February 2014

Resource-backed renaissance

Colombia seeks foreign investment in oil and gas as a development driver

By Herb Mathisen

Changing someone’s mind is tough, and Colombians are well aware of this. Known for its violent struggles against powerful drug cartels and rebel groups, which made much of the country impassable during the 1980s and 1990s, Colombia is working hard to improve its reputation internationally. A hardline approach toward guerrilla factions from former president Alvaro Uribe in the last decade has resulted in murders and kidnappings falling drastically (from 66.74 homicides per 100,000 people in 2000 to 31.42 per 100,000 in 2011 and from 3,570 kidnappings in 2000 to 305 in 2011). And in 2012, current President Juan Manuel Santos’ government entered into peace talks with the rebel Revolutionary Armed Forces of Colombia (FARC).

As Colombia has become a safer place to live in and to visit, foreign investors have increasingly begun to see it as a safer place to do business. The oil and gas sector has benefitted, particularly recently, as the government started easing foreign investment rules in 2003. In the past six years, Javier Betancourt, National Hydrocarbons Agency president, said the country had doubled its oil production and now maintains an average annual crude oil production level of more than one million barrels per day. He added that the hydrocarbons sector, which includes oil, gas and thermal coal, is responsible for 35 per cent of foreign direct investment. “This is very good, but not good enough.”

At the 15th Colombian Oil and Gas Congress, held in the capital Bogota last November, government officials linked the recent upswing in the oil and gas sector to the country’s social development, with investment in the industry being used to improve the quality of life for Colombians. Mines and Energy Minister Amylkar Acosta Medina said the government’s priority now is to support exploration and to increase reserves in order to maintain that inertia. Colombia’s proven crude oil reserves of roughly 2.37 billion barrels, for instance, pale in comparison to neighbouring Venezuela’s 297 billion barrels. “It is important to add barrels to the reserves,” said Medina. “We all know how precarious our reserves are.”

The potential to increase reserves does exist though. Due in part to its history of political unrest, dating back to 1948, much of Colombia is underexplored. State-owned oil company Ecopetrol, which counts 1.87 billion barrels in Colombian oil reserves, estimated three years ago that the country could potentially have 47 billion barrels in oil equivalent reserves. Medina said the government would focus on expediting licences and permits for exploration and also on tweaking regulations to open up the country for non-conventional oil extraction, as Colombia is thought to have major shale gas and coalbed methane potential. (Colombia has long been a major coal producer – it was ranked fourth in the world in thermal coal exports last year.) In fact, in December, Medina said the government was confident it could raise US$2.6 billion in its next round of block auctions, which will also include off-shore blocks, slated for late-February.

In recent years, Colombia has actually been the beneficiary of political unrest – most notably from the diaspora of former employees of Venezuela’s state-owned oil company, who were fired in the thousands after they resisted the policies of then president Hugo Chavez. For instance, Pacific Rubiales, a Toronto-listed company that purchased Petrominerales, another Canadian-based Colombian producer, in November, was founded by Venezuelan émigrés and is now the largest oil producer in Colombia behind Ecopetrol.

Despite the positive trend in Colombia, a legacy of insecurity persists. Kidnappings (such as last year’s 221-day abduction of Gernot Wober, Canadian miner Braeval’s vice-president of exploration, by rebel group ELN) and attacks on operations and logistics infrastructure like pipelines are still a reality companies have to contend with. Even in Bogota, the security industry is a huge private employer. Banks, public institutions, office buildings and many businesses hire private security staff or employ military personnel to stand guard outside.

But Andres Perez, oil and gas projects coordinator with consultancy Ozco, which introduces mining and now oil and gas companies to the political and investment realities of Colombia, said companies understand there are places where you should not set up shop: primarily in the country’s more remote areas where government control is tenuous. “There are little hot spots that you wouldn’t go to,” he said. Perez explained the army provides safety reports for different regions, which provide an outline of the local security situation. The reports are updated regularly, he said, as conditions in many areas are changing. “The army is getting to more places and making sure that they’re safe.”

“Fifteen years ago, you didn’t talk about oil and gas,” said Wally Swain, president of the Colombian Canadian Chamber of Commerce. “But that’s no longer true.”

Canada is currently the largest investor in Colombia’s resource sector, said Juan Camilo Vargas, the chamber’s deputy director, adding the free trade agreement between the two countries, which came into force in August 2011, has only increased Canadian interest. Camilo Vargas and Swain were part of a Canadian pavilion at the congress that featured some 25 companies including oil field suppliers and consultants looking to make inroads in Colombia. “The government is putting a huge emphasis on exploration, so all of those kinds of skills are going to be in demand,” said Swain. Colombia is also home to major heavy oil deposits, including oil sands, and opportunities exist for companies to bring their experience with extracting and transporting that product in northern Alberta to Colombia.

And Colombia is also looking to increase – and retain – its own oil and gas sector know-how. Juan Saldarriaga, vice-dean of development for Bogota’s Universidad de Los Andes’ school of engineering, said the school has started seeking out projects and partnerships with industry to build local capacity and keep jobs and money in Colombia. The government is helping by creating incentives, he said, noting that companies can use 175 per cent of the funds they devote to a university research project as a tax deduction. And by industry request, the university will also soon offer a petroleum engineering program. “The oil industry here in Colombia is growing quite fast and [companies] don’t find good engineers very easily for the problems that they have,” said Saldarriaga.

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