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Colombia Oil&Gas2012

Colombia Oil&Gas2012

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Published by: José Gregorio Freites on Sep 22, 2013
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A Special Report From O
il and Gas Investor
and Global Business Reports
olombia’s new slogan, aimed at encouraging tourism, is “Theonly risk is wanting to stay.” The country’s policymakers arehoping that the boom in investment in Colombian E&P isalso here to stay. With production now at record levels, the newchallenge is to ensure that Colombia maintains and builds upon anoil industry that has helped turn the country around.The nation has undergone a renaissance over the past 10 yearsin political stability, safety and economic growth. Among the eco-nomic sectors that have driven this revolution, oil and gas has beena leader. Colombia is now the third-largest crude producer in SouthAmerica, after Venezuela and Brazil.Colombia has become well known among oil investment circlesas one of the most exciting E&P investment markets. While the ge-ological potential has been a foundation for interest, the real cata-lyst for the increased activity has been reforms in the institutionsthat control the industry and the contract terms available to explor-ers.Although discoveries to date have not been on a sufficient scaleto attract the world’s largest oil companies to invest heavily, it hasbecome a market of choice for small to medium-size players that ap-preciate the competitive government conditions and see great valuein the unexplored potential for modest, but profitable, discoveries.According to figures from the Ministry of Mines and Energy, for-eign direct investment (FDI) in Colombian natural resources hasincreased from $500 million in 2001 to over $9 billion in 2011.This increase in investment has translated into strong results for thecountry’s industry. According to the Ministry, the country is nowon the brink of achieving a 1-million-barrel-per-day productionlandmark.However, the next great challenge is to build upon this success.The stated target from the Ministry of Mines and Energy is toachieve an average production of 1.5 million barrels per day by2020. Yet, with only 2 billion barrels in reserves, policymakers hopeto maintain an annual level of FDI investment in the sector of US$5 billion.Other challenges that the industry is facing include an infras-tructure network that has been stretched to the point that bottle-necks have developed in the key production areas. Also,maintaining a good reputation and relationship with communitiesneighbouring operations and the populace at large is vital in acountry that has Colombia’s violent civil past.In addition, the recent and rapid growth of the industry meansservice providers for the oil and gas sector were unprepared for thenew demand. For international companies and investors, this hascreated another interesting opportunity; increasing numbers of en-trepreneurs are filling those gaps and larger international player areestablishing or growing their presence.Many observers hope that the past five years can be seen asmerely the first chapter in Colombian oil development. Further op-portunities are being encouraged in offshore and unconventionalexploration. A success story in either of these developments couldopen an entirely new front for Colombian energy.
Security as a basis for prosperity
The greatest issue for Colombian investment has been concernsover security. Colombia gained infamy as a nation torn apart by theviolence of leftist guerrillas, far right paramilitaries and the druglords that profited from the associated chaos.During former president Álvaro Uribe’s time in office, and con-tinuing with his successor President Juan Manuel Santos, the coun-try made enormous improvements. The government, through thearmy, has been keen to collaborate with the private sector and hasprioritized the protection of the resource industry in the hope thatthis activity, and the local jobs and wealth it brings, can help themmaintain security in rural areas.Over the past three years, a number of the leaders of FARC,Colombia’s largest and oldest insurgency, have been killed and, inFebruary, the group announced it would cease kidnapping civilians,a practice that has been a key concern for any oil executive operat-ing in the country.However, Colombian security is an incredibly complex issuethat remains a key consideration for any E&P operation. Worry-ingly, attacks on Colombia’s oil sector were on the rise in 2011,with 84 oil pipeline bombings, up from the record low of 31 in2010. However, the hope is that this year’s spike in figures may beeventually considered an anomaly caused by the death throes of these groups.
Investing in Colombia
Colombia is now the fourth-largest economy in South America,with a GDP of $240 billion, and the central bank expects theColombian economy to expand around 4.5% this year after growingan estimated 5.8% in 2011.Within South America, a trend towards protectionism has con-cerned investors as more left-leaning governments have pursued
 An E&P investment hotspot is fast turning into a hydrocarbon production hub for South America.
researched and written by Thomas Willatt,Patricia Matey García, Liliana Ávila Sánchez and LorenzoPiras of Global Business Reports. For further information,contact info@gbreports.com or follow us on twitter:@GBReports (Cover photo courtesy of SAExploration)
 June 2012
Colombia’s president, Juan Manuel Santos, is hoping to take the countryinto its next phase of development.
