Good news from the Colombian oil industry

As we’ve discussed these last few weeks, Colombian officials are extremely worried about the state of the country’s oil industry. To recap: Colombia’s economic boom these last ten years is due in large part to the growth of the country’s oil industry, but this economic success is imperiled by falling global oil prices, dwindling Colombian reserves, and ongoing attacks by FARC guerrillas.

Bloomberg Businessweek wrote about the impact that the decline in oil prices has had on Colombia, quoting Colombian central bank governor Jose Dariel Uribe as saying, “It’s a big shock, without a doubt. … The biggest effect is on the oil revenues of the government, and that obviously generates challenges for fiscal policy.” Colombian finance minister Mauricio Cardenas is desperately trying to raise taxes to account for the $6 billion hole in Colombia’s budget for next year, which is equivalent to 1.6% of Colombia’s GDP.

However, Talisman Oil and Gas and Ecopetrol had some good news for Colombia’s beleaguered oil sector when they announced a new oil discovery in the CPO-9 block in Colombia’s Meta department. Talisman shares traded up 2.8% on the announcement, though the company is still awaiting the results of further analysis of the product of the test well.

The road to formalization in Peru

The Peruvian environment minister, Manuel Pulgar-Vidal, sparred with one of the leading representatives of Peru’s 300,000 informal miners, Hernando De Soto. As the head of the Institute for Liberty and Democracy, de Soto announced on Friday, at a meeting with the National Association of Small and Artisanal Miners, an alternative to the Peruvian government’s plan to formalize the country’s 300,000 informal miners.

De Soto argued that the government’s plan is too expensive, requiring an investment of $84,000 on the part of the miners to comply with environmental regulations; too slow, as it takes four years for a miner to be formalized; and ineffective, as to date, only 5 out of 300,000 informal miners have been formalized under the government’s plan. De Soto proposed that, first, formalization needs to be defined as a process by which all miners have the same rights; that second, the government listen to the miners in constructing policies and not go about it blindly; and lastly, that a strategy be devised to unblock the formalization process, so that it is about integration rather than exclusion.

Minister Vidal took exception to De Soto’s claims, arguing that the formalization process has actually been very simple and low-cost. He emphasized that the $84,000 are not a fee, but an investment, explaining that “high-impact mining needs rules, and the cost is that which Peruvians require to have an environment free of mercury, cyanide, and other toxic substances.”

One’s opinion on who won the debate likely depends on one’s perspective of mining: is it an inalienable right, born of a centuries-old tradition passed on from generation to generation, as Hernando De Soto would have us believe, or is it a capital-intensive, inherently-polluting endeavor that requires careful regulation, as Minister Vidal believes.

The offensive continues against illegal mining in Peru

The Peruvian government’s offensive against illegal gold mining in the Madre de Dios region was once again the leading news item. This time, the articles were accompanied by heart wrenching photos published by the Associated Press of the devastation that the illegal gold mining activities had wrought on the Peruvian Amazon. American reporting on the offensive noted that this offensive took plus curiously close to the UN-sponsored climate talks that Peru is scheduled to host, starting on December 1^st.  The article discussed the anti-illegal mining offensive exclusively from an environmental perspective, describing how illegal mining had turned the jungle into “a war-scape, pocked with craters and littered with the trunks of amputated trees.”

Latin American reports on the offensive provided a bit more context. Noticias24 explained that this area in Madre de Dios, called La Pampa, was lawless and inhabited by thousands of gold hunters, who had escaped conditions of unemployment in small Andean towns and other impoverished areas along the Pacific Coast. According to the report, the military operation displaced the approximately 40,000 people who had moved to the area in search of gold riches. The Associated Press quoted a woman who said, “The state does not think about us, we are thousands [of people], we come from many areas.”

