One of the hottest oil plays in the world right now is in South America.
I’m not talking about Brazil, or even the waters around the Falkland Islands.
I’m talking about Colombia.
That might surprise you, but investors in the know have already done well. One oil firm in the country, London-listed Amerisur, has seen its shares rise by around 400% in the last few years.
However, don’t worry if you missed that one – Colombia’s oil and gas boom isn’t over yet.
Ten years ago the Colombians had a big problem – oil production was falling fast.
For years, the country had relied on the massive Caño Limon oil field. But as it started to decline it dragged the country’s oil production down with it.
By 2004, Colombia’s overall production had slipped to 550,000 barrels of oil equivalent per day (boe/d), down from 800,000 boe/d just five years earlier.
It wasn’t that Colombia didn’t have oil. In fact, geologists told the Colombian government that more oil would probably be found in the unexplored mountains. The problem was that poor security and unhelpful regulations meant few companies wanted to explore.
That’s all changed now. Thanks to some shrewd government policy and a fair bit of luck, oil production is now almost at a million boe/d, and predicted to hit 1.5 million by 2020.
One smart move was to reorganise the oil and gas sector and change the rules to allow oil explorers to keep more of the income from any oil they found.
Another was to allow producers to charge a fair price for the oil in Colombia – many other Latin American countries fix the price of domestic oil, meaning that local producers are often forced to sell to locals for well below the going rate, hurting profit margins.
Security has also improved. Colombia’s murder rate fell to a 26-year low last year. Meanwhile, the strength of FARC, the country’s oldest and largest insurgent group, has been reduced by a series of military strikes.
Hugo Chavez, president of neighbouring Venezuela also inadvertently helped to boost Colombia’s hydrocarbon business.
In 2002 and 2003 workers at Venezuela’s national oil company, PDVSA, went on strike in an attempt to oust Chavez. Eventually Chavez got the upper hand and expelled them from Venezuela.
It’s estimated that 18,000 skilled oil technicians, engineers and managers left in the years following the strike. This diaspora of oil talent spread from Canada to the Middle East, but many thousands settled in Colombia.
‘It was a huge boost to our oil industry,’ says Colombia’s ambassador to the UK, Mauricio Rodríguez Múnera. ‘They brought the extra skills and knowledge we needed for the sector to grow.’
All these factors encouraged people to invest in Colombian oil and gas projects. Foreign direct investment in Colombian natural resources has increased from $500m in 2001 to more than $9bn in 2011.
Local investors have also backed oil and gas projects. Five years ago, oil and gas firms were not present on the local stock exchange, the Bolsa de Valores de Colombia (BVC). Now they make up almost 50% of its value.
Colombia’s growth is impressive but there is plenty more to come. The country remains underexplored. Later this month ANH, Colombia’s National Hydrocarbons Agency, is holding a round of auctions, including the first offshore blocks, to open up more of the country.
Better yet, Colombian producers enjoy some of the lowest costs in the world. That’s because they operate exclusively on dry land, and so avoid the expense of offshore rigs and the like.
That’s good – it means that even if the oil price tumbles, Colombian onshore producers will still have healthy profit margins.
Costs are set to fall even further. Colombia’s transport infrastructure is terrible. Shifting goods across the Andes mountain range is expensive and time-consuming.
But the government wants to change all that by building more transport infrastructure. According to Vanessa Buendia from the Infrastructure Journal, ‘the ten-year development plan is estimated at circa US$20bn’. One important highway has already been completed and more are being built.
This new transport network will cut costs for oil producers in remote areas. Most importantly, it will help oil firms exploit the fact that Colombia has both Atlantic and Pacific ports, giving easy access to almost any major export market.
The security situation could also improve further. While overall Colombia is stable, FARC has stepped up attacks on oil and gas infrastructure in the last year.
The head of Colombia’s national oil company, Ecopetrol, told me that attacks only account for about 1% of the country’s production. But he admitted that the need for extra security measures drives up costs.
This month the government is due to sit down with FARC for historic peace talks. There’s no point in being naïve – very few people expect any huge breakthroughs. But Colombia has made huge progress in the last decade, and if the talks help to reduce FARC attacks on oil pipelines, it will give producers another boost.
James McKeigue
Contributing Editor, Money Morning
Publisher’s Note: This article originally appeared in MoneyWeek
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