Magazine article Risk Management

Attacks Risk Energy Growth in Colombia

Magazine article Risk Management

Attacks Risk Energy Growth in Colombia

Article excerpt

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.

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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 1004 to more than one million by ion, according to the U.S. Energy Information Administration. It was a major milestone in the nation's development.

"Were among the 20 largest producers in the world," national finance minister Maurico Cardenas wrote on Twitter. …

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