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.  Continue reading

Ecopetrol and PDVSA’s Orinoco joint exploration

Carlos Rodado, Colombian Mining and Energy Minister, announced possible joint exploration of the Orinoco basin by Colombia’s Ecopetrol and Venezuela’s PDVSA. According to Colombia’s leading think tank Fedesarrollo, in 2009 Colombia extracted 66.45 percent (425 thousand b/a) of its oil from the fields in its side of the basin, which accounts for 30 percent of the basin’s area with the remainder on Venezuelan territory. Rodado’s statement comes after high-level bilateral meetings that resumed diplomatic and trade relations between the two neighboring countries, stalled after political rifts grounded on evidence of Venezuela’s support and protection of Colombia’s FARC, a left-wing terrorist organization.

Will the joint exploration come to reality? Both companies are state-owned, however their management motivations are radically different. While Ecopetrol acts independently, PDVSA operates driven by political motivations fitting clearly into state-capitalismwhere businesses’ drivers are “maximizing the state’s power and the leadership’s chances of survival”, as oppose to profit/growth maximization. Ecopetrol, a majority state-owned company, is a solid and well-governed company. Ecopetrol’s management independently decides about its investments based on project assessment without affecting Colombia’s fiscal position. The company is listed on the NYSE (EC) and, most recently, on the Toronto’s Stock Exchange. Ecopetrol’s share has performed positively, increasing value both in USD and COP, which has not been the case of other players such as Brazil’s Petrobras whose share has declined since January, according to Brooking’s Mauricio Cárdenas Santamaria.

PDVSA… well, is the opposite of Ecopetrol. The highly in-depth state owned company is crucial in Venezuela’s Hugo Chávez regime. Not surprisingly, the company’s CEO is also the head of the Ministry of Energy and Oil and one of PDV’s vice-presidents is Chavez’s brother. The company’s funds most of Venezuela’s “social” programs, which guarantee people’s support for Hugo Chávez.  PDVSA, more over, has unsuccessfully taken over several other nationalized companies in the sector.

Whether or not the joint exploration crystallizes, Ecopetrol should be wary of its business partner.