The victory of Joe Biden in the U.S. presidential elections earlier this month is perceived by many analysts to be a positive development around the world. It heralds a return to traditional U.S. foreign policy and globalist agenda along with a less isolationist approach. While there were jitters that a Biden victory would be bad for energy markets, the latest rally shows that energy markets perceive his win very differently. Biden’s victory bodes well for another round of U.S. economic stimulus which should boost energy demand and oil prices, although rising coronavirus cases and the latest round of lockdowns in Western Europe bode poorly for the short-term outlook. The president-elect has flagged he favors a political solution regarding the crisis in Venezuela, compared to Trump’s hardline stance, ever-stricter sanctions and veiled threats of military intervention. A Biden White House will seek closer ties with Latin America overall, including cornerstone regional U.S. ally Colombia. That is in stark contrast to Trump’s general disinterest toward Latin America and hardline policies taken toward the region. The White House needs to earn additional support in Latin America because there is still considerable enmity toward Washington due to a long history of regional intervention which has destabilized governments and produced political poor outcomes for many regional countries. Biden is aware of the issues facing Colombia and its economy. As a senator, he assisted with the formation of Plan Colombia, during the Clinton administration. This was a foreign and military aid package designed to combat the Andean country’s left-wing insurgency and drug cartels. The package was focused on bolstering security in a country that was on the verge of collapse and becoming a failed state. While significant improvements have been made in Colombia over the last two decades, the Andean country is still facing similar headwinds. Deteriorating security, particularly in remote rural areas where Colombia’s oil basins are located, is a serious emerging issue for the country’s economically crucial oil industry. Colombia’s last remaining guerilla group the National Liberation Army (ELN – Spanish initials) is aggressively seeking to take control of former FARC territory, including trafficking routes and coca cropping areas. There has been an increase in the number of fighters making up FARC dissident groups. Colombian think tank Fundación Ideas para la Paz estimates (in Spanish) that by late-2019 over 800 former FARC combatants had rearmed, which along with new recruits, boosted their numbers to around 2,400 combatants. Those groups are heavily involved in various criminal activities notably illegal gold mining, kidnapping, coca cropping, extortion, and cocaine trafficking. Rising violence particularly in rural areas, where there has been a sharp increase in massacres and murders of community activists, poses a direct threat to Colombia’s economically crucial oil industry. Many illegally armed groups view Colombia’s hydrocarbon sector either as a legitimate political objective vulnerable to disruption through bombings and sabotage or as a lucrative target for extortion and theft.
The Andean country’s petroleum pipelines are particularly vulnerable and popular targets for bombings and sabotage. The theft of petroleum and derivative products by tapping Colombian pipelines is a growing problem. Colombian state-controlled oil company Ecopetrol disclosed in September 2020 that by the end of August it had identified around 900 illegal valves, a notable increase over the 747 found for that period in 2019. According to Colombia’s national oil company, those illicit valves were responsible for the loss of 2,500 barrels of crude and refined products daily. Most were found on the Caño Limon-Coveñas and Transandino pipelines, which traverse remote parts of Colombia and have long been popular targets for sabotage and bombings. The tapping of vulnerable oil pipelines is becoming an increasingly lucrative source of income for criminal groups. Ongoing pressure from Washington on Colombia’s government to sharply reduce coca cropping and a notable increase in cocaine seizures has seen non-government armed groups seek to diversify their illicit revenue streams. A crackdown by Colombian authorities on cocaine trafficking and violent organized crime is partly responsible for the notable rise in oil theft. The illegal tapping of petroleum pipelines is relatively easy, lucrative, and easily concealed on remote sections of pipeline.
Related: Oil Majors Aren’t Worried About A Biden Presidency
Pipelines are the only economic means of transporting crude oil, natural gas, and refined products in Colombia because of the Andean country’s rugged terrain and lack of adequate road and rail infrastructure. When bombings and sabotage occur on the Caño Limon-Coveñas pipeline, the oil normally transported must be stored on-site by the producer, adding to their costs. Once local storage capacity is full the producer must shutter production until the pipeline is operational, further impacting earnings. This was a key consideration for Occidental Petroleum when it elected to sell its Colombian onshore oil assets, including the Caño Limon oilfield, for total consideration of $825 million. Further protests against President Duque for failing to implement the 2016 FARC peace accord, increased violence in rural areas, the murder of social leaders and corruption are expected, which will impact Colombia’s oil industry. Community blockades of roads and oilfields are a common occurrence forcing operators to shutter production in the affected localities. Those protests will grow in intensity as the national health emergency implemented to manage the pandemic winds down.
A Biden presidency will see a change in U.S. policy toward Colombia that could benefit not only the Andean country but also its beaten-down oil industry. The president-elect who as a senator participated two decades ago in the formation of Plan Colombia is aware of the issues facing Colombia. Biden has flagged that he intends to engage Latin America in stark contrast to Trump’s America First foreign policy and general disinterest in the region aside from his hardline approach on Venezuela, immigration, and narcotics. That should see the White House seek closer ties with Colombia, a country which is a cornerstone of U.S. regional policy. This will lead to greater engagement on humanitarian, economic, security, and social issues, as well as increased pressure on Bogota to proceed with the 2016 FARC peace agreement. As solutions are implemented to resolve those matters, Colombia’s security environment should improve and domestic social unrest lessen.
Those will be positive developments for the country’s hard-pressed and economically vital oil industry. Increased security and a sharp reduction in internal conflict, as well as civil dissent, will ease the level of geopolitical risk, making Colombia a more attractive jurisdiction for foreign investment. In response energy companies operating in Colombia will ramp-up exploration and oilfield development. Those activities are crucial to urgently boosting the country’s limited proven oil and natural gas reserves (in Spanish) of just over 2 million barrels and 3.1 trillion cubic feet respectively. It will also trigger higher economically vital hydrocarbon production, giving Colombia’s economy a solid boost at a time when the fallout from the COVID-19 pandemic is weighing heavily on its performance and government finances.
By Matthew Smith for Oilprice.com
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Matthew Smith
Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…
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