Colombia’s Deteriorating Security Outlook Could Impair Ronda Colombia’s Outcome

Colombia’s security environment is swiftly deteriorating as the Colombian government aggressively offers more than a hundred oil and gas exploration and production blocks in the Ronda Colombia 2012 bidding process. Oil and gas exploration is a key driver of the Colombian government’s revenue. A deteriorating security outlook could disincentive investors interested in bidding for the blocks offered in in key areas such as the Caguán-Putumayo basin.

Left-wing guerrillas have wreaked havoc in Bogotá, Caquetá, Guajira, Putumayo, and more recently in Cauca (where indigenous groups have strongly opposed the presence of armed groups). Analysts are divided about what is causing the Fuerzas Armadas Revolucionarias (FARC) and, to a lesser extent, the Ejercito de Liberación Nacional’s (ELN) recent blows to the Colombian Army, the Police force, and the country’s infrastructure. Some analysts believe this upsurge in guerrilla attacks is a defensive strategy amid the heavy military pressure of the Colombian state on areas where the guerrillas have historically been strongest, such as Caquetá in the case of the FARC. Other analysts, however, argue the uptick in guerrilla activity is the result of the government’s lack of military initiative and of the government’s military fatigue. Regardless of the cause, an emboldened guerrilla does not bode well for the outcome of the Ronda Colombia 2012, a bidding round of over a hundred exploration and production blocks in mature areas, new frontier basins, and areas with little geological knowledge.

The FARC and ELN guerrillas each have affected key oil infrastructure like the Caño-Limón and Oleoducto Transandino pipelines, which bring hydrocarbons to market through ports in the Atlantic and the Pacific coast, respectively. The rebels have also targeted railways transporting coal mined in the departments of La Guajira and Cesar. These attacks have not only affected production targets, but they are now forcing key players to re-evaluate their investment decisions. Gran Tierra Energy (GTE:CN), with assets in the rugged Caguán -Putumayo basin in southwestern Colombia, cut its capital expenditure budget by 14 percent for the remaining of this year in response to production constraints resulting from the guerrilla’s attacks on oil infrastructure. If decisions like this one are any indicator of what investor offers in the Caguán-Putumayo basin would look like, Colombian officials must be starting to feel strong shivers down their spines. 

Gran Tierra Energy’s decision should not me underestimated. The company is a key player in the Caguán-Putumayo basin. It holds the majority of the exploration licenses in Putumayo. It also controls and operates the Costayaco field, the largest producing oil field in the Caguán-Putumayo basin. Gran Tierra markets the oil it extracts through the Oleoducto Transandino, which the FARC guerrillas have regularly put out of operation, preventing the transportation of crude from the Putumayo fields to market. Assuming that Gran Tierra’s decision to cut its capital expenditure budget is solely driven by security concerns, the company’s decision is an indicator of investor confidence in Colombia’s security outlook.

The FARC’s actions have also affected other oil players. In June of 2011, the FARC kidnapped Chinese staff working for Sinochem’s controlled Emerald Energy in Caquetá. Earlier this month, left-wing guerrillas assassinated five contractors working for state-owned Ecopetrol (ECO:CB) in Putumayo. More recently, the FARC guerrillas bombed the Ombu field that Emerald Energy operates.

Exploration in the Caguán-Putumayo basin is strategic. In Colombia, current oil production comes from mature fields and significant finds have been rare, as the Energy and Mining Minister Mauricio Cardenas explained in Bogotá recently and the consultancy Control Risks told the Financial Times in May. In order to boost reserves and increase production, the Colombian government has targeted the Caguán-Putumayo basin for exploration. Indeed, of the onshore blocks currently on offer, 12 percent, 6 percent, and 23 percent of the Type 1 (mature), Type 2 (frontier), and Type 3 (little geological information) blocks, respectively are in this basin. While this accounts for 14 percent of the total blocks the Agencia Nacional de Hidrocarburos (ANH) is offering under the current bidding round, the basin concentrates 14 percent of the type 2 and 3 blocks on offer. The Colombian government expects that new findings, which include non-conventionals, would come from the Type 2 and 3 blocks up on offer.

With Colombia’s decreasing security outlook, which has particularly affected the departments comprising the Caguán-Putumayo basin (Caquetá and Putumayo), investors may follow Gran Tierra Energy’s strategy and decide to focus their energy in relatively secure areas of Colombia. If this is the case, we will see less interest in the Caguán-Putumayo basin once the ANH announces the list of qualified companies in early August and the companies submit their bids in the month of October. This will not be well received by the Colombian government. Even as the government offers to deploy additional Army and Police forces to protect oil assets and guarantee the necessary level of security for oil exploration and extraction, it will take time for these forces to secure remote territories in Colombia’s rugged South West where the FARC guerrillas have significantly impacted oil assets.

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