Colombia Risks Begin to Weigh on Investors

BOGOTA, Colombia —  Foreign investors here have known for years that they run a high risk: Their pipelines and buildings might be blown up and their executives and contractors abducted as pawns in a prolonged civil war.

Still, they have been willing to accept the risk because of the high rewards from the country’s abundant natural resources and potential markets. But now, as the guerrilla war intensifies and the economy stalls, investors are reconsidering how much they are willing to put on the line in Colombia.

“Up until a few months ago, security had been a manageable issue,” said an oil industry source here. “Now it is the driver.”

Executives from several international corporations are planning trips to their Colombian subsidiaries during the next few weeks, and security issues are at the top of their agendas.

As for new investors, “the first thing they ask me is ‘Who is Sureshot?’ ” said economist Armando Montenegro, referring to Colombia’s septuagenarian Marxist rebel leader, Manuel Marulanda. “Then, ‘Where is the FARC?’ “--the initials of Marulanda’s Revolutionary Armed Forces of Colombia, the nation’s largest rebel group.

The meetings and questions indicate that the balance between risk and reward may be shifting amid an escalation in kidnappings and attacks, including the recent insurgent occupation of a foreign-owned electric power plant.

Whether investors are reaching the point where risk outweighs reward will become clearer during the next few months as the Colombian government, hoping for foreign bidders, tries to auction off a series of state-owned companies and concessions. Economists worry that the bids may be low--or worse, that there will be no bids at all.

Privatization is considered crucial to the recovery of Colombia’s ailing economy, which is in its first recession in 50 years.

“If these sales fail, there will be budget problems and foreign exchange problems,” warned Montenegro. “The recovery will take longer.”

Such respected figures as Richard Grasso, chairman of the New York Stock Exchange, have met with FARC leaders to explain these economic realities. However, the guerrilla group’s rank and file, like other leftist rebels and the right-wing self-defense forces that fight them, appear to be more concerned about gaining territory and money to demonstrate their strength amid peace talks with the government.

Ironically, the fitful negotiations--they began early this year, stalled and then resumed last month--have set off one of the most brutal bursts of violence in the 35-year guerrilla conflict, as factions jockey for position. The result is more massacres of peasants suspected of supporting one side or the other, more kidnappings for ransom and more attacks on property.

The renewed violence affects the government’s sales efforts because many of the companies being auctioned and projects being put out to concession are in sectors of the economy and areas of the country that are vulnerable to rebel attacks. Up for bid are electric power companies, oil leases and interurban highways.

Highways are a favorite trolling ground for rebels looking for kidnapping victims. The threat of abduction has limited overland travel to the brave, the desperate and the foolhardy. Highway traffic on public roads has dropped in the past three years, according to a study by the National Highway Institute, a government agency.

“This is probably the worst time in history to be selling roads concessions,” admitted Rafael Sarmiento, the institute’s deputy director and the man in charge of finding private companies to build and finance seven highway projects worth a total of $2 billion.

However, postponing road construction would postpone economic development--and Colombia cannot afford to wait. So Sarmiento is talking to potential investors and plans to take the first bids on projects before year’s end.

Similarly, the government has to put oil leases up for auction in the next few months. Otherwise, Colombia is in danger of running low on oil. Only 16 exploratory wells each year were drilled during 1997 and 1998, compared with 75 a year in the 1980s.

“Over the next five years, we have to find 400,000 barrels of oil per year,” said Sen. Hugo Serrano, a petroleum geologist who represents a major oil-producing province. “If not, we will not be able to satisfy our domestic demand.”

Right now, Colombia’s oil exports are about all that is supporting the country’s shrinking economy. The nation cannot afford to lose those exports, much less be forced to import oil.

To reactivate exploration, the government changed its oil industry laws during the past year, decreasing royalties and allowing foreign companies a bigger share of joint ventures. The goal is to attract $6 billion for exploration during the next decade.