Peru21 published an interview with Pablo Zavala, the local priest in the Madre de Dios region. The priest reiterated a claim that illegal miners from the area gave President Ollanta Humala 17 kg of gold in 2010, when he was campaigning for the presidency. Zavala explained that the local are frustrated because they feel that they have received no support from the government. According to Zavala, Humala had promised to formalize the miners, but this never happened, and now the government is punishing them for operating illegally. The priest claimed that the descriptions of environmental devastation are just myths and stories invented by the government to help auction off Peruvian land to multinational corporations. He added that the forests will regrow, and that the earth’s riches are there to be consumed.

Colombia's oil industry - the good and the bad

As the global price of crude oil continues to fall, oil-related stories feature prominently in the Colombian headlines. According to Michel Janna, the Colombian finance ministry’s head of public credit, falling oil prices will most acutely affect Colombia in 2016.  He explained that, because average prices for 2014 are still high, the impact in 2015 “will be relatively little.” Janna added that it is still unclear how oil prices will affect Colombia’s debt levels in 2015, but with the information that he has right now, he anticipates that the impact will be minimal. Additionally, Janna noted that guerrilla attacks against Colombia’s oil infrastructure have affected production and the country’s overall revenue from oil.

The head of the Colombian Petroleum Association, Francisco José Lloreda Mera, continues to argue in the press for the use of fracking to grow Colombia oil reserves. The article discusses the difficult situation facing the country, whereby it needs to quickly boost its oil reserves in order to maintain its current level of oil revenues. The report notes that the government recently attempted to auction off unconventional oil fields that would require the use of advanced techniques like fracking in order to be developed, but there was very little interest on the part of oil companies.  Supposedly, Colombian state-owned oil company Ecopetrol is interested in obtaining an environmental license allowing fracking.

Colombian senator Jorge Robledo has positioned himself as one of fracking’s leading opponents in Colombia. He argued that Colombia needs to be careful to properly study this new technique and how it would be applied in Colombia before diving in so completely.  However, officials at the Colombian Ministry of Mining and Energy countered that fracking is only damaging if regulations are ignored, just like the conventional oil industry.

In a separate report, Johannes Dobinger, the United Nations Industrial Development Organization’s Andean head warned that the Colombia is over-reliant on mining, hydrocarbons, and ranching. These industries produce little in the way of employment, and the financial gains as a result are concentrated in the hands of very few people. 

Actions against illegal mining in Peru

Military actions against illegal mining featured prominently in headlines in Peru, as the Peruvian Interior Ministry announced that it would continue the Peruvian military’s operations in the areas of Arequipa, Puno, and Madre de Dios, in support of the local police.  The purpose of the operations is to ensure security and avoid the acts of violence that can be generated by illegal mining. With this new order, the Peruvian military’s operations against illegal mining will continue in these areas until December 17, 2014.

Over the weekend, the Peruvian National Police “rescued” sixty women from four brothels in Madre de Dios during an operation against illegal mining in the area. According to the article, twelve of the women decided to “leave prostitution” and sought government support, while the remaining 48 decided to return to the area. According to the Interior Ministry, these women will be monitored by the government, to ensure that they are not forced into prostitution in the future. According to a different report, the twelve women who “left prostitution” were actually minors.

The Peruvian High Commissioner Against Illegal Mining, Augusto Soto Castagnola, explained that these operations against illegal mining were designed to show the people living in this area that their current way of life, illegal mining, would not be permitted by the Peruvian government. In addition to the brothels shut down by the National Police, sixty motorcycles were also seized. It remains to be seen whether these operations actually dealt a strong blow to illegal mining in the area.

Nonetheless, illegal mining, the scourge that instigated these operations, is a danger. Illegal mining in Made de Dios has already destroyed more than 40,000 hectares of forest in the Peruvian jungle. This illegal way of life causes tremendous social and environmental damage.

