Peace talks with the FARC boosts Colombian oil investment

By Dialogo
February 19, 2014

Foreign investors are injecting more capital into Colombia’s booming oil industry, thanks to the prospect of improved security in the near future, according to Nicolás Urrutia, director of operations for Grupo Triarius, a private Colombian security firm.
The boom in investment is occurring as the government is continuing peace negotiations in Havana with the Revolutionary Armed Forces of Colombia (FARC). The government and the FARC have been engaged in an armed conflict for five decades. The FARC is Latin America’s longest-running rebel insurgency.
Government officials are confident that the negotiations will lead to a lasting peace, Urrutia said. That belief, in turn, has given private companies greater confidence to invest in Colombia’s oil industry, Urrutia said.
“Both the government and the FARC genuinely believe that negotiations have now passed the point of no return and this is the year to push talks over the line,” Urrutia said. “At the same time, it´s key to be in the fray now, so companies can hit the ground running once business picks up again after the (elections) in March.” He was referring to the elections scheduled for March 2014, in which voters will elect representatives of both members of Parliament.

Security forces must remain vigilant

While security has improved, Colombian police and military forces must remain vigilant, because attacks on the oil industry have continued in recent months, Uruttia said.
For example, the FARC unilaterally called for a cease-fire on Dec. 15, 2013. After the cease-fire ended on Jan. 15, 2014, “we’ve seen a renewed campaign of explosive attacks against the country’s energy infrastructure,” Urrutia said.
In all of 2013, the FARC and the National Liberation Army (ELN) -- Colombia's two largest guerrilla groups -- carried out 259 attacks on oil pipelines across the country, according to the Defense Ministry. There were 151 such attacks in 2012, authorities said. Those attacks led to an estimated loss of 30,000 barrels of oil equivalent every day, according to the Colombian Petrol Association (ACP).
Such losses are costly for oil producers, but are not damaging enough to force companies to curtail their operations, said a former Colombian military officer, who declined to be identified by name for security purposes.
“Each barrel costs $50 (USD) to extract,” the former officer said. About 5 percent of those costs are spent on security, the former officer said. “It’s a lot compared to other countries [in Latin America],” the former officer said. Attacking oil installations remains an effective strategic pressure tool for the FARC as it doesn't have the same negative impact as kidnapping civilians, blowing up a town or setting fire to buses".

New midstream investments roll in

Despite the attacks, ACP President Alejandro Martínez Villegas said 2013 had been a “good year” for the country’s oil industry, which increased its production by 7 percent compared to 2012. Colombia produced a little more than 1 million barrel of oil a day in 2013.
Foreign investment in the country’s oil industry is growing rapidly. In 2013, foreign business people invested more than $13 billion (USD) in the country’s oil industry according to Colombia’s Central Bank. That is almost twice the amount of foreign money invested in the country’s oil industry in 2010.
For example, on Dec. 9, 2013, Advent International, a Boston-based global private equity firm, invested $595 million (USD) to purchase a 12 percent stake Oleoducto Central SA (Ocensa), Colombia’s largest crude oil transportation system.
“Geologically, Colombia is a very attractive option for foreign investors with clear and well-defined rules set out by the ANH [national authority for promoting and regulating Colombia’s hydrocarbon resources],” said Mauricio Salgar, head of Advent International´s office in Bogota.

Colombia an “investment hot spot”

Advent International bought into Ocensa because it has an attractive business model with low capital expenditure and working-capital needs and strong, predictable cash flows, according to Salgar..
“Colombia´s reputation has improved tremendously over the last five years and it´s now a thriving hot spot for investment,” said Andreas Dressler, managing director of Terrain, a foreign direct investment advisory firm based in Berlin.
Despite recent attacks by the FARC on oil industry infrastructure, Colombia remains attractive for private equity investment with “significant room for further growth given the high level of capital inflows and a rapidly expanding middle-class,” Salgar said.

New and better early warning tactics

Colombian security forces are working hard to prevent attacks on oil producing infrastructure, Urrutia.
The military is working with private security forces hired by oil companies to conduct surveillance on oil producing infrastructure, Urrutia said. The military has also purchased more than a half-dozen surveillance drones, the security analyst said. “That is clearly the way of the future,” Urrutia said.
Protecting the oil industry is a high priority for the military, said Juliana Garcia Vargas, director of the public safety and infrastructure unit of the Defense Ministry. “In 2013, we set up six new special operational centers to protect the country´s energy, highway and hydrocarbons industries,” Garcia Vargas said. “However, these oil companies still have to improve the technology behind their own security operations.”
Surveillance based primarily on “boots on the ground” is inefficient and costly compared to other types of surveillance, such as drones or motion sensors, Urrutia said.
Ecopetrol, the largest oil producing company in Colombia, is working hard to improve the security of its facilities, Urrutia said. “Since late 2011, Ecopetrol really began a big push to improve the safety of its installations and refineries,” Urrutia said. “Now almost two years later, they’ve massively reduced both downtime and repair time following explosive attacks from eleven to four days and this saves money.”

Positive outlook

The ongoing improvements in security should lead to continued investment in Colombia’s oil industry, Salgar said.
“There continue to be security issues in the northeast and the south,” Salgar said. “But this is just a bump in the road and the wider picture remains very positive.”
On Dec. 13, 2013, Ecopetrol said it would invest $10.6 billion (USD) in 2014 to explore for more sources of oil and to continue to increase its daily production output.
The ongoing negotiations between the government and the FARC will impact the amount of money invested in Colombia’s oil industry in the future, Urrutia said.
“What happens over the next 12 to 15 months with the FARC affects everything tied to exploration and production,” Urrutia said. “If they do reach an agreement and a slow demobilization process takes place, this will inevitably involve the emergence of splinter groups and the increasing use of extortion on smaller oil companies to finance their illegal activities.”