economic policies that hope to insulatelocal industries from international competi-tors. Colombia, however, was recently de-scribed by the
Financial Times
as a“free-market cheerleader” for the region.In October 2011, the U.S. Senate ap-proved the free-trade agreement withColombia that was proposed in 2006. Theoil sector is expected to be the key benefi-ciary from the new free-trade agreement;oil-related exports represented 45.7% of Colombia’s total exports in September2011.The American multinational conglomer-ate General Electric (GE) has been inColombia for more than 80 years in differ-ent lines of business, but by the end of the1990s, the company decided to cease opera-tions in Colombia. In 2006, offices were re-opened, focused mainly on the capitalbusiness and also on oil and gas.Fabiola Sojet, CEO of Northern SouthAmerica for GE, describes the company’sexperience upon returning to Colombia:“We found when we arrived a very open andfriendly environment. Uribe’s governmentwas really kind of unique; they persuaded usto come back to Colombia in the first place.Mr. Uribe met with our worldwide CEO andwas very open and supportive. The Santosgovernment now is doing the right things toimprove the investment atmosphere.”
Colombian capital
Domestic capital is also increasinglyflowing into the energy sector. DespiteColombia’s relatively small local stock mar-ket, the Bolsa de Valores de Colombia(BVC), the number of energy companiesthat list shares in the country is growing.After Colombian investors had their firsttaste with Ecopetrol’s listing in 2007, otherlocal producers such as Pacific Rubiales andCanacol have added to the bourse’s energyoffering. Over the past year the BVC hasseen a record $7 billion worth of IPOs orsecondary offerings of equity in the Colom-bian marketplace.“The oil and gas industry is of tremen-dous importance to the BVC and to theColombian economy overall,” says JuanPablo Córdoba, president of the BVC. “Fiveyears ago, oil and gas were not present onthe exchange, and today it represents morethan 40% of the index. We are seeing moreand more interest from local and foreign re-source companies to come and list inColombia because there is good access tocapital.”Colombian regulators are in the processof integrating the country’s stock exchangewith those of Peru and Chile, which wouldincrease investment in those markets andstimulate trading among the countries. “Theobjective is to become a more internationalexchange and to make the Colombian ex-change a part of the global capital markets.By offering our investors a more diversifiedpool of potential investments, we will at-tract more attention locally and from over-seas,” says Córdoba.A listing in Colombia is not right forevery E&P company. Listed companies arerequired to have some cash flow and, giventhat the minimum raise is around $75 mil-lion, it is advisable to have a sizable pipelineof projects in which to invest the capital. “If you have that, I think that having local in-vestors is a big advantage. Canada is a greatplace to raise risk equity, but once you strikeoil Colombia definitely offers benefits,” saysLorenzo Garavito, president of Helm Bancode Inversion (HBI), the investment-bank-ing arm of the fifth-largest Colombian bank,Helm.Other observers also see growth poten-tial in the debt market and opportunities forlocal banks to participate: “I am sure we aregoing to see huge debt requirements for oiland gas companies, and I would dare to saythat in rough times, when equities priceschange all the time, we will see more movesin the debt market than the equities mar-ket,” believes Juan Manuel Garcés Alvarez,vice-president of investment banking atColombian bank Correval. Correval was re-cently acquired by Banco de Crédito dePerú (BCP), a move seen by many as a signof increased regional integration.Domestic pension funds represent someof the largest investors in Colombia’s oiland gas sector. Pension funds hold about$40 billion of capital for investment and aregrowing at around 15% annually. Suchfunds, for example, hold equity in Ecopetroland Pacific Rubiales and have stakes inlarge infrastructure investment funds.However, the relative youth of Colom-bia’s oil and gas sector has meant that localinvestors are not as familiar with oil and gasinvestment and the risk profile that E&Pcompanies present. “They are different risksthan traditional companies. Investors, ana-lysts and portfolio managers definitely nowunderstand better the risks the sector poses,and it seems that it has gained the interestof the Colombian economy and capital mar-kets,” said Alejandro Correa, the head in-vestment strategist at Bolsa y Renta, aColombian exchange commission with over50 years in the market.One of the largest pension funds inColombia, and one that has been an earlymover in oil and gas, is world leader Skan-dia. David Buenfil, president of SkandiaColombia, has seen the rest of the Colom-bian pension investment market start to takenotice: “Recently, many voluntary pensionsfunds have increased their oil and gas assets.After seeing the dynamics of the industry,however, we started fairly early, so investorsin our fund have seen tremendous returnsand have outperformed the market. We arevery proud to have been one of the first in-vestors when Pacific Rubiales listed.”
 June 2012
Bogota, a rapidly growing modern metropolis, is emerging as the the main hub for Colombian oiland gas. (Photo courtesy of Patricia Matey García)Fabiola Sojet, CEO of Northern South America,GE

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