Analysis: Security, Regulatory Reforms Revive Colombia Oil Production
After a period of steady decline, Colombia has seen an increase in oil production due to Colombian government efforts to curb drug and insurgent-related violence in the country and implement regulatory reforms to make investment in Colombia more attractive.
Despite strong production growth in the 1980s and 1990s, Colombia production began to decline due to increasing drug cartel and insurgent-related violence, low oil prices and unattractive contract terms that pushed upstream activity into a decline, according to analysts at Barclays Capital.
According to BP's Statistical Review of Energy 2010, oil production declined from 838,000 b/d in 1999 to 551,000 b/d in 2004, the lowest level in the period from 1999 to 2009. The lack of investment in exploration also resulted in a decline in proved oil reserves from 2.3 billion barrels in 1999 to 1.4 billion barrels in 2008.
This violence negatively impacted production as insurgents attacked oil pipelines, cutting off power to oil fields in the Aracua oil region and assaults on oil workers. Colombia's largest pipeline, Cano Limon-Covenas, was attacked 170 times by ELN insurgents in 2001, resulting in the pipeline being shut down 200 days that year, Barclays said.
Efforts by Colombian presidents Andres Pastrana and Alvaro Uribe, along with U.S. financial and military aid, to curb the country's drug trade and fight corruption and violence associated with drug cartels and insurgents proved successful. The partnership between the U.S. and Colombia was critical to the turnaround in the country's energy situation.
According to Barclays, the U.S. provided nearly $100 million for helicopters, ground facilities and training to reduce attacks along part of the Cano Limon-Covenas pipeline. The Colombian central government also stripped Aracua regional authorities of control of its oil royalties and arrest government officials connected to insurgent groups. As a result, attacks have fallen, and while some violence still occurs, it is no longer seen as an impediment to investing in Colombia's energy sector.
"In the past 10 years, Colombia has gone from being nearly a failed state to becoming a very attractive destination for foreign investment, particularly in the energy sector," said Barclays analysts in a recent report.
The improvement in security would allow the Colombian government to overhaul the country's energy sector. The Colombian government since 1999 also has enacted a series of regulatory reforms to make the sector more attractive to foreign investors, according to a March 2010 analysis by the U.S. Energy Information Administration (EIA).
Upstream sector initiatives include allowing foreign oil companies to own 100 percent stakes in oil ventures; the establishment of a lower, sliding-scale royalty rate on oil projects; longer exploration licenses; and forcing Ecopetrol to compete with private operators. The Colombian government also has partially privatized national oil company Ecopetrol by selling some shares of Ecopetrol to private investors.
The reforms have sparked a renewed interest in Colombia's upstream sector, with record levels of exploratory and development drilling, EIA reports. The Colombian government reported that the oil sector received $2.95 billion in foreign direct investment (FDI) in 2009, and FDI was expected to increase to $3.5 billion in 2010.
EIA reports that Colombia had 1.36 billion barrels of proven crude oil reserves in 2010, the fifth-largest in South America. The country produced an estimated 680,000 b/d of oil in 2009, up from 600,000 b/d in 2008. EIA estimates that Colombia oil production will rise to 760,000 b/d this year and to 810,000 b/d in 2011.
Colombia's natural gas production also has grown in recent year, thanks to greater investment in existing fields, rising domestic consumption and new export opportunities. EIA reports that the bulk of Colombia's natural gas reserves are located in the Llanos basin, although the Guajira Basin accounts for the majority of current production. Colombia is estimated to have proven gas reserves of 3.96 Tcf.
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