THE PRAGMATIST: Has Santos Finally Seen Wisdom of Uribe's Free-Market Lesson Strategies?

 – by Staff Report

Juan Manuel Santos

Addressing the country-specific risks will help (FARC, permitting delays, pipeline constraints) but the tide that would lift all boats requires the risk on trade to come back ... Investors should not sit on their hands waiting for the tide to come in ... So how should [they] approach investing in Colombian juniors? The approach is not any different from domestic E&P juniors. "Remember it's always about the people. When looking at companies to invest in, who are the people involved—and projects—how quickly can they take it to production." – Oil and Gas Investments Bulletin (9/4/12)
Dominant Social Theme: Alvaro Uribe's pro-business administration is yesterday's news.
Free-Market Analysis: Our ongoing analysis of Colombia's sociopolitical and industrial renaissance under former president Alvaro Uribe continues with this article noting that Colombia is likely a prime target for oil and gas exploration.

Unfortunately, valuations have crashed over the past two years because of renewed left-wing FARC-terrorist violence. Fortunately, steps are being taken to shore up the security situation in Colombia by those who understand that it requires strong and determined leadership. It's not hard to do but it needs firm hands to get it done.
Here's the latest from Keith Schaefer, an oil and gas analyst who analyzes Colombia's situation in an article, "Colombia Oil Stocks: Time to Invest Once Again?":
Recently, the army has increased its size and activity in the oil producing regions, improving security. This may lead to an improved perception regarding security in 3–6 months. Permitting times have been slowly improving—the government is adding more people here as well. This should allow several companies to carry their plans of drilling high impact wells in the second half of 2012.
This is not surprising, given that Uribe's policies worked well for Colombia during his tenure as president for most of the first decade of the 2000s. Uribe's combination of toughness when it came to FARC and his support of free-market principles transformed Colombia into a rising-star performer among developing countries, not just in Latin America but around the world.
As a result, both Uribe and Colombia garnered considerable goodwill from the international investment community – goodwill that still exists today, despite concerns over the current administration's policies on domestic security. Colombian industry and exports under the Uribe administration surged on a number of fronts and Colombian cities generally became known for urbanity and technological progress.
An energetic and educated middle class emerged, one that pulled many out of poverty as well. Colombia experienced the benefits of entrepreneurship and individual creativity.
Unfortunately, from Uribe's point of view, his administration's policies have not been followed closely by those of protégé Juan Manuel Santos. Santos took a decidedly different perspective ... especially regarding terrorism. He has declined to pursue the heads of FARC, hoping that this less aggressive approach will cultivate mediation. Today Colombia fights the cadres not the leaders. In fact, Santos prefers a radically different approach – he'd rather give them a legitimate voice in Colombian affairs.
See THE PRAGMATIST: Santos's 'Kiss and Make Up' Approach Renews FARC Rather than Colombia.
Uribe remains highly popular – and as Santos's policies have unfortunately led to an increase in the level of violence, Uribe seems to be winning the policy battle between these two political giants – a battle that is currently raging throughout Latin American media outlets. The strengthening of Colombia's response to recent FARC terrorism would seem to illustrate that perhaps the Santos administration is listening.
Uribe's perspective continues to be shared inside Colombia, even before the Santos administration appeared to re-endorse his policies with this latest security build-up.
His influence can be seen in various officials and political candidates supporting Colombia's industrial sector within an increasingly free-market environment.
The international community remains grateful, even admiring. For instance, News Corp recently nominated Uribe to its board. Murdoch, who has surely been embattled of late, called Uribe, "a transformative figure who saved his country's democratic institutions, revitalized its economy and restored the security of its people."
Uribe's policies are responsible for the tremendous upsurge in oil and gas investing in Colombia. They convinced Vancouver-based venture capitalist heavyweight Frank Giustra, for instance, to climb aboard an initiative to invest in Colombia as part of a pro-business, anti-poverty campaign. Giustra raised US$440 million for flagship Canadian oil company Petro Rubiales Energy Corp., to advance operations in Colombia's Llanos basin, a promising hydrocarbons reserve.
Giustra's enthusiasm is shared by oil and gas analyst Schaefer, as mentioned above. Here's another excerpt ...
Two years ago Colombia was the hottest international oil play in the world (for Canadian investors), with big wells creating big valuations and stock runs that left investors hungry for more.
Now, these stocks have not only fallen to earth, they've crashed through the floor into the basement —despite good oil prices. What happened? And more importantly, is this an opportunity for investors?
The opportunity answer is. . .almost, says Fred Kozak, former oil and gas analyst at Canadian brokerage firm Canaccord Genuity, and now an independent.
"Colombia still has FARC issues, environmental permitting is still a big problem and pipeline constraints are all impacting the investment climate," he said in an interview.
FARC is the Spanish acronym for the left wing guerrilla movement in Colombia. Former President Alvaro Uribe was able to secure billions of dollars in US aid in the last decade, which was used for the military and other means to reduce the FARC's impact on the country.
With the FARC risk down a lot, foreign investors felt secure in investing billions of private capital into the country's energy sector—especially the upstream oil and gas producers. The Canadians were VERY active, led by companies like Frank Giustra's and Serafino Iacono's Pacific Rubiales (PRE-TSX) and John Wright's/Corey Ruttan's Petrominerales (PMG-TSX) ...
But now? In what I would call the senior Colombian stocks—Rubiales, Gran Tierra—they're just above 50% of their highs, and the rest are anywhere from 20-50% of their highs.
Did anybody get the license plate on the truck that ran over these stocks?
It was actually several trucks, says Kozak. He says one of the big factors hitting these stocks was the Arab Spring of 2011—all international juniors the world over sold off after institutional and retail investors lost their appetite for foreign risk, as dictators got toppled one after the other starting in early 2011.
But sadly for everyone, FARC violence has increased this year. After several years of declining activity, brokerage firm Raymond James reports in an Aug 13 report that has been a "material" increase of security incidents reported since the beginning of the year. Pipeline attacks increased three-fold year-over-year and five Ecopetrol contractors were killed in Putumayo this summer, near the Colombian/Ecuador/Peru border.
Schaefer points out that Colombia's daily oil production currently exceeds 900,000 bopd, but he blames political restrains for not allowing production to crack the "magic million."
He also points out that producers are experiencing long permitting delays and thus wells are not being drilled as fast and exploration is not advancing as fast.
Optimistically, he points out that a new pipeline coming online in Q1/13 "is expected to carry more than 490,000 bopd. As that new capacity becomes imminent, it could be a huge catalyst for Colombian juniors."
There is a good deal of shale exploration going on in the Magdalena Basin and elsewhere. Momentum is returning to Colombia's oil and gas industry – and none too soon. The Santos administration finally seems to be making some of the right noises regarding both security and marketplace access.
How long this will last is anybody's guess ... as is whether the trend continues. If the administration's collective heart is not in its policy shift, then long-term there will be more dysfunction and failure.
This is one reason Uribe has raised his profile and taken to Twitter, among other social media outlets, to show his unease with what's taken place since he departed. Having increased security and created an explosion of new business in Colombia, the man doesn't want his legacy squandered.
Now a new group of politicians and entrepreneurs are emerging with renewed vigor and support for his policies, guidance and counsel. This time it seems Uribe is not going to take any chances, similar perhaps in strategy to the highly successful Operation Jaque carried out during his presidential reign. As godfather of Colombia's renewed success on the world stage, Uribe is determined that progress will continue.
Conclusion: Polls show that millions of Colombians agree with him on this. Perhaps the Uribe revolution is not over but is more like a phoenix, about to experience a major renewal. Time will tell...