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Problem: Colombia’s exploration and production boom since the late 2000s is just a product of improved security after decades of lawlessness on the ground.

Significance

The conditions underlying and enabling Colombia’s hydrocarbon boom can provide an indicator of the necessary conditions to reproduce a similar boom elsewhere in Latin America. In direct contrast to neighboring Venezuela, hydrocarbon reserves are only a prerequisite, but insufficient, condition for a boom in hydrocarbon production. Colombia’s improving security environment merits examination as one of the enabling factors in the country’s hydrocarbon boom.

This analysis will argue that improved security is but one of the factors that influenced Colombia’s hydrocarbon boom, but not the primary driver. Hydrocarbon extraction by private actors requires the minimization of risk through general stability, ease of investment, sufficiently high prices sufficient to justify the risk, and proven reserves. Hydrocarbon commerciality – the discoveries and market prices that make extraction economical – as well as the overall regulatory and rule of law environment could have all contributed to Colombia’s hydrocarbon boom in the late 2000s. As such, they are significant in determining the conditions necessary to replicate the boom elsewhere.

Analysis:

The confluence of several factors, within and without Colombia, created the conditions for the boom and each merits a separate hypothesis to be tested. Thus, the analysis examines three hypotheses with oil production as the dependent variable.

  • H1: Decreasing violence in Colombia is associated with an increase in oil production.
  • H2: Improving hydrocarbon commerciality conditions are associated with an increase in oil production.
  • H3: Legal and regulatory reforms in Colombia are associated with an increase in oil production.

Each subsection provides the context for each hypothesis and examines the quantitative results arising from the analysis.

Violence and Lawlessness

The decline in violence and improvement in security in Colombia helped provide the environment and stability for investment in multi-year E&P projects. Using World Bank data[1] on homicides per 100,000 as a proxy for the level of security, violence in Colombia did materially decrease between 2000 and 2013, the last year for which data is available. Homicides declined from a high of 68 in 2002 to 31 in 2013, during which period oil production grew by 74%.[2] As programs dedicated to weakening armed groups through demobilization and an overall tougher stance to retain government control over territory proved effective, lawlessness and the general security environment improved. These developments are reflected in the World Bank metrics on rule of law, which include control of corruption, government effectiveness, political stability and absence of violence, regulatory quality, and general rule of law. Colombia has seen marked improvements from the 1990s to 2011, the last year of data availability. These data, transformed into a 0-10 scale where 10 presents the greatest level of rule of law, are available in Table 1.

While homicides declined and rule of law improved throughout the 2000s, the relationship with oil production is tenuous. Plotting the available data points against oil production yields a weak association as presented in Figures 1 and 2. Figure 3 presents a more rigorous statistical analysis in which statistical significance, the beta coefficients of the regression, and R2 are all presented. In this analysis neither the homicides variable nor the average of each of the rule of law metrics yields any statistical significance or meaningful R2. Admittedly, the analysis is flawed in that it only contains 16 data points, thereby skewing the results, and homicides serves as an imperfect proxy for guerrilla violence in the country. However, based on this specific analysis, the lack of statistical significance suggests that there is no association between the improved security environment and oil production in Colombia. Indeed, international oil companies often operate in hostile environments and are able to produce oil.

International Markets and Colombian Hydrocarbons

The increase in price of international crude benchmarks throughout the 2000s pushed certain projects into positive net present value and encouraged E&P activity in riskier markets, yielding a production boom around the world. Thereby, price and reserves are plausible drivers of Colombian production. Colombia’s production figures and reserves are presented in Figure 4, as indexed to the year 2000. After falling for years, Colombian reserves recovered from 2010 onward, though primarily as a result of smaller fields becoming economical and more productive, rather than major new discoveries[3].

