Wednesday, May 26, 2010

War ebbing, Colombia enjoys oil boom

(Reuters) - Viewed from the air, Rubiales oil field spreads like a small town in the heart of Colombia's flatlands with huge oil tanks and pipelines that spider across the plains as if they were gleaming roadways.

The bustling camp has come a long way since a decade ago, when Marxist guerrillas torched its grounds and harassed its engineers in the remote area that was once a bastion of the rebels' four-decade-old insurgency.

After languishing for years with production at a trickle, Rubiales is now a symbol of Colombia's newly reactivated oil industry and the country's largest producer of the crude that once again has foreign operators clamoring for contracts.

Latin America's No. 4 crude producer, Colombia is enjoying a boom in oil and mining thanks to its geological and mineral promise, dramatically improved security under President Alvaro Uribe and a new political and legal stability, executives say.

Guerrilla violence and armed gangs heavily involved in cocaine trafficking are still a risk, while weak infrastructure adds costs and local communities are demanding their share of oil wealth as the industry expands rapidly around them.

But under-developed oil fields coupled with the government's incentives to attract foreign investors have turned Colombia into a rival of mainstream oil-producing countries.

"The story of Pacific Rubiales has its roots in the good policies of the Colombian government," Pacific Rubiales' chief executive Ronald Pantin told Reuters at the company's offices in the plush district of northern Bogota.

"Ten years ago Colombia was a country, because of security, where you couldn't really work," he said.

His company is operating in the Llanos, a region of sweltering plains that stretch across Colombia and into Venezuela and are rich in heavy crude.

Like Pacific Rubiales (PRE.TO), which expects production to reach 300,000 barrels per day by the end of next year, Canada-based companies Gran Tierra (GTE.TO), Alange Energy (ALE.V) and others have taken the lead in energy investment in Colombia, where around 120 companies are working in oil fields.

Colombia recently doubled its estimates of proven to possible reserves to 3.1 billion barrels.

Its OPEC neighbors Venezuela and Ecuador have reserves of 99.2 billion barrels and 3.8 billion barrels respectively, according to a British Petroleum energy review.

But at nearly 800,000 barrels per day, Colombia is already pumping almost twice as much oil as Ecuador and its output will likely hit 1 million bpd next year.

One barometer of interest in Colombia's oil will be the 2010 round of auctions in June, when more than 200 oil and gas fields will be up for grabs.

Some observers say Colombia is putting too much on offer for the existing demand, but the government says if even half of the blocks are sold the bidding will be a success.

"Depending on the areas auctioned, and the success in exploration, we could be talking about new investments of $1 billion in the next two or three years," Energy Minister Hernan Martinez told Reuters.


Much of this change came about under Uribe, a hard-liner who made stamping out violence and drawing investment the almost singular mission of his eight years in power. He steps down this year after two terms with his popularity high.

Uribe's U.S.-backed war on the FARC guerrilla group drove its fighters back into rural areas. Kidnapping, bombings and massacres dropped sharply as troops put rebels on the back foot, helped by better military intelligence and helicopters.

Uribe also welcomed foreign investment with open arms, loosening regulations, creating a streamlined hydrocarbons agency and lowering industry taxes. When he first came to power in 2002, foreign direct investment was around $2 billion a year. It is now expected to reach $10 billion this year.

His security and business policies have proved so popular that the two leading candidates for the May 30 presidential election, former defense minister Juan Manuel Santos and two-time Bogota mayor Antanas Mockus, have built their campaigns around promises of continuity.

Some worry the oil and mining boom could bring a dose of "Dutch Disease" with non-oil industries declining as a huge influx of energy and mining dollars sends the peso currency higher, making exporters uncompetitive.

Both presidential contenders want to create off-shore savings accounts to better manage the surge of dollar revenues -- a sign of how much foreign investment Colombia expects for its oil industry as well as its coal, gold and nickel mines.

Oil and mining investment was $500 million eight years ago but jumped to more than $6 billion in 2008/09, accounting for nearly half total foreign investment in the two-year period.

A few years ago, rebel groups bombed pipelines almost daily but the army now has a strong presence in many oil-producing areas.

"The companies that were really on the ball got in about three or four years ago," said Frederick Kozak, an oil and gas analyst at Calgary-based Canaccord Adams, although he cautioned that Colombia needs to improve its infrastructure if it is to continue the success of recent years.

The government plans to invest nearly $4 billion in oil infrastructure, mainly on pipelines and transport networks, to prevent bottlenecks as increasing output overloads the system.


Security problems remain a risk in the world's top cocaine producer, especially for subcontractors who carry out initial exploration and test blasting in remote areas where there is scarce state presence.

In March this year, five subcontractors working for Tuboscope and Tecnioriente and hired by Occidental Petroleum Corp (OXY.N) were kidnapped by FARC rebels in a border region near Venezuela. Troops rescued them four days later.

Also in March, guerrillas set fire to and destroyed a helicopter from a contractor hired by Argentine company Pluspetrol as engineers worked on seismic studies. The attack suspended work in the jungle area although no one was injured.

Despite occasional problems like those, the darkest days of Colombia's often brutal war have been left behind.

"The risk still exists in areas where the state has not reached and areas where there is a mix of drug traffickers and FARC activities," said Waldyr Rodriguez, a Pluspetrol director. "But in no way did it put us off being in Colombia."

Dodging builders in his new offices in northern Bogota, Luis Giusti explains how his company, Alange Energy, started with crude production of about 800 bpd in Colombia's plains and has since lifted total output to around 2,500 bpd.

A former executive at Venezuela's state oil firm PDVSA, Giusti left after socialist President Hugo Chavez came to power and is one of scores of ex-PDVSA men in Colombia's industry.

Chavez nationalized oil assets and rewrote contracts with foreign firms, and his socialist ally in neighboring Ecuador, President Rafael Correa, is also leaning on foreign investors, a sharp contrast to Colombia's business-friendly approach.

"In Colombia they are doing all the right things. In Venezuela they are doing all the wrong things," Giusti said.

Out in its Cubiro oil field in the plains of Casanare province, Alange still has to truck its oil along unpaved roads to pipeline points to get the crude out. But with more companies coming in, it is looking at a possible pipeline partnership to reduce costs.

"Colombia is a country that lets itself get the help it needs," said Jose Luis Acevedo, a Venezuelan executive touring the Cubiro site. "It has opened its doors." (Editing by Kieran Murray)

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