Social Unrest in Colombia May Affect Investment in Colombian Oil Industry

Sources:
Columbia Reports: Violence Escalates in Columbia Oil Worker Protests
MercoPress: Columbia the Rising Star of the Oil Industry in South America
Time: Violent Protests Threaten Columbia’s Oil Boom
WSJ: Columbia Protests Halt Oil Output at Big Fields
WSJ: Oil Firm to Restart Columbia Output
WSJ: Pacific Rubiales Moves to Restart Output at Columbia Oil Field

Eight years ago, Colombia’s oil fields were unsafe to operate. Insurgents from the Revolutionary Armed Forces of Colombia (FARC), Latin America’s largest and oldest guerilla group, frequently blew up pipelines and kidnapped oil workers. Since that time, the government has successfully increased its efforts to drive the FARC out of the oil-producing eastern part of the country. As a result of improved security, investment in Colombia’s oil industry has increased. Colombia’s relatively low tax and royalty rates have also encouraged foreign drilling.

The oil companies and the Colombian government have benefitted financially from the oil boom that began four years ago. Oil companies have boosted production by investing in new technology. Last month, Colombia produced an average of 953,000 barrels of oil per day—double the amount it produced four years ago. The oil industry aims to reach one million barrels of crude per day by the end of 2011. However, social unrest in Colombia has threatened the ability of oil companies to reach this goal.

Although the oil boom has helped the Colombian economy overall, oil workers and locals from the towns and villages surrounding the oil fields feel that the oil industry has not benefitted them equally. For example, 44% of people in Puerto Gaitán, an oil boomtown, live in poverty and have access to running water for only a few hours per day. Last week, production was halted at two of Pacific Rubiales Energy Corporation’s oil fields—which represent nearly a quarter of Colombia’s oil production (nearly 225,000 barrels a day)—due to protests by workers and locals. The protests have also hurt Ecopetrol S.A., a state-run oil company that is the fourth-largest oil company in Latin America, as Ecopetrol receives a large share of the oil pumped from Pacific Rubiales. On September 22, Pacific Rubiales resumed production after reaching a temporary agreement to meet with workers to discuss their concerns. The leader of the Colombian Oil Workers’ Union, however, warned that labor strife will be constant unless companies begin responding to local demands. If they cannot come to an agreement, protests in the region may continue.

Experts believe that oil workers and members of the local community may have legitimate reasons for demanding that oil companies provide better living and working conditions for workers, hire local people, and buy local products. However, they largely blame the government’s mismanagement of petrodollars (U.S. dollars countries earn through the sale of oil) for these conditions. For example, instead of investing in social welfare projects, the government spent millions on a cycling arena and a waterpark.

Analysts are concerned that if the government cannot adequately protect the oil companies from continued social unrest, foreign investment in the region will decrease. Following the protests, the price of Pacific Rubiales’ and Ecopetrol S.A.’s stock dropped. Prospective investors may hesitate to invest in the oil industry if social unrest would limit areas available for drilling, as was the case eight years ago. Social unrest could also lower production—and profits—as was the case this past week, which would also scare investors away.