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Colombia needs oil, has oil, but comunities said No

Communities are exercising their constitutional right to block oil and mining projects, jeopardizing the country's future as a petroleum exporter.

By Matthew Bristow

Petroleumworld 09 08

Coffee and fruit growers in the mountains around Arbeláez, a small farming town 35 miles from Bogotá, may have a significant amount of oil wealth under their feet. In July they defied the government and foreign investors and voted to leave it there. Local referendums, known as “popular consultations” in Colombia, are increasingly being used to block oil and mining projects, causing alarm among companies in those industries. More than 40 such votes are planned, according to the National Hydrocarbons Agency, threatening to paralyze exploration across the Andean nation.

Canacol Energy Ltd. , a Toronto-listed company, paid $7.5 million in 2014 for a 190,000-acre block in Arbeláez, but following the July 9 vote it can't carry out seismic testing or drill exploratory wells to ascertain how much crude may be underground. South Africa's AngloGold Ashanti Ltd. invested $360 million to mine gold in western Colombia but shelved the project after local residents voted 6,165 to 76 on March 26 to ban mining in the area.

Community referendums have become the greatest obstacle to operating in Colombia, says Charle Gamba, chief executive officer of Canacol. “The worst investment signal for a foreign investor is to invest in a country where there's no contractual stability.” The plebiscites threaten the industry that's powered Colombia's growth over the last decade and a half and provides its biggest source of export revenue. With oil production dropping and untapped reserves down to less than six years of output, the nation urgently needs new discoveries if it wishes to remain an energy exporter. (Colombia's neighbors, Ecuador and Venezuela, have approximately 40 years and 340 years of reserves, respectively.)

Finance Minister Mauricio Cárdenas has said the rules need to change to keep small communities from vetoing projects that are in the national interest. But since Colombia's constitution grants citizens the right to hold these types of referendums, the government can't simply send a bill to Congress. “To change this, a law wouldn't be sufficient,” says José Gregorio Hernández, a former head of Colombia's Constitutional Court. “It's necessary to change the constitution.”

Colombia's mining code had previously prevented local authorities from barring projects in their territory. But the Constitutional Court struck down the provision as unconstitutional last year, helping to trigger the wave of popular consultations, according to Rodrigo Negrete, a lawyer who's advised Arbeláez and other communities on environmental questions. The plebiscites can be convened by either the local authorities or residents who've collected a requisite number of signatures. The high court ruled last year that the votes are binding. An oil field or mine that was already licensed to produce wouldn't be affected, says Negrete.

In all five of the popular consultations held this year, locals voted overwhelmingly against letting oil and mining companies into their communities. They've been cheered on by environmentalists and national politicians, including former Bogotá Mayor Gustavo Petro, who leads in polling for the 2018 presidential election. In Arbeláez, the split was 4,312 to 38 in opposition. Farmers feared the presence of oil wells would threaten their water supply, according to Mayor Jorge Godoy, a member of the Conservative Party.

“We don't have that much water. There isn't enough for the oil company,” says Luis Jaime Ortiz, who runs a coffee shop in the town and campaigned for the no vote. “The government's attitude is that we are left-wing subversives, when in fact this is a town that's completely conservative and Catholic.” The area, which supplies Bogotá with tomatoes, peas, and blackberries, largely escaped the civil conflict and drug violence that plagued other regions in recent decades.

A change in 2011 to the way Colombia apportions oil and mining royalties has inadvertently stoked opposition to projects in communities such as Arbeláez, according to Leonardo Villar, director of Fedesarrollo , a Bogotá-based economics research group. Many municipalities experienced a windfall during the recent era of high oil prices, but much of the money was stolen or squandered by local politicians, Villar says. To address the problem and to distribute the oil wealth more evenly across the country, the central government cut the share of royalties flowing into town coffers. Juan Carlos Echeverry, the finance minister at the time and now CEO of Ecopetrol , the state-controlled oil producer, said the goal was to “spread the jam across the whole slice of toast.”

The upshot is that local governments have less incentive to incur the political cost of supporting oil projects, particularly when the price of Colombia's benchmark crude is trading at about $45 per barrel, less than half its value five years ago.

Canacol CEO Gamba says that these types of referendums have no equivalent in the rest of the region and that, without a change in the rules, a single community can “hold hostage” the rest of Colombia, depriving it of royalties and taxes. The government's inability, or unwillingness, to get on top of the issue is “increasingly worrisome,” he says.

Things might have turned out differently for the company had local residents believed they could benefit from its presence in their backyard. “The majority of people in Arbeláez aren't petroleum engineers, who are the ones who earn the big salaries,” says Oscar Javier Velásquez, a local farmer. “We are cheap labor, unqualified. So what can they offer us? Practically nothing.”

BOTTOM LINE - A wave of local referendums threatens to paralyze oil exploration in Colombia, jeopardizing the country's future as a petroleum exporter.

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