State of Colombian Extractive Industires

With just a few exceptions, the Colombian extractive industries are suffering greatly. The scourges of illegal mining and plummeting global oil prices have already been expanded upon in this blog, but it does not appear that there will be relief any time soon. Goldman Sachs lowered its projections of global oil prices in 2015 by 17%, from $90 per barrel to $75 per barrel. To appreciate the impact that this will have on Colombian society, keep in mind that the Colombian government made its budget projections for 2015 and 2016 assuming a base world oil price of $100 per barrel. For every dollar that is shaved off world oil prices, Colombia loses over $200 million USD. Goldman of course also lowered its expectations for Pacific Rubiales and Ecopetrol, the two leading oil companies in Colombia, and their share prices quickly plummeted.

However, despite this uncertain context and rumors of takeover bids, Pacific Rubiales also had some good news. In September and October, 72% of the exploratory wells that the oil company dug were successful. The vast majority of these wells was located in Colombia and Peru. Pacific Rubiales will need to keep up this streak if it wants to counteract the effect of low oil prices on its stock.

The Colombian oil industry isn’t alone – the mining industry has also been severely affected by declining world commodity prices. Mining-related revenues have fallen 50% in the last 20 months, with much of this decline occurring in the coal mining sector, which represents 70% of mining-related GDP in Colombia. That said, coal isn’t the only problem with the Colombian mining industry. Nickel prices have also plummeted dramatically, severely affecting Colombian nickel mining and the communities that rely on this activity. 

Economic Development in Peru

The United Nations’ Economic Commission for Latin America and the Caribbean (ECLAC) predicted that Foreign Direct Investment in Peru will total $9.8 billion for the year, down 18% from 2013’s total. This decline was chalked up to the declining commodity prices of the metals that fuel Peru’s mining industry and overall economy. Though the Peruvian economy had a down year, compared to the rest of the region, it was one of the better performers. In Latin America as a whole, FDI fell 23.5% in the first six months of 2014 as compared to 2013, with Mexico and Argentina hardest hit. Brazil and Colombia, two countries that recently reelected incumbent presidents, were the only countries in the region that actually experienced FDI growth.

The Commission also announced that Peru is currently on track with its National Plan for Economic Diversity, and should start seeing results within one or two years. The ECLAC cautioned that, of course, some sectors are more complex and could take longer than others. Nonetheless, the Commission said, Peru should take advantage of its strong mining sector to become a provider of services and goods related to this industry, thus diversifying its economic base. Clearly, though, a persistent slowdown in the global mining industry, and a lingering depression in metal prices, would have consequences beyond just investment in new mining projects, and would also affect the development of the envisioned Peruvian mining services industry.

Meanwhile, the Peruvian authorities continued their crackdown on illegal mining, with the Peruvian navy interdicting an illegal mining operation in Puerto Inca, destroying equipment that the miners had been using. 

Mining In Colombia

The Colombian Attorney General made headlines over the weekend when he called for the Colombian government to make illegal mining a felony because of the tremendous damage that it causes to the environment. Attorney General Alejandro Ordóñez made his appeal in the context of strengthening protections for the environment in Colombia, arguing that the government, companies, and private citizens are all responsible for protecting Colombia’s natural resources, which make it one of the most biodiverse countries in the world. Ordóñez, in highlighting individuals’ and companies’ responsibilities towards the environment, was drawing linkages between illegal mining activities and the controversy surrounding Drummond’s operations in Colombia. Drummond has been repeatedly accused of causing damage to Colombia’s coastline by dumping coal.

On the subject of illegal mining, Attorney General Ordóñez also called on the federal government to resolve the uncertainty regarding the Paramo of Santurbán. Theoretically, high-altitude paramos are protected areas in Colombia, and mining is illegal within their borders. One consequence of this law has been to make the demarcation of these areas a very politically-charged process, which has slowed the process down significantly. The Attorney General was pointing out that the persistent delays in finalizing the borders of the Paramo of Santurban has permitted a resurgence of illegal mining, and thus more environmental damage, undermining the original intentions of the law.