In Colombia, there will be no peace without oil

Semana, the leading weekly publication in Colombia, ran an opinion piece by Alfonso Cuéllar, outlining and exploring the ties between Colombia’s oil industry and the peace negotiations with the ELN and the FARC. Cuéllar explains that the FARC, in recognition of its weakened military might, has started targeting oil companies. The FARC accurately gauges the oil companies as an inexhaustible source of funds, and has targeted them with extortions and kidnappings, bombing pipelines and refineries, and causing tremendous environmental devastation in the process.

According to Cuéllar, if the FARC and the ELN lay down their weapons, the biggest winner will be the Colombian oil industry. Oil companies will no longer have to devote so many resources to security and will be able to focus on extracting oil in a profitable, environmentally-friendly, and socially-acceptable manner. Cuéllar adds that, paradoxically, so many actors in Colombian society are making it more and more difficult to explore and extract oil and gas in Colombia. He stresses that without the resources generated by the oil industry, there will be no way to pay for the resolution of the peace process. There is no Post Conflict without oil revenues.

Cuéllar calls out the hypocrisy in those who fiercely oppose fracking yet are also the first in supporting and defending the necessity of peace negotiations, and the need to invest billions of dollars in social programs to make ensure that the peace is permanent. He stresses that without fracking, the Post Conflict is impossible. There is no Plan B – there are no alternative funding sources.

This clear-eyed view on the social importance of the Colombian oil industry is refreshing, and also provides insight into the second- and third-order effects of a peace process. Done right, the improved security conditions will be a boon to Colombian industry, and enable continued economic growth.

Attracting foreign investment for Colombian oil and mining projects

Since 2003, Colombia has enjoyed a boom in foreign investment in oil and mining projects, but this enthusiasm began to ebb in the last year. Nonetheless, the Colombian government is aware of this problem and is trying to rectify it. On Wednesday, the National Hydrocarbons Agency released a 150-page manual full of guidelines advising companies on how to consult with local communities before entering new areas. Reuters noted that the Colombian state-run oil company, Ecopetrol, had said that social conflicts with local communities had affected its second- and third-quarter earnings. According to Reuters’ report, one of the fundamental causes of these conflicts is a lack of communication and expectation management.

Portafolio.co, a Colombian business journal, published a lengthy interview with Antonio Sanclemente, one of the leading oil and gas lawyers in Colombia and the world. Sanclemente, whose firm primarily represents foreign investors in the Colombia oil industry, stressed that the Colombian government needs to be wary not to scare off investors. He explained that foreign investors have two main worries: security conditions in their areas of operations and the frequent changes in the regulations governing the country’s oil industry. According to Sanclemente, globally, the average tax on oil profits is between 15 and 25 percent, but in Colombia, the tax regime has undergone frequent changes over the last few years and currently, the total tax on profits reaches 34 percent. Sanclemente remembers the days when foreign oil companies were afraid to invest in Colombia, and cautions that the government must be sensitive to investors’ needs, or they will go elsewhere.

How To Grow The Peruvian Economy

The Peruvian Production Minister warned on Tuesday that growth in the country’s manufacturing industry would be flat for 2014. The country’s economic performance this year has been its worst since 2009.  Minister Piero Ghezzi added that, unless Peru diversifies its economy beyond the mining sector, it would never be able to regain the levels of 7% annual economic growth.  Nonetheless, the Minister is optimistic that the manufacturing sector and the economy in general will rebound in 2015, thanks to increased public spending by the Humala administration.

From the same press conference, it was reported that Peru plans to increase its federal investment in the development of new technologies. Currently, Peru only invests 0.12% of its GDP in research and development, whereas the regional average is 0.75% of GDP. According to Minister Ghezzi, the government will invest in a total of 268 projects through 2016.  The Peruvian government is already investing in 23 projects, including innovative new businesses and startup business incubators.

Separately, Brazilian state-run oil company Petrobras announced that it had received $2.2 billion from the sale of its oil and gas assets in Peru to PetroChina. The tax bill on this windfall amounted to just $400,000. According to Petrobras, the company is divesting from its foreign assets in order to invest in Brazil’s offshore desposits.

