Armed conflict, stalled bureaucracy limit Colombia’s economic growth

2012 Car Bombing in Bogota; Source: David Maiolo via Wikipedia

Global Risk Insights has reported that the largest problem for Venezuela’s PDVSA and Mexico’s Pemex is falling oil production. Now, another South American country, Colombia, has also reported a decrease in oil production for 2013 — due to terrorism, social unrest and government inefficiency.  

This year’s spring has not been very pleasant for Colombian politics. The list of high-profile political developments is extensive — upheaval surrounding Bogota’s major, heated public discourse on the FARC peace talks, organized dissent in peripheral communities, massive corruption among military elites, fraud in legislative elections and the growth of the deadly Urabeños criminal organization.

Despite the political commotion, the general attitude towards Colombia’s future remains hopeful because of visible economic progress. However, this economic optimism might change because of setbacks to the oil industry, which is a main driver of the Colombian economy. There are two main reasons why oil production decreased in 2013: persistent terrorist violence and inefficient bureaucratic processes.

In 2013, due to instability, Colombia’s oil production decreased by 51,000 barrels of oil per day, which is alarming because crude oil accounts for a large part of total exports and is one of the country’s fastest growing and dynamic industries. As the economy boomed in the 2000s, so did petroleum exploration, extraction and refining. The reason for this expansion is that Ecopetrol — Colombia’s largest primary sector company — needs to continue expanding in order to continue attracting investment. The need to sustain investment is already a problem, as foreign direct investment in oil decreased by 9.4% in 2013.

Unlike neighboring Venezuela, Colombia has relatively limited known oil reserves. Ecopetrol’s revenues depend mainly on the upstream processes, which include oil exploration and extraction. Because of the limited known reserves, Ecopetrol sets yearly benchmarks for finding new wells — in the next ten years, it expects to open 1,400 new wells. The need to continuously expand upstream production sets up the background for Colombia’s oil industry, which has been immensely successful despite operating in a fragile political setting.

But after 15 years of growth, this success is being jeopardized by social and bureaucratic factors. PDVSA and Pemex can afford to post low productivity numbers because they have vast amounts of known reserves. The situation in Colombia is quite different — a drop in productivity poses an immediate threat to the future of the industry.

Terrorism

Despite peace talks, Colombia remains plagued by violence. There have been 39 terrorist attacks on oil infrastructure in 2014 alone. Most of the attacks are on oil pipelines, which are more difficult to monitor and protect. Last year there were 228 successful terrorist attempts. It is clear that production decreased in 2013 because even a basic production procedure such as transporting crude oil to refineries and ports was unsafe.

Despite the Colombian government’s frontal assault on organized crime and guerrilla groups, it has not been able to provide protection for oil infrastructure. Attacks on oil infrastructure today are as frequent as they were in the 1990s, when the FARC guerrillas were strongest. These attacks also hinder production because they delay exploration projects and the possibility of opening new wells. Last year, 15 wells were left closed because of limitations posed by security threats.

Red tape

The other problem for Ecopetrol and other multinationals operating in Colombia is obtaining the licenses to operate. The oil left in Colombia is not easily extractable. Most of what is being discovered as of late is referred to as unconventional hydrocarbons, such as shale oil. Since the extraction for unconventional hydrocarbons is different from that of traditional extraction methods, the government cannot accept regular licensing agreements.

The problem at hand is that the responsible ministry is still devising a set of procedural standards for unconventional drilling, which takes more time. Ecopetrol and its partners now have to wait longer for the government to craft a way to sustainably regulate new drilling techniques. The old system of licensing and regulation worked for both the government and the extractor. Now, there is no regulation for new practices, which has stalled operations. Unconventional drilling also makes environmental licenses more difficult to obtain because of uncertainty over their ecological impact.

Most of the attention surrounding oil productivity has been placed on Venezuela and Mexico because they have the largest oil reserves. The Colombian case, however, shows that low productivity is becoming a region-wide problem. The difference between Colombia’s Ecopetrol and its larger oil-producing counterparts is that productivity is not being diminished by the company’s inefficiency but rather factors beyond its control—a surge in criminality and disorganized bureaucracy.

If anything, investors should see Ecopetrol optimistically because it continues to be competitive in an unfriendly environment. Ecopetrol also serves as an example to larger, nationalized oil corporations by setting tangible commitments to continue producing and exporting at competitive levels. Since easily extractable oil is quickly running out in Colombia, Ecopetrol has had to seek new technologies and invest heavily in research and technology while partnering with multinationals to reach oil in non-conventional ways. The investment environment will be well served if the government takes a more proactive approach to protecting oil interests and streamlining its licensing process.

Thank you to Tomas Mogollon Hoyos, who shared his insight on Colombia’s oil industry. Tomas previously worked for Ecopetrol’s finance division and is now project director at Canal Gas S.A.S in Cartagena, Colombia.

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Categories: Economics, Latin America

Author:Daniel Lemaitre

Currently completing an MSc degree in Comparative Politics and International Political Economy at the London School of Economics. Graduated Magna Cum Laude from Emory University with a Bachelor's degree in International Studies, specializing on the regional political economy of Latin America. Email: daniellemaitre00@gmail.com Twitter handle: dlemait

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