A July attack by FARC Guerrillas resulted in a 4,000-barrel oil spill in Puerto Asis, Colombia.[/caption]Many still see Colombia as a nation plagued by drugs and violence, but investors see something else. Colombia has become a Wall Street darling, thanks to high GDP growth that appears stable compared to other large Latin American economies.
The country's energy sector, in particular, has become a success story. Although Colombia is not considered a major player in fossil fuels, it has the most coal in South America, several proven oil reserves and a swath of alternative energy sources like shale gas.
But smoldering conflict is jeopardizing further advancement, as guerrilla attacks on rural pipelines threaten to stall a decade of progress. This is an old problem in a country that has been fighting the Revolutionary Armed Forces of Colombia (FARC) and other insurgent groups for nearly a half century, but one that was largely contained until recently.
A March 25 attack, for example, prevented Colombia's national oil company, Ecopetrol, from using the country's second-longest pipeline for 40 days. First came business interruption from the damage, then a blockade prevented the company from making the necessary repairs.
The fallout was dramatic: Compared to 2013, profits fell 18.2% in the second quarter of 2014, even as oil prices rallied from last year's lows. "The results for April and May were severely hit by the interruption at the Cano Limon-Covenas pipeline," CEO Javier Gutierrez said in a statement. "International crude prices partially compensated for the strong impact."
This was far from the only attack. In the first six months of 2014, rebels hit the nation's six major pipelines 67 times.
In one sense, that number is encouraging. Last year there were 259 attacks-the most in more than a decade. But even though the frequency has dropped, the impact to the industry this year has been as large as ever, and companies are suffering from shakedown threats, infrastructure bombings, environmental cleanup costs and lost revenue.
Countering Threats, Counting Money
Colombia has been here before. Attacks in 2001 cost the government some $500 million and devastated the local budget of Arauca, a state that counted on pipeline royalties for 90% of its revenue, according to the U.S. Government Accountability Office. The security strategy that was soon developed included military training, helicopters and other equipment from the United States. Washington offered support as part of its larger "Plan Colombia" initiative designed to combat drug trafficking and rebel groups in a country that has become its closest regional ally. Roughly $100 million of the $9 billion total aid provided thus far went to protect the Cano Limon pipeline after attacks shut it down for 200 days in 2001.
Pipeline attacks fell dramatically within a few years. From 2008 to 2010, there were never more than 32 attacks a year across the entire country, and oil output grew steadily.
The security plan coincided with local structural reforms, leading to half a decade of relative calm. Officials in Bogota privatized portions of Ecopetrol, established a strong regulatory authority, and used tax breaks to open the sector to the international market.
Increased investment and exploration led to the discovery of new reserves, which helped oil production spike from just over 500,000 barrels per day in 2004 to more than one million by 2012, according to the U.S. Energy Information Administration. It was a major milestone in the nation's development.
"We're among the 20 largest producers in the world," national finance minister Maurico Cardenas wrote on Twitter. "A million barrels of oil is the best opportunity for the country to close the gap and create social and economic equality."
Ecopetrol made up most of that total, reaching nearly 750,000 barrels a day by mid-2012, when it overtook Brazil's Petrobras as South America's largest company by market value. The Brazilian giant has since re-taken the crown as the largest oil company in the region, and challenges surely remain for Colombia to hit its goal of 1.5 million barrels per day by 2020. But the nation's moves to liberalize rules for foreign investment have been heralded as forward-looking reforms that will continue to pay off in the coming decades-especially if a proposed Venezuela-Colombia pipeline to the Pacific coast comes online in a few years, increasing exports to China.
"There's a re-figuration of the international energy market," Colombia Mines and Energy Minister Amylkar Acosta told Bloomberg last year. "From a security perspective, Colombia can't keep relying on a single port for oil exports."
Interest remains strong. Occidental Petroleum in the United States and Canada's Rubiales Pacific have a large presence in Colombia already, and when the country opened a bidding round for further exploration this summer, foreign companies including ExxonMobil, Shell and ConocoPhillips tossed their hats in the ring.
Searching for Solutions
Colombia's energy future looks bright, but improving security is critical. Companies realize that it will be their responsibility to protect infrastructure if the government fails and are therefore hesitant to inject themselves into a region where turmoil is the norm. Pipeline monitoring technologies have helped combat vandalism elsewhere, but such investments are difficult to implement in the remote jungles that house some of Colombia's infrastructure.
Insurance may help companies recoup costs from some of the direct losses. Those in the sector have significant assets in Colombia, however, and need them to be productive long-term in order to make their investments worthwhile.
But there may be a more promising way to decrease the number of attacks. In June, Colombian President Manuel Juan Santos was re-elected. His campaign focused on a pledge to continue peace talks with FARC leaders that have been ongoing in Cuba for more than a year. Further talks will guarantee nothing, but if the government can get the 8,000-strong guerrilla faction to lay down its arms, the nation's energy sector should only grow stronger.
In addition to resources in the ground, Colombia has great prospects in renewable energy. It already meets the bulk of its electricity needs from hydro and has vast potential for wind power. If developed, windfields in the northeast region could produce more electricity than anywhere in South America outside of Patagonia, according to a 2010 study by Peter Cramton of the University of Maryland. Tapping this resource over the next decade could allow Colombia to meet its own energy needs while becoming an even larger exporter of oil and coal and, along with other security and economic improvements, help it move away from its violent past.