It appears that some of the Colombian authorities are taking illegal mining seriously. In the Amazonas department of Colombia, in the Amacayacu National Natural Park, fourteen illegal miners were detained and transported to the departmental capital in a joint operation by the Colombia Air Force, Army, National Police, and Attorney General. 

Colombian Oil Industry

The Colombian oil industry continues to be buffeted by two competing pressures: on the one hand, world oil prices continue to plummet, reaching some of their lowest levels since 2008. Colombia has followed suit, finding a market for its oil exports in China by undercutting OPEC prices. 

Traditionally, Colombia has exported the bulk of its oil to the United States, but decreasing demand in the U.S. has forced Colombia to export more to China and Mexico.

The Colombian journal Portafolio.co ran several articles detailing the ongoing Colombian search and debate for new oil reserves in the country. Francisco Lloreda, president of the Colombian Petroleum Association, drew attention to the economic crisis that Colombia will face in 6 to 7 years if the country is unable to find and access new oil reserves. He of course argued that fracking will play a key role in Colombia’s oil future. Margarita Flórez, director of the environmental NGO Environment and Society, highlighted the environmental dangers that fracking presents, particularly in a country with such a high rate of seismic activity. Mr. Lloreda brushed aside these concerns, arguing that, “[Fracking] has risks, but if things are done right, those risks decrease signficantly.” Not exactly a statement that inspires confidence, especially in a country with an ongoing armed conflict.

Additionally, studies carried out by the National University of Colombia in the Vaupés – Putumayo basin of the Amazon uncovered prospective reserves of 2.4 billion oil barrels, a boon to the country’s oil industry. Of course, these results are still very preliminary, but there are several hurdles that need to be overcome before these reserves could be exploited. First, the government would have to assuage environmental concerns regarding oil exploration in one of the world’s most important ecosystems. Secondly, given the ongoing FARC attacks on oil infrastructure in the Putumayo and Amazon regions, security in the area will need to be significantly improved. 

Illegal Mining in Peru

Accusations of political corruption have become commonplace in Lima these days. This week, Peruvian Interior Minister Daniel Urresti sued Victor Chanduvi, the self-declared leader of informal miners in Peru, for defamation. Chanduvi had previously accused Urresti in the press of soliciting bribes from miners when he was the high commissioner of illegal mining for the President of the Council of Ministers. Minister Urresti called these accusations insulting, disrespectful, cowardly, and in bad faith, and said that they were clearly part of a systematic attempt to hurt his honor and reputation.

Accusations regarding impropriety and the illegal mining industry in Peru reach all the way to the presidency. Congressman Héctor Becerril has called for President Ollanta Humala and his wife, Nadine Heredia, to be called before Congress’ Finance Commission to respond to Chanduvi’s allegations regarding illegal miners’ contributions to the 2011 Humala campaign for the presidency. Becerril added that Urresti should stop defending Humala and allow the president to speak for himself.

News for the Cajamarca region is not good. Vice President for the region, Porfirio Medina, has stated his opposition to the Conga project and to mining in general in Cajamarca. He somehow believes that agriculture can replace mining as the economic engine for the region. The truth is, however, that Cajamarca desperately needs the revenue from mining, and agriculture could never come close to replacing it. The region clearly needs a diversified economic strategy, but mining will have to be a key component.

Illegal Gold Mining in Colombia

One of the long-running conflicts in Colombia has been the battle between Colombia’s “artisanal” gold miners and the Colombian government and its allies, the large mining companies that operate in the country. For a long time, largely overshadowed by the higher-priority armed conflicts in Colombia, artisanal gold miners operated in the background. However, when gold prices skyrocketed in the last decade, informal gold mining quickly followed suit.

Artisanal mining is incredibly controversial because of the tremendous environmental devastation that unregulated mining can have on the environment. However, simply declaring these activities illegal does not resolve the problem. Solidarity organizations for artisanal miners in Colombia have been working to formalize and organize small-scale miners in the country. These new mining cooperatives will hopefully give the individual miners a voice in the public policy decision making process.