Civil Unrest in Peru

Social conflict and civil unrest always seems to be at a low boil in Peru. Strikes and demonstrations are being planned by copper miners, workers in natural gas, and by Peruvian indigenous groups.

Unions at Antamina, Peru’s largest copper mine, plan to walk out today and strike due to a disagreement over wages. Bonuses for the miners are based on overall profits at the mine, and declining production and depressed ore prices have affected the miners’ total compensation. Workers at the mine had threatened to strike in 2009, but a showdown was avoided, as workers were given a one-time bonus. Silvio Brigneti, Antamina’s VP for Human Resources, admitted that production will decrease as a result of the strike, but added that the workers’ demands are unreasonable.

More bad news for Pluspetrol, as the main Peruvian natural gas workers’ union said that it was going to pull out of negotiations and vote on a strike within the next few weeks. Peru is Latin America’s leading exporter of liquefied natural gas, and a strike would completely shut down production. 

Pluspetrol remains in the headlines, after its disagreements with Peruvian indigenous groups made international news a week and a half ago.

El País speculated about the rise in social conflicts that could come from last week’s report about the tremendous selling-off of Peruvian territory for mining, oil, and lumber developments. Meanwhile, the Peruvian government has decided to double down on its current strategy by streamlining the environmental permitting process. While this policy decision was taking to boost spending in the country, it certainly does not address the Munden Project’s concerns about the lack of a role played by local communities in project planning. 

News from the Colombian Oil Industry

News coming out of the Colombian oil industry was mixed on Thursday. On the one hand, Colombian oil production for the month of October averaged more than 1 million barrels per day, an increase in production of 1.3% from the same month in 2013. The Colombian Ministry of Mines and Energy announced the new production totals, adding that the mean natural gas production in October was 1.11 billion cubic feet per day, roughly the same as the previous year.

Ecopetrol, Colombia’s state-run oil company, announced that it will increase its average oil production by an additional 10,000 bpd in November and December, and increase it still further into the first half of 2015. This announcement should help Ecopetrol’s depressed stock price, which has been sharply affected by the global fall in oil prices.

On the other hand, attacks continue on Colombia’s oil infrastructure. Ecopetrol reported that a team of technicians were attacked in Tumaco in the Nariño department. One worker was killed and three others were killed in the bomb attack. Colombian authorities have not yet determined who was behind the attack, but the FARC and the ELN are both active in the area. Reuters provided additional details, explaining that the Ecopetrol contractor was killed after stepping on a landmine while trying to repair the Transandino pipeline. 

The Future of the Peruvian Economy

The Peruvian government is taking great pains to reinvest the wealth and profits and of its abundant national resources in diversifying the country’s economy and protecting the environment. The Responsible Gold Initiative is working hard to combat Illegal mining, one of the most prominent issues confronting the Peruvian mining industry. Thirty-three thousand “artisanal miners,” a less-confrontational euphemism for illegal miners, are in the process of being organized and formalized through the Responsible Gold Initiative. The program gives miners the necessary support to sell directly to gold importers in Switzerland.

Nonetheless, there is still a long way to go. The Peruvian non-governmental organization Instituto del Bien Comun has found that a large part of the Peruvian Amazon has been destroyed. Approximately 3.5 million acres have been deforested, 25% of which are located in protected indigenous or park areas. In the rush to develop Peru’s mineral wealth, the Peruvian government must be careful not to ignore the country’s abundant natural wealth.  

The Peruvian Minister of Finance and the Economy warned that Peru must also find a replacement for the mining industry, as that sector will no longer be able to fuel the country’s growth on its own. Minister Alonso Segura stressed that Peru needs to focus on diversifying its economic base and make it easy for new businesses to form in the country, thus stimulating innovation and the spread of technology.

