Colombia: Eastern ties to further energy growth
A memorandum of understanding, signed on the sidelines of a summit meeting in September between Colombian President Juan Manuel Santos and South Korean President Lee Myung-bak, confirms Colombia’s growing importance to the energy-hungry economies of the East, and exemplifies the Andean nation’s goal to expand its petroleum sector both abroad and at home.
The agreement, signed in Seoul on September 15, lays the framework for a joint project that engages public and private partners in South Korea and Colombia to develop new oil fields in the eastern region of Colombia. The project also aims to build a pipeline to carry crude to Colombia’s western coast, as well as new shipping centres for Asian markets. The deal, which is estimated to be worth $10bn, comes on the back of a free-trade agreement signed between the two countries in June that is expected to be approved by end-2012.
Colombia’s role in the global petroleum sector is rapidly expanding, thanks to a series of oil discoveries that have revived the once-stagnating domestic industry. A range of regulatory reforms begun in 2002 have helped revive the industry and made Colombia an attractive destination for foreign direct investment (FDI). Between 2003 and 2010, nearly 250m ha were explored for new reserves, and discoveries climbed from 12 in 2006 to 35 in 2010.
According to the Central Bank of Colombia, total FDI reached $2.86bn in 2010 and had more than tripled by mid-2012, reaching $9.3bn, of which 82% went to the mining and energy sector. By mid-2011, investments in the oil sector accounted for 28% of GDP – higher than both neighbouring Brazil and Chile, which have strong and expanding petroleum industries of their own.
Major capital increases have helped to significantly boost production levels. Oil production in Colombia climbed from 595,000 barrels per day (bpd) in 2008 to 923,000 bpd in 2011. According to the Ministry of Mines and Energy, in September 2012 production levels stood at 956,000 bpd, and are expected to reach 1m bpd by the end of the year and 1.5m bpd by the end of the decade. By contrast, in 1999 Colombia’s production levels peaked at 830,000 bpd and were on a steady decline thereafter, hitting 531,000 bpd in 2007.
However, hitting future production targets requires that Colombia significantly expand its proven reserves base, which stands at 2.2bn barrels, up from 1.9bn barrels in 2011. This expansion is a primary government objective for the sector and is crucial for sustaining the industry. Current projections expect reserves to climb to anywhere between 7.7bn and 41bn barrels – a 20-fold increase – by 2030.
To this end, between November and December 2012, the Colombian National Hydrocarbons Agency (Agencia Nacional de Hidrocarburos, ANH) will be announcing the bid winners of Open Round Colombia 2012, which allocates new exploration contracts for 102 onshore and 11 offshore blocks, covering a total of 156,469 sq km.
Colombia has efficiently managed the resurgence of its petroleum sector, in line with the trajectory of the global industry. Its emphasis on growing Asian energy markets, as well as its ability to channel their demand into investment, growth and development of its own local industry, highlight the strategic vision of the government and industry leaders. Commenting on evolving conditions in the global market, Mauricio Cárdenas, the then-minister of mines and energy, said in a recent interview with the Wall Street Journal that his country had “to start shifting [its] markets to Asia”.
The oil sector has become a prime target for countries such as South Korea, China and India, which are increasingly energy-hungry and looking to secure future resources. The higher liquidity of Asian investors means that they have greater capacity to invest than Western counterparts, which have traditionally been sources of capital for the Colombian economy. Furthermore, new trends in the US energy sector – particularly the rise of the shale gas segment – may be a sign that Colombia could soon lose ground in its biggest petroleum export market. In 2011 the US imported 422,000 bpd of Colombian crude oil and refined products, nearly half of Colombia’s daily production.
Alongside the agreement with South Korea, recent Asian inroads in Colombia include a deal in May 2012 with the state-owned China Development Bank to finance a 600,000-bpd pipeline to transport Colombian and Venezuelan crude from oil fields in the east to western seaports. This is only the latest in a string of Chinese investments in the energy sector, including similar infrastructure development projects and numerous asset acquisitions by China-based Sinopec, a state-controlled petroleum firm, and China’s largest petrochemicals trading company, Sinochem.
In August, part state-owned Colombian petroleum company Ecopetrol signed a $1.2bn deal with India-based refinery Essar to supply 12m barrels of crude oil over a 12-month period. Javier Gutiérrez, the president and CEO of Ecopetrol, told OBG that the agreement reflects the growing preference of Ecopetrol and many Colombian petroleum firms to export heavy crude to major oil refining countries, such as India and China.
Such agreements have clear benefits for both the supplier and buyers. As Colombia regains the ground it lost during years of decline, it has managed to restructure both the sector and investment climate to attract FDI that has served to increase its share of the global market and expand the local sector’s capacity.