Examining the impact of price and reserves on oil production statistically, as presented in Figure 5, there is a clear and statistically significant association between both price and reserves and oil production. When using both reserves and price as dependent variables, both are statistically significant and R2 reaches 0.5. One should note some multicollinearity issues as reserves are also a function of price, not just in-situ resources. Interpreting these results, a $1 increase in the Brent price translates into an increase in oil production of 2,500 b/d on average, while a 1,000,000 barrel increase in reserves translates into an increase in oil production of 200 b/d on average. Figure 6 presents the substantive effects of price on oil production, with reserves at the median.

Colombian Reforms

The reforms to the overall economy and the hydrocarbon sector in particular under the Uribe administration are difficult to quantify, but nevertheless enabled the environment in which production could grow quickly in the late 2000s. Beginning its mandate in 2002, the Uribe administration’s platform focused combating armed groups, encouraging foreign investment, and improving regulatory stability. In 2003, the Uribe administration enacted liberalization reforms in the hydrocarbon sector, deemphasizing the role of Ecopetrol and partially privatizing the company in 2007. The fiscal terms were amended in favor of producers to encourage investment and lowered the state’s share of revenues to 50% from 70%.[4] An independent regulator, Agencia Nacional de Hidrocarburos (ANH), was also established to impartially auction licenses and administer bid rounds. After the reforms, private partners could retain 100% ownership of fields with fewer than 60 million barrels of reserves. Foreign investment increased tenfold between the time of the reforms and 2010 as a result.[5]

The reforms were found to be statistically significant in each of the models examined in Figure 7. The reforms were coded as a binary variable, where 1 indicates a year in which the reforms were promulgated and in force. The reforms are strongly associated with oil production, even when controlling for price or reserves. On average, a year in which reforms were in force registered an increase in oil production of 377,000 b/d. Interestingly, when controlling for price, reforms remain statistically significant while price falls from statistical significance. The quantitative analysis suggests that the reforms were successful in increasing oil production. When coupled with a supportive price environment and discoveries in Colombia, they were successful in attracting investment and stimulating production.

Conclusion

While price increases, discoveries, and reforms of the regulatory structure and fiscal terms were found to be associated with the late 2000s oil boom, declines in violence and improvements in rule of law were found to lack statistical significance. Certainly, a diminishment of violence has not hindered oil production. However, improved security is not correlated with oil production despite citations of violence as one of the limiting factors to oil and gas E&P. Admittedly, the analysis is limited by the lack of data points and the availability of data to serve as a proxy for overall security environment and violence. As such, further analysis is required to ascertain the link between improved security the hydrocarbon boom.

The lessons of Colombia’s hydrocarbon boom provide a framework for increasing hydrocarbon production elsewhere in Latin America. A confluence of factors created the conditions necessary for Colombia’s hydrocarbon boom. Given that Colombia is not particularly well endowed with reserves and the quality of its oil remains low, it suggests that other countries with suboptimal conditions can also replicate a boom. In particular, Colombia’s government has been stable, supportive towards the sector, and has offered attractive fiscal terms. Moreover, its focus on improving fiscal terms and providing an impartial regulatory regime has sustained the necessary capital flows. Underlying reserves and global prices were necessary to support the risk-taking in the country yet are ultimately exogenous factors. Although global benchmark oil prices are currently depressed, a government that provides investors with a regulatory framework and the stability necessary to create certainty over projects will set the foundation for expanding production once cyclical prices rebound.

