Investors—Canadian ones, in particular—may recall Colombia as one of the hottest oil plays in the world.

That was just a few years ago. Huge wells in these plays created huge valuations—and some strong runs for stocks like Pacific Rubiales and Petrominerales.

Today of course is a different story, with stock prices having fallen off the map—despite favorable oil prices. So what happened that caused these sharp share price drops? And are there good reasons for investors to turn back again to Colombia’s oil plays?

We asked Fred Kozak for his insights—He’s an independent oil and gas analyst, formerly with the Canadian brokerage firm Canaccord Genuity.

“Colombia still has FARC issues, environmental permitting is still a big problem and pipeline constraints are all impacting the investment climate,” he said in an interview.

FARC is the Spanish acronym for the left wing guerrilla movement in Colombia. Former President Alvaro Uribe was able to secure billions of dollars in US aid in the last decade, which was used for the military and other means to reduce the FARC’s impact on the country.

With the FARC risk down considerably, foreign investors felt secure in investing billions of private capital into the country’s energy sector—especially the upstream oil and gas producers.

The Canadians were quite active then, led by companies like Frank Giustra’s and Serafino Iacono’s Pacific Rubiales and John Wright’s and Corey Ruttan’s Petrominerales.

Both companies had great success developing assets in the Llanos Basin in the middle of the country, and both had exceptional stock runs. PRE skyrocketed from $2-$34 in 2009-2010, and PMG rose from $6-$40.

A Perfect Storm of Oil Exploration

It all happened at the same time: There was a perfect storm of exploration success, a lower royalty rate, and the sense that this under-explored country could continue its string of high profile discoveries for years. Promoters created new junior exploration companies with bloated share counts—hundreds of millions of shares out—and investors jumped all over these opportunities.

These days? In what I would refer to as the senior Colombian stocks—Rubiales, Gran Tierra—they’re just above 50 percent of their highs, and the rest are anywhere from 20-50 percent of their highs. That second round of bloated share-count juniors quickly lost 80 percent of their value, and have only recently popped their head up.

Did anybody get the license plate on the truck that ran over these stocks?

It was actually several trucks, says Kozak. He says one of the big factors hitting these stocks was the Arab Spring of 2011—all international juniors the world over sold off after institutional and retail investors lost their appetite for foreign risk, as dictators got toppled one after the other starting in early 2011.

And sadly for everyone, FARC violence has increased this year. After several years of declining activity, brokerage firm Raymond James reports in an Aug. 13 report that there has been a “material” increase of security incidents reported since the beginning of the year. Pipeline attacks increased three-fold year-over-year, and five Ecopetrol contractors were killed in Putumayo this summer, near the Colombian/Ecuador/Peru border.

FARC pipeline attacks don’t help an already difficult situation—increased oil production in Colombia has strained pipeline capacity.

“As much as 100,000 barrels a day of oil production (bopd) could be shut in, I’m not exactly sure, but it means that you have to truck oil,” says Kozak.

This means higher transportation costs, and companies can’t produce new discoveries at full throttle. In a negative market, that’s deadly to a company’s share price.

Colombia’s daily oil production currently exceeds 900,000 bopd, having risen more than 60 percent since 2006, but pipeline constraints have not allowed it to crack the magic 1 million bopd mark.

Sourch. CNBC