Colombia’s peace deal could spur oil sector turnaround: Fuel for Thought

Is a peace dividend in the form of more investment–and ultimately more production and jobs–coming to Colombia’s beleaguered oil and gas sector?

That’s been the hope of executives and analysts since the government signed a permanent cease fire on June 23 with the Revolutionary Armed Forces of Colombia, or FARC, the country’s largest rebel group. If a comprehensive peace deal is signed later this summer as expected, the warring sides could end 52 years of armed aggression.

An end to hostilities, assuming one takes hold in the mostly rural areas where oil is pumped, would be welcome news for E&P and oil field services firms. Their employees have been regular victims over the decades of FARC kidnappings, bombings, extortion and murders.

From 2001 through 2015, Colombian national police reported 219 oil company employees were kidnapped for ransom by FARC guerrillas and other groups, according to figures compiled by Agora Consultorias, a risk analysis firm in Bogota. Oil firms have paid untold millions in extortion payments to armed groups as well.

Over that same 15-year period, there were 1,814 reported bombings of Colombian pipelines, the vast majority by suspected FARC rebels. According to El Tiempo newspaper, as many as 4.1 million barrels of oil have been lost to the bombings since the mid-1980s, or more than twice the oil spilled by the Exxon Valdez after it ran aground in Alaska in 1989.

Naturally, those statistics have had a chilling effect on Colombia’s oil patch, especially in recent years as lower global prices have made the Andean country a tougher sell to oil companies’ investment committees. Added to the country’s challenging logistics and higher lifting costs associated with heavy oil, security issues have driven many companies to more inviting conditions in Mexico, Peru and Argentina.

Three years of investment declines are coming home to roost, contributing to a precipitous decline in Colombia’s crude output this year. After averaging 1,005,000 b/d in 2015, Colombia pumped only 904,000 b/d in May, down a shocking 11.8% from what was pumped in the year-ago month.

Adding to the gloom is that Colombia’s proven oil reserves took a major hit last year, falling to 2 billion barrels as of December 31, down from 2.308 billion barrels at the end of 2014, a 13% decline.

The drop follows a 5.6% decline reported at the end of 2014.

Others step in where FAR C left

President Juan Manuel Santos insists the improved security resulting from a peace deal, which if signed would go before Colombian voters later this year, could be a turning point, making Colombia more appealing to investors in energy and other sectors.

But analysts caution that benefits from a peace accord will take time to materialize. Moreover, investors are weighing factors other than security in their Colombian investment decisions, including a looming tax reform package that goes before Congress later this year that could place a higher fiscal burden on oil companies.

Orlando Hernandez, president of Agora Consultorias, notes that Colombian armed forces are still at war with other rebel and criminal groups that dominate some areas of rural Colombia, making the Colombian oil patch still a risky environment.

Hernandez notes that as the FARC has wound down its violent activities since declaring a provisional cease-fire a year ago, the National Liberation Army, another rebel group known by its Spanish initials ELN, had moved in. The ELN has carried out 15 pipeline attacks so far this year, up from its year-ago total of five, he said.

The Colombian government and the ELN are not currently in peace talks.

Another problem that oil companies face that won’t be helped by a FARC peace deal is the rising occurrence of blockades by peasants and indigenous groups of oil and gas installations. Executives complain that the blockades have been more damaging to production in recent years than the rebels. Some groups have environmental complaints against E&P projects, others do it to extract labor or royalty concessions from the government.

Currently, a month-long blockade by indigenous groups of a natural gas processing plant in the town of Gibraltar in northeast Colombia has caused a 30% increase in gas prices for residents of nearby Bucaramanga. Last year, groups blocked repair crews from fixing the 220,000-b/d Cano Limon pipeline for two months, costing the country millions in oil revenue, Hernandez said.

Source: http://blogs.platts.com/

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