In turnaround, Colombia reaps benefits from oil fields

BOGOTA, Colombia — A decade ago Marxist rebels bombed one Colombian oil pipeline so often it was nicknamed “the flute.”

Back then, guerrilla attacks, extortion threats and kidnappings rendered many areas of the nation off-limits to oil companies. As production stagnated, fears grew that Colombia, long an oil exporter, would be forced to import.

But improved security, higher oil prices and more attractive regulatory conditions for investors have led to a surge in oil exploration and production. The government’s National Statistics Department estimated last month that daily oil production would double from the current 764,000 barrels to 1.5 million barrels by 2018.

“Colombia has changed a lot,” said Ronald Pantin, CEO of Pacific Rubiales Energy, which operates the Rubiales field in southern Colombia and is the country’s No. 1 private producer.

Rebels bombed the field 11 years ago but since Pacific Rubiales Energy took it over in 2007 “we haven’t had one guerrilla attack or extortion threat," Pantin said in an interview. "We feel very safe here.”

Colombia is South America’s fourth-leading oil producer behind Brazil (2.5 million barrels per day), Venezuela (2.4 million bpd) and Argentina (796,000 bpd), according to the U.S. government’s Energy Information Agency. Oil sales represent about 40 percent of Colombia's export income, with much of the oil destined for the United States.

Colombia’s turnaround began in 2002 with the election of President Alvaro Uribe. At the time, rebels patrolled vast tracts of rural Colombia where they abducted petroleum workers and forced companies, like Occidental Petroleum of Los Angeles, to fork over extortion payments to continue operating.

After the construction in 1986 of the Cano Limon-Covenas pipeline, which carries Occidental oil to Colombia's Caribbean coast, the rebels began blowing up the line to extract payoffs.

In his book "Dossier," a biography of the late Occidental Chairman Armand Hammer, Edward Jay Epstein writes that Hammer hired a former CIA agent and local mercenaries to negotiate a series of payments to the guerrillas.

A 1998 Colombian government report estimated that oil companies paid more than $40 million annually to the guerrillas.

But with the help of billions in U.S. aid, Uribe upgraded the Colombian army and launched military offensives that pushed the guerrillas out of many oil-producing areas. The surge included a battalion of U.S.-trained Colombian soldiers tasked with protecting the Cano Limon-Covenas pipeline — the line that had been dubbed “the flute.”

Colombia also took advantage of shifting business conditions.

As the price of oil rose, many producing countries changed investment laws and royalty rates, squeezing private companies and giving their governments a greater share of oil profits. But in some cases those policies scared away foreign investors.

Uribe took the opposite approach.

Foreign companies were allowed to own 100 percent stakes in oil ventures. Government royalties were reduced, exploring licenses were extended and state-run Ecopetrol was partially privatized and forced to compete with foreign firms.

“Significant strides on the security front laid down the foundation for the recent wave in investment,” said Roseanne Franco, a Latin America analyst at Washington-based PFC Energy, which advises energy companies and governments. “But competitive fiscal terms and a fair and defined regulatory environment invited companies in; it’s been years in the making, but it is finally paying off for the Colombians.”

It’s also paying dividends for Pacific Rubiales, which was formed by former executives of state-run Petroleos de Venezuela S.A., or PDVSA. Pantin was fired by Venezuelan President Hugo Chavez in a company-wide shakeup and he joined an exodus of PDVSA workers who ended up in Colombia.

Discovered by Exxon in the 1980s, the Rubiales field in eastern Meta state was under-explored due to the lack of roads and the danger of rebel attacks. But its geological conditions are similar to the Orinoco heavy oil belt in eastern Venezuela, which is believed to hold the largest reserves in the hemisphere.

Of Pacific Rubiales’ 48 exploratory wells, 42 were successful. As a result, the company has in just three years upped production from 15,000 bpd to 140,000 bpd and surpassed BP and Occidental to become the No. 1 private producer in Colombia. By the end of next year, the company forecasts 300,000 bpd. In conjunction with Ecopetrol, the company has also built a 146-mile pipeline so it no longer has to transport oil overland.

“Just in the Rubiales field, we might have larger reserves than in the rest of Colombia put together,” said Pantin, the company CEO.

Security problems persist in the most remote areas. In March, five subcontractors for Occidental were kidnapped by rebels near the Venezuelan border but were rescued four days later. That same month guerrillas also destroyed a helicopter as engineers worked on seismic studies in the jungle.

Still, the Bogota government is spending more time grappling with normal business concerns. For one thing, production is coming online so quickly that Armando Zamorra, who heads the government’s hydrocarbons agency, has warned that Colombia may soon lack pumping capacity.

Officials here are also concerned about a phenomenon known as “Dutch Disease.” The term refers to how an influx of petro-dollars can strengthen local currencies to the point where a country’s other export industries suffer because they are no longer competitive.

President-elect Juan Manuel Santos, who takes office Aug. 7 and pledges to maintain Uribe’s business-friendly policies, has spoken of setting up an offshore stabilization or “rainy day” fund to fend off Dutch disease by initially soaking up petro-dollars then spending them over the long term.