Alarm bells ringing for Colombian oil sector

Francisco Lloreda and the Colombian Association of Petroleum (ACP) have succeeded in stealing the headlines from the impending Colombian oil workers strike and getting the message out regarding the significant problems facing the country’s oil industry. The ACP president admitted that oil exploration in 2015 is decreasing at a rate much greater than what the ACP had anticipated, jeopardizing Colombia’s future oil security.

Lloreda warned, “There is a moment in which the country will surely need to go back to importing crude (…) Colombia achieved self-sufficiency in regards to hydrocarbons and (today) it requires investment, or else, if we are not able to increase reserves we will lose that self-sufficiency.” The ACP has called on the Colombian government to lower operational costs and give increased flexibility to oil companies when it comes to contracts and taxes, in order to stimulate investment in oil exploration.

Luis Restrepo, an executive director at ProColombia, talked with TheStreet about the impact that falling oil prices and the U.S.-Colombia free-trade agreement have had on the Colombian economy. He argued that the free-trade agreement has been a huge success for Colombia, with tremendous gains in the tourism sector. Restrepo added that, given the collapse in oil prices, Colombia is relying even more on the textile and tourism industries to drive economic growth.

Other industry observers were much less optimistic than Luis Restrepo. Diego Cortés Valencia argued that the Colombian economy has become overly dependent on resource extraction, and now that commodities prices have fallen, the ambitious social goals of the second Santos government are now imperiled. According to Valencia, “The next 4 years will be lean years, and the big question is, who will pay for the crisis?”

                                                                                                               

Controversy over management of Petroperú

The Peruvian edition of La Republica was fiercely critical of the Peruvian government’s management of the state oil company Petroperú. La Republica accused Peruvian President Ollanta Humala of breaking his campaign promise to strengthen Petroperú through vertical integration. The article highlights the importance of having a strong state oil company, but Petroperú has been fatally undermined by the legal restriction prohibiting it from working oil fields and involvement in oil refining.

Carlos Herrera Descalzi, the original Minister of Energy and Mines in the Humala administration, told La Republica, “The idea was that Petroperú should be able to operate in all of the activities of the oil sector, which is no different from what occurs with other state companies in South America and the world.” Ultimately, the problem is that the Peruvian government has not yet decided whether it wants a strong state oil company. If Petroperú continues on its current path to insolvency, it will likely end in privatization.

In mining-related news, Peruvian economists have reluctantly admitted that the global mining boom is over. China’s accelerated growth rate has steadily slowed down in search of a more sustainable model, and international metal prices have similarly gone down.

This does not mean that Peru’s mining industry is in jeopardy. Quite the contrary, as a recovery in the country’s mining sector this year will help it weather the external shocks of the strengthening U.S. dollar and the collapse in copper prices.

Of far greater concern is the tremendous environmental problem posed by the country’s illegal miners. Mariana Castro, the Peruvian Vice Minister for the Environment, told reporters that illegal miners dump 40.5 tons of mercury every year into the Manu and Candamo rivers in the Madre de Dios region.

Colombian economy grows despite oil and mining sectors

The National Administrative Department of Statistics (DANE) in Colombia announced that the country’s economy grew by 4.6% in 2014, despite a 0.2% slowdown in the mining and hydrocarbon sectors, which previously had driven economic growth in Colombia. This shortfall was compensated for by growth in areas like the construction sector, which grew by 9.9% over the previous year.

Things likely will just get worse for the oil sector this year, with the Colombian Finance Ministry predicting a fall of more than 60% in the government’s oil-related revenue from $3.55 billion in 2014 to a projected $8.96 billion in 2015. Reuters added that the Colombian government will need to act fast to counteract this revenue shortfall. Colombia has already announced spending cuts for this year and imposed a new tax on businesses just last year. However, this is not enough, and according to Colombia economist Andrés Pardo, “The government will need to raise taxes, make a larger cut in spending, and surely the budget deficit will be even greater.”

To add to the bad news for the Colombian oil sector, Francisco Lloreda, president of the Colombian Petroleum Association (ACP), warned once again that the sector is running into a “perfect storm” of problems in 2015. Despite dwindling reserves and an urgent need for new proven oil reserves, oil exploration activity dropped by 96% during the first two months of 2015 as compared with the same period in 2014. Lloreda emphasized that now is the time for “the national government and congress to make fundamental decisions that will allow the industry to overcome the crisis, and if the industry does well, so will the country.”

