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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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Colombia’s Oil Industry Faces 3 Big Problems

Colombia’s beleaguered oil patch remains under considerable pressure. Aside from falling investment and a lack of proven reserves that has led to fears that it only can support another five years of production at current rates, it continues to experience considerable disruptions and outages.

The failure of peace talks and ending of a bilateral ceasefire with the last remaining Marxist insurgent group the National Liberation Army (ELN) has seen the guerillas recommence attacks on domestic energy industry infrastructure.

That includes the recent bombing of the all-important Caño Limón pipeline, which connects the Caño Limón oil field operated by Ecopetrol and produces around 50,000 barrels daily to the Caribbean port of Coveñas. In early February 2018 another bomb destroyed a stretch of the pipeline, extending an already month-long stoppage caused by earlier attacks. This has taken 210,000 barrels daily of transportation capacity offline, impacting Colombia’s already declining production.

To make matters worse, the ELN instituted a national three-day armed halt in the territory it controlled, slated to end on February 13, 2018. This was aimed at disrupting local commerce — including the transportation of crude — in that territory as means of exerting economic pressure on the Santos government to recommence peace talks.

The latest news for Colombia’s oil industry couldn’t get any worse. Violent protests have erupted at state-controlled Ecopetrol’s Castilla, Chichimene and CPO-9 oilfields in Colombia’s central Meta province. The protests stem from a years-long labor dispute between locals and Ecopetrol, the state’s largest oil producer. The violence — including threats against the safety of Ecopetrol workers at those locations — forced it to shutter production at those fields. Related: Clean Oil That Only Costs $20

It’s difficult to determine when Ecopetrol will be able to open the spigots and recommence pumping at those oilfields. It will have a sharp impact on its 2018 performance because the three oilfields combined are responsible for around 212,000 barrels of daily oil production, which amounts roughly 30 percent of Ecopetrol’s total daily output. This doesn’t bode well for the company, especially as it battles a range of preexisting issues like dwindling reserves and oil output.  

This latest development, along with oil’s recent weakness, caused Ecopetrol’s stock to fall by 8 percent over the last week.

When combined with the ongoing outage of the Caño Limón pipeline and further threats by the ELN to attack the crucial Transandino pipeline (which can pump up to 85,000 barrels of crude daily between the southern Putumayo basin and the Pacific port of Tumaco) it’s a dark omen for Colombia’s energy patch.

The Andean nation’s oil output has been in decline since 2013, resulting in a sharp impact on its oil-dependent economy — causing export earnings, national income and the value of the Colombian peso to decline.

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These issues also act as a deterrent to desperately needed foreign investment in Colombia’s energy patch. According to data from the nation’s central bank, by the end of 2016, foreign investment in Colombia’s oil industry fell to less than half of what it was in both 2013 and 2014.

The latest unrest certainly doesn’t bode well for Colombia’s oil industry, and could very well — depending on how long production is shuttered — further impact Bogota’s 2018 budget. A fiscal deficit of 3.1 percent of GDP was forecast for the year, and due to the importance of oil exports for generating national income and economic growth, it could cause that deficit to widen.

When coupled with a more sober outlook for crude, the ongoing unrest in Colombia’s crucially important oil industry doesn’t bode well for either Ecopetrol’s or the economy’s performance in 2018.

Matthew D. Smith for Oilprice.com

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