Future Mining Prospects in Peru

On Tuesday, Peruvian mining and energy minister Eleodoro Mayorga declared that Peru plans to become the world’s second-leading producer of copper by 2016 and of silver by 2017. Mayorga was quite bullish on Peru’s mining prospects, especially as this would represent a doubling of Peru’s current copper output. The minister went on to detail all of the mining investments currently in progress that will result in a significant increase in production. Most notably, Minister Mayorga stressed that his ministry is doing everything in its power to facilitate the progress of the Conga project, in which Yanacocha, the region’s largest gold producer, is looking to invest $5.3 billion. The project has stalled because of protests by the local community. Social conflicts continue to be the main barrier in the way of Peru tapping the full extent of the country’s mineral wealth.

While medium-term production estimates are positive, short-term estimates were revised downwards. Copper production in 2014 and 2015 will likely fall below the original government estimates, rising just slightly over 2013.

Nonetheless, Peru is plowing ahead, announcing that it will open seven or eight new oil fields to bidding in December. The government had originally tried to auction off these fields in April, but that effort was delayed because of a new law requiring prior consultations with the local communities in the area before the mineral rights could be sold off and extracted. Separately, the Latin American Herald Tribune reports that Peru represents a wonderful opportunity for infrastructure investments, specifically in roads and rail.

Mining Is the Talk of the Town in Colombia

Mining continues to be the talk of the town in Colombia. News about the twelve trapped miners in the Antioquia province of Colombia dominated headlines, but authorities confirmed that all of the miners are almost certainly dead and at the bottom of the water-filled 800-meters-long mining shaft. Colombian authorities are doing all they can to rescue the miners’ corpses from their watery tomb, but the conditions at the mine are not helping the extraction effort. A large volume of water flooded the mine, the mine is quite narrow, and the infrastructure in the area has limited the strength and number of pumps used to drain the water from the mine.

The victims are all men between the ages of 23 and 55, from families with a long tradition of working in the Colombian mining industry. In one interview, an ex-miner who lost two of his sons in mining accidents explained the difficult choice that all families in the region must face:  after disasters like this, one never wants to go back to mining, but in these rural areas, people don’t have a choice. Mining is the only way to make a living.

Pulzo.com ran a feature on the damaging effects of illegal mining on Colombia. The report noted that 63% of all mining activity in the country is illegal; stressing that any conversation about mining in Colombia has to address the specter of illegal mining. Mining is already far more lucrative than agriculture, and has surpassed drug trafficking in the profit-making potential of illicit activities in Colombia. The mining boom started about six years ago and hasn’t slowed, forcing the government, including the Colombian armed forces, to turn its attention towards stamping out illegal mining.

Social Conflicts in Peru

Social conflicts are once again the leading topic of conversation in Peru. The disagreements between Argentine oil company Pluspetrol and the Andoas indigenous group continue. While negotiations had resumed between the two parties, they broke down again over the weekend. The Andoas people are determined to resolve all of their complaints in one fell swoop, whereas Pluspetrol once to negotiate each issue separately. The Andoas group abandoned the talks and took over the airport again.

In related news, the Rights and Resources Initiative (RRI) released a report titled, “Communities as Counterparties: Preliminary Review of Concessions and Conflict in Emerging and Frontier Markets,” documenting and analyzing social conflicts in eight countries, including Peru. In their research, RRI found that more than 40% of the Peruvian territory has been allocated for timber, mining, and oil and gas operations. In addition, the vast majority of conflict starts at the beginning of projects. Instead of involving local communities in drawing up projects and constructing project plans, the Peruvian government and private companies present the project as a fait accompli, and conflict ensues.

Ninety-three percent of the lands allocated by the government for timber, mining, and oil and gas, are inhabited. The report explains that any time you’re selling land where people already live, conflict becomes inevitable. It stresses that it is best for everyone involved, including the private companies, to involve the local communities from the start and to win their buy-in. If you do things wrong from the start, ultimately, the costs will end up being much greater.