Over the past several years, Colombia's energy industry has increased its operating area from 8 million hectares to over 41 million hectares. Ronda Colombia 2012 will increase this figure by an additional 13 million hectares. Paradoxically, the success of the Colombian military in downgrading the rebel groups' capacity to control territory has forced them to rely on small-unit guerrilla strikes.
When companies are granted concessions in November and begin expanding linear infrastructure deeper into Colombia's rural jungle areas, they will offer rebel groups a ripe target for the new style of fighting. Additionally, as the military continues to interrupt drug-related sources of funding, extortion will become a more attractive fundraising alternative.
Despite challenges, investment in the energy sector will only be nominally affected unless the Revolutionary Armed Forces of Colombia and National Liberation Army succeed in paralyzing the country's commodity flows for an extended period of time. While they have partially succeeded in doing this in the southwest and to some degree in the northeast, it is still uncertain whether they have the capability or desire to launch a long-term war on soft targets. If such attacks increase military pressure on illicit supply routes, the rebel groups may reconsider their current tactic.
Due to the nature of the attacks, the changing composition of investment and the changing security environment, investment in the energy sector has not been drastically affected by increased attacks and extortion. Foreign direct investment is driven primarily by a combination of Colombia's business-friendly regulatory environment, high oil prices and under-investment as a result of decades of civil war, so investment will be largely resistant to increasing challenges until we see a marked shift in these factors.
Attacks and Ecopetrol
First, while some foreign firms have been targeted, most attacks in 2012 have been focused on pipelines, truck caravans and other distribution infrastructure like bridges and roads. Given that most foreign investment is in drilling, technical analysis, exploration and extraction, the state will shoulder most of the burden.
State-owned firm Ecopetrol is directly responsible for about one-third of Colombia's total oil production, not including its subsidiaries. It owns all of the country's five main refineries and either owns outright or has a controlling share in the country's seven major pipelines: Ocensa, Cano-Limon, Upper Magdalena, Colombia Oil, Eastern Llanos, Transandino and Bicentennial. As such, Ecopetrol should not be viewed as a barometer for investment in the sector as a whole. It has by far the highest exposure to risk among investors in Colombian energy and, being a state-owned enterprise, obligations and priorities beyond profitability. It can therefore afford to take temporary losses if its long-term objective is to increase Colombia's sovereign wealth.
Ecopetrol has demonstrated a willingness to buy out its partners in the past, and given that in May 2012 Ecopetrol surged beyond Petrobras to become the largest company in Latin America by market capitalization, we can expect Ecopetrol to have the resources available to continue this tactic. As such, the likelihood that attacks will seriously undermine future investment in pipelines is minimal. Ecopetrol's production numbers will likely suffer disproportionately to the rest of the industry.
The Changing Composition of Investment
Second, the composition of investment is changing. Whereas in the past, all companies had an incentive to invest in the periphery, in Ronda Colombia 2010 and Ronda Colombia 2012, the National Hydrocarbons Agency placed capital and production requirements on firms seeking to invest. The agency requires a minimum market capitalization of $6 million per block and an operational capacity of 500 barrels per day for firms applying for Type 1 (proved potential/mature basin) concessions, $20 million per block and 5,000 barrels per day for Type 2 (new frontier basin) concessions and $200 million per block and 20,000 barrels per day for Type 3 (technical evaluation agreement) concessions.
The deeper into the periphery a company wishes to invest, the larger the company must be. In this case, size is being used as a proxy metric for security standards and risk thresholds. These regulations were implemented to prevent small firms from investing in the periphery and being potentially forced out by attacks, which results in negative public relations for the industry as a whole.
The Changing Security Environment
Finally, an increase in vulnerability may not result in diminished investment in the energy and extractive sectors because of a changing security environment. Recent reports in Colombia's newspaper El Tiempo indicate that one soldier out of every three is dedicated to protecting energy-related infrastructure. At this time, 20,000 troops protect the petroleum sector, 10,400 protect the mining sector, 11,910 protect energy generating facilities and transmission lines and an additional 36,000 protect bridges and highways.
These deployments are not new but rather part of a larger strategy of the Colombian military to protect key infrastructural nodes. However, the recent deployment of 5,000 soldiers to protect the construction of the Bicentennial Pipeline and another 28,000 soldiers to protect the southwest shows the government's continued commitment to protect existing infrastructure and to provide secure conditions for further exploration. Increased military presence will not necessarily result in improved security conditions, but it is nevertheless reassuring to companies looking to invest in Colombia.
Because of Colombia's geopolitical realities — namely its natural resources concentrated deep in the periphery — an expansion into rebel strongholds was only a matter of time and it has exposed investors to additional risk. Since attacks have largely been limited to state-controlled linear infrastructure, risky investment is now limited to large, highly capable firms and security forces are increasingly dedicated to protecting vital infrastructure, the threat of attacks will not significantly deter investment in the long term. As long as profit opportunities exist and militant attacks remain relatively small, instability will remain just another factor for businesses to consider. The continuation of exploration, acquisitions and expansion in the sector is evidence that violence and instability have not yet reached the tipping point where companies automatically disqualify the Colombian energy sector as a destination for investment.