Appendix

Table 1

Year Control of Corruption Government Effectiveness Political Stability and Absence of Violence/Terrorism Regulatory Quality Rule of Law Voice and Accountability Composite Score
1996 4.02 4.61 1.80 5.15 3.22 3.69 3.75
1997 4.14 4.66 1.47 5.10 3.43 4.06 3.81
1998 4.19 4.43 1.78 5.28 3.04 3.88 3.77
1999 4.53 4.18 1.04 5.05 3.38 4.00 3.70
2000 4.66 4.73 0.22 4.84 3.48 4.08 3.67
2001 4.80 4.72 0.62 4.95 3.60 4.38 3.85
2002 4.77 4.67 0.93 5.11 3.67 4.40 3.92
2003 4.79 4.76 1.29 5.25 3.96 4.64 4.12
2004 4.62 4.90 1.42 5.47 4.06 4.64 4.19
2005 4.56 4.94 1.32 5.52 4.13 4.65 4.18
2006 4.39 4.54 1.34 5.31 4.15 4.68 4.07
2007 4.18 4.91 1.94 5.52 4.31 4.69 4.26
2008 4.40 5.13 2.47 5.74 4.43 4.82 4.50
2009 4.13 5.02 2.21 5.78 4.22 4.80 4.36
2010 4.12 5.09 2.43 5.78 4.10 4.77 4.38
2011 4.21 4.78 2.76 6.01 4.32 4.81 4.48
Change 4.7% 3.7% 53.3% 16.6% 34.2% 30.2% 19.5%

Figure 1

1

Figure 2

2

Figure 3

Lawlessness and Oil Production
Dependent variable:
Oil Production (‘000 b/d)
(1) (2) (3)
Homicides

per 100,000

-2.5 -0.7
(2.2) (5.2)
Rule of Law

Composite Score

-20.8 -57.7
(113.9) (285.4)
Constant 806.6*** 734.5 921.9
(113.8) (463.9) (1,403.4)
Observations 19 16 16
R2 0.1 0.002 0.004
Adjusted R2 0.02 -0.1 -0.1
Residual Std. Error 151.5 (df = 17) 126.3 (df = 14) 131.0 (df = 13)
F Statistic 1.3 (df = 1; 17) 0.03 (df = 1; 14) 0.03 (df = 2; 13)
Note: *p<0.1; **p<0.05; ***p<0.01

 

Figure 4

4.png

Figure 5

Price, Reserves, and Oil Production
Dependent variable:
Oil Production (‘000 b/d)
(1) (2) (3)
Brent Price (2014 USD) 2.5** 4.2***
(1.1) (1.1)
Reserves (Millions Barrels) 0.2*** 0.3***
(0.05) (0.05)
Constant 300.7*** 187.2* -213.1
(66.5) (99.0) (133.0)
Observations 50 35 35
R2 0.1 0.3 0.5
Adjusted R2 0.1 0.3 0.5
Residual Std. Error 251.2 (df = 48) 209.4 (df = 33) 175.7 (df = 32)
F Statistic 5.0** (df = 1; 48) 13.8*** (df = 1; 33) 17.2*** (df = 2; 32)
Note: *p<0.1; **p<0.05; ***p<0.01

 

Figure 6

 6

 Figure 7

Reforms and Oil Production
Dependent variable:
Production (‘000 b/d)
(1) (2) (3) (4)
Reforms 377.2*** 419.1*** 310.8*** 266.1***
(68.4) (86.4) (52.8) (69.9)
Brent Price

(2014 USD)

-0.9 1.2
(1.2) (1.2)
Reserves

(Million Barrels)

0.2*** 0.2***
(0.04) (0.04)
Constant 335.7*** 372.3*** 38.8 -52.4
(33.5) (56.8) (74.0) (119.3)
Observations 50 50 35 35
R2 0.4 0.4 0.7 0.7
Adjusted R2 0.4 0.4 0.6 0.6
Residual Std. Error 206.5 (df = 48) 207.2 (df = 47) 147.3 (df = 32) 147.4 (df = 31)
F Statistic 30.4*** (df = 1; 48) 15.4*** (df = 2; 47) 31.3*** (df = 2; 32) 21.2*** (df = 3; 31)

 

 

[1] World Development Indicators. (Washington, DC: World Bank Group, 2016).

[2] BP Statistical Review of World Energy June 2015. (London: BP, 2015).

[3] Robert Perkins, “Colombia’s Oil Boom Stalls.Platts. December 2014.

[4] Lisa Viscidi. “Colombia’s Energy Renaissance.” Americas Society and Council of the Americas. December, 2010

[5] Lisa Viscidi. “Colombia’s Energy Renaissance.” Americas Society and Council of the Americas. December, 2010

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