Colombia Sets Ambitious Peace Agenda: Oil

BOGOTA (Dow Jones Newswires), Nov. 1, 2010

Colombia is capping a string of military victories against Marxist guerrillas with a lucrative peace dividend: oil production.

This week, global oil-industry leaders are expected at a conference in the coastal city of Cartagena, where the country will tout its petroleum resources for potential investors.

Foreign oil executives are crisscrossing Colombia buying up exploration projects or fields that were abandoned because of security risks.

The rebirth of Colombia's oil patch has leaders in the capital, Bogota, forecasting that production will nearly double in the next eight years, to 1.5 million barrels a day, on par with the oil-rich Gulf of Mexico, marking a shift in the petroleum pecking order of Latin America.

As Venezuela and Mexico see their dominance decline, Brazil and Colombia are ascendant, aided by foreign investment.

Just eight years ago, the country's oil industry was near a standstill because oil fields such as Rubiales, now the country's largest producer, were inaccessible, surrounded by insurgents from the Revolutionary Armed Forces of Colombia, Latin America's oldest and largest guerrilla group, also known as FARC. The guerrillas didn't tap the oil but established hideouts in the remote areas where most of Colombia's reserves are found.

"Nobody could work here," said Ronald Pantin, chief executive of Pacific Rubiales, which runs the field.

A U.S.-backed military offensive begun in 2002 by then-President Alvaro Uribe, helped secure much of the countryside, driving the FARC deep into the mountains. Now companies, including Pacific Rubiales, are reaping the benefits. Since 2007, Rubiales has seen its production grow tenfold--to nearly 20% of the country's entire output--without a single rebel attack, Pantin said.

"Oil executives are driving to every corner of Colombia and they are safe," said Armando Zamora, head of the country's oil-licensing agency. Crime in big cities, once a major concern for foreign oil employees, also is under control. One important benchmark of the security situation, kidnappings, decreased by 97% under the Uribe government, according to International Crisis Group, a nonprofit policy organization.

"The security in the major cities is as good as you can get," said Ali Moshiri, Chevron's president for Latin America and Africa.

While the security issues have been addressed, investing in Colombia's resources remains risky, as the specter of state control always rises once large profits appear. It is likely that the newly elected conservative government will keep welcoming foreign investment, but "the issue of how you split up the pie is never going to go to away," said Jeremy Martin, director of the energy program at the Institute of the Americas at the University of California in San Diego.

Colombia's industry has been advanced by a diaspora of former employees of Venezuela's state oil company, Petroleos de Venezuela SA, or PDVSA. Many of them were purged after publicly opposing Venezuelan President Hugo Chavez's socialist policies.

Former PDVSA head Luis Giusti, after advising the Colombian government, started his own company to prospect previously inaccessible areas, where he says there is a chance of large oil finds.

"Former PDVSA people that stayed in Venezuela are being left out of the oil industry," Giusti said.

Pantin, one of the first to bet that it was time to invest in Colombia's oil industry, was part of that Venezuelan exodus. In 2007, his company bought the Rubiales field and brought in technicians with experience in extracting its goop-like heavy crude--an expertise that was missing in Colombia.

For two years, more than 2,000 trucks formed a "pipeline on wheels," carrying the crude over hundreds of miles of empty, dusty roads until a pipeline from Rubiales was finished in 2009, Pantin said.

Rubiales's bounty helped double Colombia's oil exports to the U.S. in the last three years. In the same period, U.S. crude imports from Venezuela fell 20%. The government here has been quick to show its gratitude. In May, President Uribe bestowed Colombian citizenship on Pantin and other Venezuelan oilmen.

Colombia's progress is also thanks to a decision to open up the country's oil industry to international investment, a policy that contrasts with those of energy-rich neighbors such as Venezuela, Ecuador and Bolivia, that have veered to the left, limiting private development of their resources.

In 2002, to encourage new domestic and foreign oil firms, Colombia reduced the domestic role played by state-run Ecopetrol, created a licensing agency independent from the oil company, and lowered royalty payments that developers of new fields had to pay the government.

"If we hadn't taken these measures, Colombia would surely be importing crude to run its refineries," says former Colombian Mining and Energy Minister Luis Ernesto Mejia, who under Uribe enacted several of the reforms that led to the turnaround.

The military's gains against the FARC continue under President Juan Manuel Santos, who succeeded Uribe in August. Colombian Special Forces last month killed Victor Suarez, also known as Jorge Briceno, the FARC's second in command, when he was bunkered down about 250 miles from the Rubiales field. Pipeline attacks, which in 2001 shut down a key conduit for 200 days, have fallen to a handful each year.

The government is trying to dispel fears that it could elbow out foreign investors once larger oil riches start pouring in, something it did in the early 1990s after the discovery of three huge fields.

"The last time Colombia scared away oil companies, it generated a crisis," said Zamora, the licensing chief. "Everybody remembers it was a huge failure and the overwhelming national feeling is that we don't want to repeat it."

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