What the government could not change is that oil companies are a favorite target of guerrillas. Attacks against the companies and their suppliers have escalated in the past year, industry sources say.

Pipeline Attacked 631 Times

Rebels use political arguments about foreign domination of natural resources to justify kidnappings and extortion attempts backed by damage to pipelines. Oil industry sources say the rebels want companies to pay them “taxes” like those levied on ranchers and merchants in the 40% of the country under guerrilla control.

“The oil companies have not submitted to blackmail,” said Alejandro Martinez, president of the Colombian Oil Assn. So the insurgents attack them.

A single pipeline, Cano Limon, which transports 80% of Colombia’s oil production, has been damaged 58 times this year, 631 times since construction began in 1985.

Guerrilla attacks on the pipeline, which is operated by Los Angeles-based Occidental Petroleum, have released 2.1 million barrels of oil--about 88 million gallons, or eight times the amount lost by the Exxon Valdez a decade ago in the United States’ worst oil spill.

The oil field that supplies the pipeline is like an armed camp. Workers leave only when they go home on days off.

Operating such an outpost is expensive, but Occidental can still show a profit because Cano Limon is a huge field.

“When you are producing 50,000 barrels a day, you can afford security,” Serrano said. “When you are producing 5,000 barrels a day, security becomes a touchy subject.”

Significantly, most of this country’s other fields pump fewer than 5,000 barrels a day. Assigning soldiers to guard such small fields, when hundreds of villages are unprotected, is controversial.

Rebels Alter Tactics After Blast

Only public relations blunders appear to discourage rebel attacks on oil installations. Insurgents have not bothered a pipeline co-owned by BP Amoco since last year, when one of their explosions killed 73 people, mostly children, in the village of Machuca.

Nevertheless, oil companies continue to work in Colombia. Occidental plans to drill an exploratory well soon in an area near the Venezuelan border, not far from the place where three U.S. ecologists were slain by rebels earlier this year.

Companies say they are more cautious now. For instance, one industry source noted that BP Amoco once invested $2 billion over a two-year period to develop one major field. Today, no oil company would invest that much money so quickly, he said.

The real test, said Martinez of the oil association, will come in March, when the government plans to offer new exploration licenses. “Companies present in Colombia know that you can work here,” he said. “The risk is high that new investors will not appear.”

That possibility also worries Francisco Lozano, who as director of the energy unit in Colombia’s Planning Ministry is responsible for selling two electric power companies, worth a combined $1 billion, and a coal mine.

Bids on one of the power companies are scheduled for Nov. 22. During roadshows for potential bidders in Europe and the United States, Lozano fielded plenty of questions about the guerrillas.

“The subject of security has come up,” he said. “Otherwise, I would be dealing with people who do not read the newspapers.”

The questioning became more intense after rebels occupied the foreign-owned electric plant outside Cali in September and demanded a reduction in rates.

The occupation turned out to be more strange than threatening when the insurgents permitted the normal operation of the plant, then left after four days. Unlike Central American guerrillas during the 1980s, Colombian rebels have rarely attacked such installations.

“Every time they do something to our business, they affect the man on the street, whose support they are trying to win,” said Ed Monto, president of Houston-based Reliant Energy International, which is a partner in the plant and has invested $1.1 billion in Colombia during the past two years.

The company’s decision about whether to bid on the new offers will be determined mainly by regulatory considerations, he added.

Reliant’s subsidiary already supplies about one-fifth of Colombia’s electricity and is approaching the legal limit to its holdings.

That is the kind of investor attitude that the Colombian government is trying to promote. President Andres Pastrana made a strong pitch to potential foreign investors at a conference in Houston last month, urging them to “talk with people who are already in Colombia.”

Meanwhile, said Serrano, the senator, Colombians “are waiting with our fingers crossed” to find out whether their country will get the investment it needs.

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Darling was recently on assignment in Bogota.