The one piece of good news for the oil industry this week is that a new pumping station has more than doubled the capacity on Colombia state oil company Ecopetrol’s Transandino pipeline. This will allow more than 85,000 barrels of oil to be pumped each day from the Putumayo department to the Tumaco terminal on Colombia’s Pacific coast. One of the biggest obstacles to growth in the Colombian oil sector is the high cost of transporting oil due to the country’s poor oil infrastructure. This represents an important step in the right direction.

Conversations on illegal mining in Peru

On Wednesday, the U.S. Department of State announced the award of a $1 million grant to fund the Blacksmith Institute’s work in collaboration with the Peruvian Ministry of Environment to reduce the use of mercury in mining in the Madre de Dios and Puno regions of Southern Peru.

An information session was also organized, which hosted officials from Colombia, Brazil, Ecuador, and Peru, to teach them about the importance of reducing mercury use by small-scale miners. The organizers hope to encourage countries to ratify the Minamata Convention, intended to reduce health and environmental damage caused by mercury use.

Peruvian Environment Minister Manuel Pulgar-Vidal spoke out after the workshop, calling Peruvian economist Hernando de Soto’s proposal to suspend the formalization process for artisanal miners “absolutely irresponsible.” De Soto has been highly critical of the process, arguing, “Only 7 of 70,000 recognized miners have managed to become formalized, and it is not because of a lack of desire, but rather because of the innumerable obstacles that system puts in their way.”

Pulgar-Vidal emphasized that the formalization process is just one part of the large effort undertaken by the government to get rid of illegal mining. Nonetheless, he agreed that some changes need to be made to achieve the country’s goals: replacing the mining intermediaries with the state and directly buying mining products, and second, promoting the use of technology to reduce the use of mercury.

Colombian oil crisis is also an opportunity

Leading Colombian daily El Tiempo interviewed Colombian finance minister Mauricio Cardenas, asking him about what measures the Colombian government will need to take due to the oil crisis’ impact on the state’ revenues. Minister Cardenas countered by saying that “The oil crisis is an opportunity that we need to take advantage of for the Colombian economy, because our industrial, fish farming, and tourism sectors have been affected during the last several years – the last decade – by the overvaluing of the peso.”

The Colombian government hopes that the newly-devalued peso will allow a new industrial leader to emerge in Colombia. Minister Cardenas emphasized that, despite the difficulties, foreign direct investment in Colombia has not slowed down, and he is confident that the country will continue to be attractive to foreign investors.

In security-related news, a UN report was released early this week warning that violence committed by the bandas criminales (bacrim) in Colombia is the greatest threat to public security in Colombia. The bacrim are involved in drug trafficking, illegal mining, and extortion, and likely pose an emerging threat to the Colombian oil sector. In recent years, leftist guerrilla groups like the FARC and the ELN have targeted Colombia’s oil industry as an easy sector to extort and steal from. Although these groups appear to be close to a peace agreement with the Colombian government, oil companies should worry that their attacks will be taken up again by the bacrim.

In other oil-related news, the markets were not kind to Ecopetrol’s and Pacific Rubiales’ stock prices after the announcement that Ecopetrol would not renew Pacific’s contract for the Rubiales oil field. Pacific’s stock price fell 8.6%, and Ecopetrol’s by 4.2%.

Peruvian government's goal is the total eradication of illegal mining

Peuvian interior minister José Luis Pérez Guadalupe traveled to Puerto Maldando in Peru’s Madre de Dios region, ground zero for illegal mining in the country. He told the press that, “The government’s final objective is the total eradication of this crime [illegal mining] and the normalization of informal mining.” Minister Guadalupe explained that illegal mining also generates insecurity because it attracts thousands of addition people just looking to make a quick buck to areas of the country that are already disadvantaged. The minister traveled to the area to meet with regional president Luis Otsuka and come up with a holistic, joint solution to the problem, so that the various government officials do not end up working in isolation.

In other news related to illegal mining in Peru, approximately 15,000 informal miners are meeting in Puno this week for the Fourth National Meeting of Small and Artisanal Miners. The activist and outspoken Peruvian economist Hernando de Soto will also attend the event to lay out a new alternative to the Peruvian government’s formalization program, which he believes has been a colossal failure. The organizers of the event hope to unite all of the country’s disparate groups of informal miners behind a new proposal.

Lastly, the Peruvian government is scrambling to protect the mashco-piros tribe, an indigenous group of some 800 people that had lived intentionally cut off from the rest of Peruvian society. Unfortunately, the mashco-piros had been living in the Madre de Dios region, and are being forcibly displaced by the illegal gold mining in the area. Peruvian officials fear that because of the tribe’s isolation, it could be particularly vulnerable to disease.