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Colombia's peace brings little oil dividend

Once an industry darling, the country's energy industry is still struggling with a rebel threat and local community strife

For years, Colombia's oil industry hoped that peace with its main rebel group, the Revolutionary Armed Forces of Colombia (Farc), would bring new riches. During its decades of waging war on the Colombian state, Farc saw the industry as a prime target and wrought havoc on oil operations. The group regularly kidnapped oil workers, bombed pipelines, and made potentially oil-rich areas too dangerous to drill. So, when Congress finally signed off on a peace deal in November, the industry looked forward to a new era.

But more than six months on there is still little sign of the promised peace dividend. Other fighting groups continue to mount attacks against the oil industry. Relations between oil drillers and local communities, which have long been strained, continue to deteriorate. Low oil prices continue to sap investment. Combined, these forces have dragged the oil industry into a multi-year downturn, and pose a serious challenge to any potential recovery.

Oil output fell to 0.837m barrels a day in December, a six-year low and down nearly 20% from a year earlier. The drop in production reflects a sharp fall in drilling activity—a result of the weaker oil price. The rig count plunged from 30 in August 2015 to two just eight months later. Drilling activity has picked up as oil prices rose to around $50 a barrel, as companies drill their producing fields. This should help stabilise output over the coming months. But just a handful of exploration wells have been sunk in the past couple of years, and the reserves to production ratio has fallen to just five years.

Insecurity, still

While the government reached a peace deal with Farc, historically the largest and most effective rebel group, the smaller National Liberation Army (ELN) remains a potent fighting force. The ELN has entered into peace negotiations with the Colombian government, but at the same time has stepped up its attacks on the nation's oil infrastructure. In the first three months of this year, the 220,000-b/d Caño Limon-to-Coveñas pipeline alone has been hit 29 times, once every three days, according to state-run Ecopetrol. The attacks knocked off about 6,500 b/d of output, and cost millions of dollars in repairs. Beyond the barrels lost, the persistent threat of sabotage continues to deter investment.

The stepped-up attacks are widely seen as a negotiating tactic by ELN, aimed at ratcheting up pressure on the government and extracting friendlier terms in any potential peace deal. Because ELN's stronghold is in the major oil-producing regions of Casanare and Norte de Santander in the northwest, a peace agreement with ELN could be more important than the deal with Farc. Some fear that if peace negotiations with ELN break down, disaffected former Farc fighters could join the group, amplifying their threat. In the meantime, 2017 is likely to see a much higher level of rebel activity than 2016, which brought 52 pipeline attacks, raising the stakes for the industry in the peace negotiations.

0.837m b/d - Colombian oil production at a six-year low

Rebel attacks are not the only problem Colombian oil producers face. Relations with local communities have been deteriorating for years, and are reaching critical levels. Protests and roadblocks in oil-producing areas regularly shut down production. Most recently, in late May, state-run Ecopetrol had to shut in about 80% of the La-Cira-Infantas' 40,000 b/d of output for nearly two weeks because nearby residents shut down roads around the field. Locals wanted Ecopetrol and its partner, American producer Occidental, to hire more Colombians to work the oilfield. Ecopetrol struck a deal with local government and union officials to reopen the field, but it won't be the last time such demands are made or tactics used.

The causes of the strained relations are complex and won't be easily smoothed over. In some cases, they arise organically in response to legitimate environmental and labour issues. Oil spills from installations are all too common, and in many areas local politicians and criminal groups have rigged the hiring and contracting processes to create patronage networks. In other cases, though, protests are drummed up against oil companies by politicians and criminal groups as part of a shakedown of what is seen as a cash-rich industry.

For the oil industry, these issues have gone from a nuisance to a potentially existential threat. Cumaral municipality in the oil-rich Meta department voted in a 4 June referendum to ban all oil and gas drilling activity—the first such vote to hit the oil industry. The Cumaral vote was a wake-up call.

With problems onshore, it is little surprise that explorers are turning their sites to sea. The oil industry has seen some good news in a steady flow of discoveries being made in the Caribbean waters off Colombia, indicating a potentially sizable gas play in the country's waters. Ecopetrol, Anadarko and Repsol have all notched major offshore gas finds over the past couple of years.

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