Despite Peace Talks, Colombia’s Oil Industry Increasingly Under Attack

Posted on Jan 30 2013 - 8:50am by Rico

With peace talks engaged for the first time in a decade, and the Revolutionary Armed Forces of Colombia (FARC) at its weakest point in history, Colombia’s once-stifled oil and mining sectors have taken off, enabling oil production to reach a record of 1 million barrels per day in late-December. Yet the extractive industry has found itself increasingly targeted by the FARC and other rebels who are seeking to force concessions from the government, putting foreign investment, now at all-time highs, at risk.

The FARC are suspected in the bombing of a gas pipeline in La Guajira in Northeastern Colombia on Friday. The attack came days after the leftist rebel group destroyed sections of two oil pipelines and planted a bomb on a railway owned by the country’s largest coal exporter, Cerrejón, a joint venture of BHP Billiton, Xstrata and Anglo American.

The bombings coincide with the end of a unilateral cease-fire declared by the FARC two months ago, at the start of peace talks with the administration of Colombian President Juan Manuel Santos. Observers are optimistic that the talks, which are ongoing in Havana, Cuba, could end the longest-running conflict in Latin America — and provide some relief for the country’s investors.

The Colombian government estimates that the war with the FARC costs the economy one to two percentage points of gross domestic product annually, in addition to making large portions of arable land unusable due to landmines and active conflict. Following a government crackdown on the drug trade, historically the FARC’s primary source of income, the rebels have turned to harder-to-detect illicit activities in legal industries, namely gold mining, timber and fisheries, and are known to charge workers a “war tax” to carry goods through rebel-held territory.

After five decades of combat, the Colombian military has succeeded in diminishing the rebel forces to an estimated 8,000 troops, according to 2011 government figures — down from at least 16,000 10 years prior. Colombian forces have killed many of the FARC’s top leaders and pushed the remaining rebels into a handful of remote regions, mostly along the borders with Venezuela and Ecuador and far from major cities and tourist destinations.

The improved security landscape, combined with market-friendly policies and a free trade agreement with the United States, have bolstered the Colombian economy. Foreign direct investment rose to a record $16.7 billion last year, up 11 percent from 2011. Of foreign investment that entered Colombia in the first six months of 2012, 82 percent went to energy and commodities, with oil being pumped and new fields explored in parts of the country that were once inaccessible FARC strongholds. As a result of record production and profits, Ecopetrol, which is 88.5 percent owned by the state, became the world’s best-performing major oil company in mid-2012, with 35 percent returns.

However, Colombia’s energy sector may have become a victim of its own success, as assaults on the industry are rapidly increasing. Attacks on oil infrastructure more than doubled between 2008 and 2011, according to the Center for Security and Democracy at Sergio Arboleda University in Bogota. The Transandino pipeline, operated by Ecopetrol, suffered 51 attacks in 2011, and overall attacks on Colombia’s pipelines rose 460 percent in the first seven months of 2012, according to the Ministry of Defense. Kidnapping in Colombia’s oil sector also rose from less than 1 percent of all kidnappings in 2000 to more than 10 percent in 2011. The FARC officially renounced kidnapping in early 2012, but in the same year 21 employees of the oil industry were kidnapped by the country’s second-largest rebel group, the National Liberation Army (ELN), and two were killed.

The oil industry pays $55 million per year for government security, according to the Colombian Oil Association. The government, however, has struggled to keep up with the number of oil companies — totaling 130 as of August 2011 — operating in the country, despite deploying additional forces to some of the more vulnerable regions. Land use for oil exploration and production in Colombia expanded from 20 million acres in 2007 to 94 million acres in 2011.

Land reform, another major sticking point of the ongoing negotiations between the FARC and the government, also has implications for foreign investment. The FARC has not abandoned its long-held position calling for the expropriation of large landholdings and confiscation of land held by foreigners. While the government is unlikely to restrict foreign investment in land, they may seek to regulate it. The Colombian Agriculture Society calculated in 2012 that $6 billion in foreign investment was on hold because of land reform bills that are currently making their way through Congress.

In addition to land reform, the peace talks have focused on ending drug trafficking, guaranteeing political recognition for demobilized guerillas and ensuring rights for victims of the conflict.

While a peace deal would be a monumental achievement for the president and the country, and could potentially resolve a number of issues for businesses operating in Colombia, concerns have arisen that a deal may encourage spoiler activity by other rebel groups seeking political recognition. Last weekend, the ELN kidnapped three employees and two consultants of the Toronto-based Braeval Mining Corp. near a gold and silver mine in Northern Colombia, in a move said to have been carried out to force peace talks between the government and the 1,500-strong movement. Others are concerned that if the FARC renounces violence, some of the group’s fighters will merely join other criminal organizations operating in the same hard-to-reach border areas.

Santos, up for re-election in 2014, is hoping to reach a peace agreement with the FARC by November of this year. If he succeeds, the deal could set an example for rebel groups in other resource-rich countries, including Nigeria and the Democratic Republic of the Congo, that have recently come to the negotiating table. It could also demonstrate that vast natural resources and foreign investment can come hand and hand with equitable social and economic development, and not at their expense.