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Investors Jumping On-Board the Colombian Oil Bandwagon

Carlos Slim announced in early February that he would increase his investments in Colombia, particularly in the oil sector. This week he backed up his statement by having his Grupo Carso purchase a 70% stake in Tabasco Oil, which is exploring in the “LLA 56” area in Colombia.

Slim is far from the only investor jumping on the Colombia bandwagon. Eike Batista, Brazil’s richest man and the eighth richest man in the world, is said to be investing about $5 billion in Colombia’s oil and mining sector. According to Reuters, he plans to raise at least $1 billion in an IPO of Colombian coal mining assets early next year. Meanwhile, in an interview with FT, Colombian President Santos indicated that China plans to invest in a rail line through the once completely ungoverned border region with Panama.

The positive assessments of Colombia are based on two factors: improved security and a pro-business political environment. Both of those factors, particularly when placed in a comparative perspective with Colombia’s neighbors, make the country a very promising location for investment.

Pipeline and other infrastructure bombings have dropped dramatically following President Uribe’s surge in security around the country. The military and civilian government have improved their intelligence capabilities, allowing Colombia to stop attacks before they occur and seize significant explosive caches. They have also improved patrolling of vulnerable sectors and response to pipeline bombings, arresting those responsible. This is on top of the general citizen security improvements that have dramatically reduced homicides and kidnappings, once a key fear of energy company employees.

Two bombings on the Transandino pipeline in Southern Colombia earlier this month were reminders that the FARC, ELN and other groups maintain the capacity to cause infrastructure damage, even if they are greatly weakened compared to a decade ago. However, the quick repairs and the insignificant effects on production or exports show Colombia has successfully built up resiliency to those sorts of attacks - an advantage of experience that other countries in this hemisphere do not have should they face violent attacks in the future.

Colombia has some of the most pro-business regulations in the hemisphere. Perhaps more importantly, the perception is that Colombia will have stability in those rules for the foreseeable future. The last presidential race was a contest among pro-business candidates fighting over the details, not a grand ideological challenge. Few analysts see the potential for a candidate along the lines of Hugo Chavez being elected to Colombia at any point in the next decade. Even the populist candidates in Colombia who have received 15-20% of the votes in recent elections advocate a more responsible investment platform that Colombia’s neighbors to the immediate east or southwest.

Still, the assumptions holding up Colombia investment should be questioned. Some optimism on Colombia is certainly justified and the investments being made will likely pay off big for those getting in today. However, there should be caution against what the US Fed Chair once called “irrational exuberance.” Any country that can improve as dramatically as Colombia has in 10 years could decline just as quickly. While the FARC’s decline as an ideological insurgency is near certain, there is nothing irreversible about Colombia’s security gains. Many of the key indicators including homicides and kidnappings ticked up last year after having bottomed out in 2008 or 2009.

Indeed, as we’ve seen in other countries in the hemisphere, the decline in the security or political environment is fast and often catches businesses off guard. There is a tendency in Latin America to believe, “it can’t happen here” - until it does. History suggests that Colombia’s geography makes its territory tough to govern and secure. Additionally, the general instability and increasing crime across the border in Venezuela, Ecuador and Peru should be a concern to those looking at investments in the border regions of Colombia.

Note: Heavy rains halted mining in Colombia last year, causing the country to miss its coal mining goals.

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