foreign investment in the sector has fallen by 45 percent since 2012. The government must resolve these issues for broad-based investment to return. Many of the regions directly affected by post-conflict strategies lie in close proximity to hydrocarbons and mining activity. Local communities will continue to demand jobs and aid, among other things, from the extractive industry. The government must help stimulate economic activity and improve conditions in local communities. But inflation in Colombia has exceeded 8 percent over the past 12 months, unemployment has officially reached 9.8 percent (and is much worse in many areas), and external debt is at an all-time high (more than 40 percent of GDP). Those dynamics will not woo new investment, peace accord or not. Ecopetrol plans to bid and award 17 smaller blocks on Nov. 25. The tender’s results may be the best indicator of potential post-conflict sector investment in the near term.

Leopoldo Olavarría, partner and head of energy for the Latin America division, and Santiago González, attorney and local partner at the Bogotá office, at Norton Rose Fulbright LLP: Colombia is relatively underexplored, due in part to its historically difficult on-the-ground security situation. It is expected that regions with great potential (e.g., Putumayo, Catatumbo and the Magdalena Basin) will see security improvements as a result of the peace process. This in turn should facilitate increases in exploratory activities such as seismic acquisition and the drilling of exploratory wells. If these exploratory campaigns bear fruit, Colombia should see medium- and long-term production gains. Recently, the country’s oil and gas sector has experienced consolidation, as certain mid-size players with pre-existing positions in the country and solid balance sheets have seized the low oil price environment to make low-cost acquisitions, thus growing their reserves and production bases. These ‘opportunistic’ investors will certainly seek to promptly recover their investments by increasing production and locating markets for their production. Colombia should be able to attract further investments if, as a result of the expected structural tax reform, the government’s take is lowered to compensate for the country’s relatively high production and transportation costs. The tax reforms are a crucial element to ensure Colombia remains competitive. Additionally, it is certainly to be expected that the energy sector will see a more favorable security situation as a result of the accords. Since the FARC’s unilateral cease-fire, attacks on oil and gas infrastructure and operations have diminished considerably. Nonetheless, improving security conditions on the ground is still a work in progress, as other illegal armed groups, such as the ELN, have attacked energy infrastructure, and this group is quite proactive in their engagement. A peace accord with the ELN and improved relations with communities will be key factors to ensuring a more favorable security situation.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor


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