Broader implications of Pacific Rubiales' fall

The collapse in global oil prices has hurt all oil companies, but Colombian oil giants Ecopetrol and Pacific Rubiales must feel that they are somehow worse off than all the rest. They are right. We’ve talked extensively about Ecopetrol in these posts, so today we will focus on Pacific Rubiales.

The Wall Street Journal is concerned about Pacific Rubiales’ prospects for the future and the greater impact it could have on the Colombian economy. According to the Journal’s report, Pacific Rubiales has been devastated by “a perfect of storm” of not just the crash in oil prices, but also a failure to discover new major fields and reduce the company’s $4.5 billion debt load. Nathan Piper, an analyst with RBC Capital Markets, warned that right now, Pacific Rubiales isn’t even covering its costs, adding, “Investors are concerned about what Rubiales can do to turn around

… It’s going to be a very difficult time.”

The WSJ’s report added the common refrain about Colombia’s reliance on oil: “Any problems at Pacific Rubiales have implications for Colombia’s economy… In recent years, petroleum has grown to account for more than 50% of exports, most coming from Pacific Rubiales and … Ecopetrol S.A. President Juan Manuel Santos has said that royalties from the oil companies generate much of the country’s social and development spending.”

Nicolas Mejia, vice president for promotion at Colombia’s hydrocarbons agency, told Bloomberg that the Colombian government is acutely aware of the troubles facing the country’s oil sector, and is considering measures to support its oil producers. Mejia’s recommendations are quite radical in their scope: he proposes “[cutting] the approval time for the exchange of oil blocks between companies from one year to a maximum of three months,” and a legal reform “that would give landholders a percentage of oil and gas produced on their holdings.” Mejia claims that “If communities and landowners feel like stakeholders it will greatly reduce the social problems across the regions.” He is grossly mistaken. Most of the social problems in Colombia are tied to issues of land ownership. This proposal would provide a tremendous incentive for people to be robbed of their land, only exacerbating Colombia’s social problems.