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Tsvetana Paraskova

Tsvetana Paraskova

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Is The Colombian Peace Deal Enough To Revive Oil Investment?

Colombia

Colombia’s government and the leftist guerrilla rebels FARC sealed a peace deal in August to end Latin America’s longest-running armed conflict. Some praised the agreement for paving the way to restore battered investor confidence in Colombia’s oil industry.

However, the FARC peace deal – set for a referendum vote in October – is not the single most decisive factor in Colombia regaining trust and revitalizing its oil industry, which has been pummeled by the low crude prices, not only in terms of revenue but also in terms of companies cutting spending for drilling in high-cost ventures.

High production costs are also one of the country’s drawbacks in the eyes of investors. Attacks on oil infrastructure by other guerrilla groups is another: FARC may have agreed to peace but other rebel insurgents are still abundant and active. Looming strikes on the oil industry is a third. Possible tax increases a fourth. A fifth drawback is changes to oil contract and regulations, which are aimed at luring new investors, but at this point, they are merely drafts, revisions, proposals and counterproposals.

So the FARC deal – as good as it is for peace – is not in itself bringing about stability to Colombia’s oil industry, which needs investments. Billions of investments—$70 billion to be exact.

Colombia’s energy industry needs US$70 billion in fresh investments over the next ten years just to survive, according to the head of the country’s oil association, Jose Lloreda. This is twice as much annually as the $3.8 billion expected to be invested in the country’s oil patch this year.

Unfortunately, in this crude price environment, investors are not rushing to throw hard-to-come-by money at a high-cost project that doubles as a guerilla target. For example, the leftist rebel group National Liberation Army (ELN) bombed this past Saturday Colombia's second most important oil pipeline, Cano-Limon Covenas, halting pumping operations along the pipeline. Although the attack did not lead to production or exports halts, it is a constant reminder that it has not been only FARC that has disrupted oil infrastructure operations in the country.

Since 2013, Colombia has been producing around 1 million barrels of oil per day, but has been struggling recently to maintain that level of output. In July 2016, oil production averaged 843,000 bpd, down by 4.15 percent over June, the Ministry of Mines and Energy has said.

“We are facing a great challenge for the sector to maintain its importance as part of the economy while generating employment and competitiveness,” Minister Germán Arce Zapata said, commenting on the figures.

While Colombia’s proven crude reserves are some 2 billion barrels, it has offshore and shale reserves, which if developed, could ensure its energy self-sufficiency for decades to come. Related: What’s Behind The Epic Draw In U.S. Crude Stocks?

The offshore potential of the Caribbean coast is significant, and the non-conventional oil exploration is an opportunity, but Colombia needs clearly detailed plans, technical regulations, and “to learn and understand from experiences on an international level” as far as shale is concerned, Orlando Velandia, the president of the National Hydrocarbons Agency, has said in a recent interview with the Oxford Business Group.

Until then, the country has to grapple with attempts to procure investments in its conventional oil industry while facing potential strikes over planned privatizations at state-run Ecopetrol. The company has been hit by low crude prices and is now selling subsidiaries, assets and oil fields to raise cash and compensate for lost revenues.

So Colombian oil is in dire need of investor confidence and more importantly, of investments. In the lower-for-longer world, however, reinvigorating the sector is a long shot in the short term.

By Tsvetana Paraskova for Oilprice.com

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