Crime is significant deterrent to foreign investment required to kickstart Colombia’s oil industry

By Matthew Smith

RIO DE JANEIRO, BRAZIL – There has long been an association between petroleum production, political repression, poor governance, and increased internal conflict. For strife-torn oil-dependent Colombia, which is claimed to be Latin America’s longest-running democracy, this is no different. Like South American neighbors Venezuela, Brazil, and Ecuador, black gold became an important economic motor for Colombia with the country’s addiction to petroleum starting in the mid-1980s when it became a net oil exporter.

The Andean nation’s decades-long low-intensity multi-faceted asymmetric civil conflict, which again escalated during the mid-1990s, did little to slow Colombia’s burgeoning oil industry and economy. Even the Andean country’s scant-proven oil reserves, which are significantly lower than its petroleum-producing neighbors, did not prevent Colombia from becoming a leading Latin American oil producer. By 1999, Colombia’s oil production peaked at a record 816,000 barrels of crude oil per day which was only surpassed over a decade later during the last global oil boom.

Colombia’s decades-long multifaceted internal conflict can be primarily blamed on chronic structural socio-economic inequality and political disenfranchisement. The explosion in violence is a result of the massive profits derived from coca cropping and cocaine trafficking. While those are the key elements that continue to foment bloodshed and strife in Colombia, like many petroleum-rich developing nations, rapidly rising petroleum revenue helped fueled that escalation.

Colombia’s limited proven petroleum reserves, which are among the lowest of any oil-producing nation in Latin America, did not stop the country from expanding its oil industry to eventually become the region’s third-largest producer. It was tremendous investments by foreign energy companies that led to a string of major oil discoveries that rapidly boosted Colombia’s oil-producing capacity.

These included Occidental Petroleum’s 1983 discovery of the Caño Limon oilfield followed by BP’s giant Cusiana and Cupiagua 1988 and 1993 discoveries in the Llanos Basin which were responsible for sparking Colombia’s petroleum boom. As a result, by the mid-1980s Colombia emerged as a net petroleum exporter, and crude oil during the 1990s was responsible for gross domestic product expanding at over 3% annually, one of Latin America’s fastest growth rates during that decade.

Oil revenue became an ever more important source of funding for an embattled central government in Bogota, which had lost control of vast swathes of territory outside of the major cities. Between 1993, the year when Medellin cartel kingpin Pablo Escobar died in a rooftop shootout with security forces, and 2000 Colombia’s oil rents roughly doubled.

Over a similar period, 1995 to 2000, the homicide rate rose significantly, increasing by 9% as the civil conflict once again escalated. Rapidly expanding inflows of money from illicit sources, notably cocaine trafficking, a weak state with little control outside major cities and a poorly trained as well as funded military and police were responsible for rising violence.

By 2000, nearly half of Colombia’s national territory was controlled by various illegal armed groups and non-state forces with the leftist FARC guerillas firmly ensconced in a Switzerland-sized demilitarized zone. Those non-state armed groups were not only fighting an ideological battle but also for control of lucrative territory containing illicit gold mining, coca crops, cocaine labs, and smuggling routes to finance their operations.

The Colombian government’s inability to control its geographic territory combined with heightened levels of violence, including wellhead attacks and the mass kidnapping of oil workers impacted onshore oil operations, foreign investment, and the economy. Those factors, along with a sharp decline in oil production contributed to the severity of Colombia’s 1999 economic crisis and resulting recession. That dilemma was initially triggered by high levels of public as well as private sector debt, elevated budget deficits, and declining fiscal income.

As a result, Colombia’s economy declined with annual GDP during 1999 contracting by 4.2%, which after Venezuela and Ecuador was the worst downturn in Latin America that year. This was the conflict-torn Latin American country’s worst recession on record, although it was surpassed by the sharp economic slump triggered by the COVID-19 pandemic, which according to data from the government statistical agency DANE caused GDP to shrink by 7%.

A serious consequence of the sharp rise in violence in Colombia during the late 1990s and early 2000s was that onshore hydrocarbon exploration virtually ground to a halt and crude oil production fell into what appeared to be a terminal decline. Much of the Andean country’s unexplored or underexplored territory was located in areas controlled by the various non-state armed groups. This is a key reason for Colombia’s meager hydrocarbon reserves in a country estimated to have up to 15 billion barrels of undiscovered oil resources weighing on its petroleum industry and economy.

By the end of 1999, Colombia’s proved crude oil reserves totaled 2.3 billion barrels and sharply declined over the following decades. It wasn’t until 2013, when the Brent average oil price of $108 per barrel and the country’s improving internal security and reforming the hydrocarbon sector, stimulating investment in oil exploration, that Colombia’s proved oil reserves exceeded that number, expanding to 2.4 billion barrels. Since peaking at almost 2.5 billion barrels in 2014 Colombia’s proved oil reserves are again in decline falling to a mere 2 billion barrels, with a short six-year production life, by the end of 2019.

A deeply politically and socially polarized Colombia is still inundated with violence despite the controversial 2016 peace deal with the FARC, Colombia’s largest leftist guerilla group. During 2020 there were 66 massacres recorded by the UN peace mission in Colombia, the highest number in years, and Colombian peace thinktank indepaz registered 14 mass killings during the first two months of 2021. Oil industry infrastructure still suffers attacks.

In December 2020 Colombia’s peak industry body the Colombian Petroleum Association (ACP) issued a statement deploring the violent invasion of oilfields in the Llanos Basin and escalating violence impacting Colombia’s oil industry. A favored target of illegal armed groups the 210,000 barrel per day Caño Limon-Covenas oil pipeline was bombed last month forcing operations to halt. Those events, when coupled with weaker Brent pricing and high onshore breakeven prices, are a significant deterrent to the considerable foreign investment required to kickstart Colombia’s oil industry and encourage urgently required hydrocarbon exploration.

They pose a significant threat to Colombia’s petroleum-dependent economy because by the end of 2020 the oil industry was responsible for around 3% of GDP, 17% of government revenues, and 28% of exports by value. It is important to note that those numbers are significantly lower than during the last oil boom where at its 2013 peak crude oil was generating over a fifth of Colombia’s fiscal revenues, 5% of GDP, and 55% of exports by value.

While the dismantling of the various cocaine trafficking cartels, surrender of the M19 guerilla movement, the 2016 FARC peace accord, and demobilization of Colombia’s largest guerilla group were all heralded as milestones in bringing peace to Colombia, they have done little to stop the violence. Ultimately all those actions have done is de-escalate the scale of the civil conflict while fragmenting the various illegal armed groups involved, making it more difficult for government authorities to prevent violence.

This is weighing heavily on Colombia’s economically vital petroleum industry with oilfield and pipeline attacks continuing and authorities seemingly unable to guarantee the security of remote industry operations. That is deterring urgently needed investment from foreign energy companies required to bolster crude oil reserves, expand hydrocarbon production, and ultimately drive economic growth.