Nonetheless, not all of the news about artisanal mining is positive. Individuals continue to subvert the environmental regulations that have been put in place, polluting rivers, ground water, and soil. The Colombian authorities are doing all they can, but the allure of profit is a strong one.

We believe that the underlying problem is one of communication: the government is not involving the artisanal mining communities in the conversation about state policy on mining, and is not providing them with the resources to continue mining, but in a manner that is less destructive to the environment.

The Economics of the Peruvian Mining Industry

Renowned Peruvian journalist Mario Sifuentes Briceño believes that Peru will become a first-world country and that mining will be the key to this transformation. He argues that Peru has always been a nation of skilled miners, and that this is not something to be ashamed of, but rather taken of advantage of.

No one could accuse Peru of not taking advantage of its abundant resources – so goes the mining industry, so goes the Peruvian economy. The Central Reserve Bank of Peru recently revised downwards its estimates for the country’s GDP growth in 2014, from 4.4% to 3.1%, down from last year’s rate of 5.8%. The delay in starting operations at Las Bambas in southern Peru contributed to the revision. Developed by MMG, at unit of China Minmetals, the Las Bambas project requires approximately an additional $3 billion USD to become operational. MMG expects the project to become operational in the first quarter of 2016.

Barclays’ head of European asset allocation research, Guillermo Felices, predicted that the Peruvian economy will rebound. While decreased demand for Peru’s mining exports were to blame for the slowdown, the near-term expansion of the mining industry will more than compensate.

Colombian Oil Alternatives_October 20, 2014

The largest state-owned oil company in Colombia, Pacific Rubiales, announced that it has signed a three-year memorandum of understanding with Petróleos Mexicanos (Pemex), to cooperate on “exploration, deep-water projects, revitalization of mature fields, heavy and extra-heavy oil onshore and offshore fields, high water production fields and other upstream activities.” 

Mexico recently opened up its oil industry to foreign investment, and given the dwindling oil reserves in Colombia, it’s important that Pacific Rubiales start looking abroad for other investment opportunities.

José Salazar emphasized the dire straits facing the Colombian oil industry, warning that if Colombia is unable to find new reserves in the country, the consequences to the country could be catastrophic. Petroleum products represent more than 65% of Colombia’s exports, and if the country were to go from oil exporter to oil importer, that source of revenue would need to be replaced.

Unfortunately, the investment in exploration to discover new reserves in Colombia isn’t occurring at the necessary pace. Fracking will likely be a part of the solution, but investors remain wary about the impact that the ongoing armed conflict in Colombia has on the country’s infrastructure. Just this weekend, there was an attack on the Transandino pipeline in the Putumayo department, causing an oil spill of 300,000 barrels. The peace negotiations with the FARC in Havana are just part of the solution. 

Investors and oil services companies would be wise to invest in strengthening their relationships with local communities in these rural parts of Colombia, and in improving their communication strategy. There aren’t enough soldiers to guard the whole length of the pipeline in Colombia – an outside-the-box approach is need, an approach that Grupo Leo can provide.

Colombia Oil Production

Since 2007, Colombia has almost doubled its oil production, with 31% of the country’s total revenue generated by the oil industry. That said, the country’s reserves are not inexhaustible, and could run out in less than a decade if new sources are not discovered.

However, the Colombian Petroleum Association is hard at work on the problem, as Colombia Reports states, and is looking to fracking to tap into the country’s natural gas reserves. According to the Association, this development could add an additional three billion barrels to the country’s reserves.

This news couldn’t come at a better time, as oil prices continue to fall. State oil company Ecopetrol has lost almost 25% of its market value in the last year, largely due to the fall in oil prices. 

Nonetheless, Ecopetrol is keeping its eyes in its production targets, hoping to raise production to 1 million barrels per day in the next year. The company is finding it hard to meet its current goal of 819,000 barrels per day, which will do nothing to help the company rebound in the market.