It comes down to one question: Are the oil fields in Colombia, a country rich in oil assets, worth the investment to exploit them? Many industry executives are asking themselves that question these days-and the answer may well be no.
A source at Shell Colombia SA, speaking off the record, told LatinFinance that the multinational company is in the process of reviewing its profitability in Colombia to determine its future options. Although the source did not admit as much, one of those options may be to pull out. Nothing better illustrates how the fallen price of petroleum and poor competitive levels have undermined exploration in Colombia.In fact, Colombia may become a net importer of oil very soon-a hard pill to swallow considering the nation is traditionally the fourth largest oil exporter in Latin America. Oil is currently the country’s leading export, worth an estimated $3.1 billion this year. The level of production this year should be about 870,000 barrels per day and should maintain itself at that level through 2000 before tapering off. Why will it taper off? Consider this: While Venezuela has 400 wells in operation, Colombia has just 38 with not many new ones on the horizon, according to Prabhas R. Panigrahi, oil analyst and senior vice president at Dresdner Kleinwort Benson.

Various Obstacles
In other words, it is comparatively too expensive to drill for more. Low oil prices are not the cause for the stall in exploration; rather, they underscore several conditions that weaken Colombia’s international competitiveness. In this environment, international oil companies looking out for shareholder value are intent on developing the cheapest sources of crude.One of the disadvantages facing Colombia is comparatively higher “lifting” costs-the price of getting the oil out of the ground. The country’s Andean geology, which forces companies to spend a lot of money digging deep wells through steel-like rock, naturally boosts lifting costs considerably. Panigrahi points out that the BP-Ecopetrol joint venture at Colombia’s Cuisiana field faces lifting costs of about $3.50 per barrel, compared to Argentine oil company YPF’s average lifting cost of $2.50 per barrel, which in turn is high versus lifting costs in Saudi Arabia of under $2.00. In the globalized economy, with a handful of multinational oil companies like Shell competing around the world, it makes more business sense for them to go to countries where the oil is more economical to exploit.Enter Saudi Arabia, a country where oil is cheap and where production is only running at 80% of capacity. “With petroleum prices so low, the Saudis are under tremendous pressure to open their frontiers to foreign oil companies,” said Panigrahi. “These guys are really hurting these days. I mean, last year we saw a deficit in the budget, and they really need foreign capital to come in.” There, in the desert sands, it is comparatively quite easy to reach the well spring of Persian Gulf oil. “It is no secret that the Middle East holds the answer to low oil prices,” said Panigrahi. “And that’s where most of those majors are going to gravitate to. I mean, if you’re looking at the $12 to $13 (per barrel) oil prices going forward, there is no way the world’s oil majors are going to concentrate in high-cost areas, such as Alaska, the North Sea and other parts of the world, including Colombia.”Another potential cost comes from the depth of Colombia’s reserves, which means that companies must dig deep before reaching the prize. Those circumstances consequently increase the risk of hitting a dry well and multiply the expense of drilling in the first place. That is another reason some companies may be deciding not to gamble there. An industry source told LatinFinance that Dallas-based Harkin Energy Corp., which had been exploring in Colombia, recently lost $20 million to a dry well. Calls to Harkin to verify this information were not returned.Another obstacle barring further exploration in Colombia is the state’s contract and tax structure. Observers say that the present contract is not attractive enough to entice foreign companies to enter the country and make such major investments. And there’s the rub: Colombia depends on foreign oil companies to bring in much-needed capital and technology, but in a low-price environment where multinational oil companies must save on costs, they will first go to countries that offer more competitive tax structures.

Colombia’s Contract
According to terms in Colombia’s exploration contract, when a foreign company signs on, the state gets a 50% take of all oil production up to 60 million barrels. Above 60 million barrels, the R Factor entitlement is factored in, which in some cases can be as much as 75% of the extracted oil. Panigrahi contrasted that to the Argentine government, which takes under 20%. Thailand takes even less; however, Russia’s government demands up to 65%. (See box.)Add to the R Factor the numerous taxes that companies must pay. There are a total of seven categories of related taxes that must be paid: a 35% income tax; a value added tax of 16%; a remittance tax of 4.5%; a pipeline transportation tax of between 2% and 6%; a 0.7% industry and commerce tax, and a minimal stamp tax. The stamp tax is applied on all official, legally binding documents in Colombia, which must be stamped by authorities.Press reports indicate that the government is considering reducing the initial 50% stake that Ecopetrol, the state oil company, takes from each site. But to do so risks the ire of Colombia’s guerrilla groups, which have openly said the government is already too generous with foreign oil companies.The guerrilla attacks on pipelines are another issue. Beyond the different exploration contracts and geological features between oil-producing nations, another factor that oil companies must consider in Colombia is security. While the source at Shell refused to quantify the weight of the security issue, it is nonetheless a significant consideration.At the end of January, Colombian rebels blew up the oil pipeline linking Occidental Petroleum Corp.’s Cano Limon field to the Caribbean port of Covenas for the fourth time this year. That same pipeline was bombed 78 times in 1998, the highest number in its 12-year history. The Cano Limon field produced about 17% of Colombia’s total 843,000 barrel-per-day output last year. Occidental attributes the attack to the National Liberation Army, Colombia’s second largest guerrilla group. Not only are there costs involved in repairing damaged facilities, but there are also costs in employing security personnel.

In a blazing critique of Ecopetrol, Colombian newsmagazine Semana reported that in the last 10 years, the state has had to infuse at least $8.8 billion into the company and that its published financials don’t seem to have been audited. The magazine declares, “If Ecopetrol were to function as a private company, its shareholders would be indignant at getting negative returns and would demand an explanation from those responsible.”The country,” it continues, “is not conscious of the fact that Ecopetrol does not generate any value in relation to the money that is invested in it. In contrast to what many Colombians think, Ecopetrol is a company that, instead of generating value for the nation, destroys it.”The government, with respect to the oil sector, is between a rock and a hard place. If Ecopetrol’s labor union would concede to cost-cutting measures, sources agree that one of the steps the country could take is to revamp the excessive taxes and percentage ownership applied to joint ventures. But since the union threatens to strike at the instant any austerity measures are proposed, and since the union is large and wields political power, the government is forced to back down. The heightened guerrilla attacks on pipelines is another source of anxiety the government must contend with when it considers appeasing the foreign investor with a kinder, gentler contract.The result is Shell Colombia SA, for one, is having to think very hard about its options. And if Saudi Arabia opens up and the price of oil on international markets plunges even more, the future for Colombia as an oil exporter would not look good at all. LF-by David Swafford