The peace dividend
The signing of the agreement between the Santos government and FARC at the end of 2016 will boost economic growth, including in the hydrocarbon and renewable sectors. But this progress is not without difficulties

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It was one of those days when spring glistens in all its splendor. For this reason, there was no lack of observations on how the pleasant temperature recorded in Washington on April 18, 2017 was the perfect natural setting for the International Monetary Fund’s disclosure of more positive forecasts for the world economy. At the height of optimism for the planet's progress, the contrast with the situation in Latin American clearly emerged. Far from improving, the region’s prospects are currently grimmer than they were at the beginning of the year, although the red figures now seem to belong to the past. In addition, in terms of per capita income, the situation worsens. "The region will record another year of recession in per capita GDP in 2017," said Alicia Bárcena, Executive Secretary of the Economic Commission for Latin America and the Caribbean (CEPAL), an organization linked to the United Nations and based in Santiago, Chile. Of course, the fates of the countries in an area that extends south from the Río Grande to Patagonia vary greatly. Alongside the defeats in Venezuela there are success stories such as that of Peru, the country that recorded the best performance in the past century, or Colombia, which is no longer considered a "failed state," but a nation with great potential.

The end of the longest internal conflict in history

With a population of over 49 million people and a territory of over 1.1 million square kilometers, Colombia’s present reality is profoundly different from that of ten or twenty years ago. Drug cartels belong to the past, leaving a trail of blood and death behind them, and the longest internal conflict in world history has been overcome. The signing of the peace agreement between the government of Juan Manuel Santos and FARC guerrillas at the end of 2016 was a reason for celebration on many levels, but Colombian public opinion is divided, as evidenced by the outcome of the referendum in October 2016. However, despite political controversy the improvement in security conditions is expected to boost economic growth. "Peace will deliver a dividend," said the Finance Minister, Mauricio Cárdenas. Moderate calculations indicate a growth of 0.3 points in Colombia’s GDP, although the Minister is among those who believe that the results will be rosier. "The main reason is the increase in investments in additional areas and sectors," said the Minister. Energy is one of the sectors that should benefit. Hydrocarbons, biofuels and electricity production depend on the expected presence of minimum conditions of tranquility in rural areas. To this must be added the country's huge potential in terms of renewable sources such as wind and solar power. However, this progress is not without attendant difficulties. Although the FARC fighters have abandoned their weapons, active violent groups remain, some of which are linked to the production of illegal drugs. In addition, communities are increasingly reluctant to permit an energy project in their territory, a reluctance due to fear of irreversible environmental damage. Although the legal consequences are unclear, a growing number of municipalities have decided to prohibit mining in their area with an accompanying tightening of laws and reduction of permits. Climate change adds to this. While in some expressions of public opinion doubts continue regarding global warming, severe droughts and persistent rainy seasons seem to have intensified, increasing risks for people and infrastructure. It should be recalled that the Andean Cordillera is divided into three ranges in Colombia. The main water resources that make this country one of the top five water-rich states in the world come from the mountain peaks, but deforestation is increasing the likelihood of major changes in the way water presents itself, possibly in a more harmful manner. For this reason the equation of the development of the energy sector in Colombia must include the reported variables if it intends to continue in a sustainable manner. The possibilities are there, but now the situation has changed, as several experts interviewed for this article maintain.

Hydrocarbons on the horizon

While it shares a border of over 2,000 kilometers with Venezuela, Colombia's oil wealth is comparatively very low. Proven crude oil and gas reserves are less than 2,000 million barrels, far less than the almost 300,000 million barrels estimated for Venezuela. Nevertheless, there is a positive dynamic that is expressed through a rate of production of almost 800,000 barrels per day, investments aimed at new deposits and the improvement of the percentage of recovery of existing fields. Thanks to these positive factors, the country has managed to be a major exporter, a key aspect for an economy in which oil accounts for half of its exports. The investment forecast in 2017 is $4,700 million according to the Colombian Oil Association, an association that represents companies in the oil industry. This figure is double that recorded in the previous year and this improvement has resulted from the increase in international prices, the improvement of the security climate and better prospects in certain areas. At the beginning of May, for example, state-owned company Ecopetrol announced that the drilling of a well in the deep waters of the Caribbean Sea, in partnership with Anadarko, proved positive. Although months of testing are required, the discovery confirms the existence of a major gas field with reserves equal to over 800 million barrels of crude oil. Research has focused on an area measuring 14,900 square kilometers, but experts say that the area with potential for further discoveries amounts to 49,000 square kilometers. "We are very optimistic because the tests carried out show that our forecasts on the presence of hydrocarbons were well founded," says Juan Carlos Echeverry, President of Ecopetrol. The potential of Colombia's reserves is important, both on land and offshore. According to the Agencia Nacional de Hidrocarburos [National Hydrocarbons Agency], over 120,000 million barrels of natural oil are expected to be in place. Transforming these possibilities into reality, however, is not easy. For months, industry spokesmen have confirmed that current legislation has weakened the country’s competitiveness compared with other Latin American countries. In response the government argues that there are incentives for exploration that increase the internal rate of return of a successful project and reward the discovery, addition or inclusion of reserves. The emphasis is also on improved oil recovery, which includes techniques such as the continuous injection of steam, on-site combustion, and the injection of water and gas. The overall aim is to reduce the viscosity of the remaining crude oil present to optimize the amount of oil that can be extracted from a mature field. All this demonstrates that there is ample room for the private sector. Both in partnership with Ecopetrol and on an individual level, there is a long tradition of foreign countries involved in Colombia’s petroleum business. It is appropriate, however, to mention certain difficulties. In addition to the logistical challenges typical of a complex topography and poor communication pathways, the management of local communities has become a very complex activity. “The presence of the State in Colombia is weak, especially in isolated areas. When a company arrives to carry out a project, pressure is exerted, not only for the recruitment of local staff, but also for the maintenance of roads, the construction of libraries or the improvement of health care conditions,” explained expert Francisco Miranda. “Technically, there is no obligation to intervene in the local scene, but experience shows that ignoring these local desires can result in blockages or alterations and that it is usually better to be receptive to these local issues.” On the other hand, security conditions have significantly improved compared with the past, although risks are still present. To cite a case, plants such as coca are cultivated in areas close to some oil fields, attracting the presence of criminal gangs linked to drug cartels. “The advice is to know the territory. Working in Colombia can be very profitable, but it’s not like working in a developed country,” concluded Miranda.

The resistance of coal

The challenges faced by coal production, Colombia’s second largest export material, are different.. With deposits of 6,746 million tons that could last over seventy years at the current rate of exploitation, the South American country is one of the top five exporters in the world. In 2016, 90.5 million tons of coal were produced, a historic record. Most of the mines are located near the ports of the Atlantic coast and supply thermal plants in various countries around the world. In the Colombian hinterland there is a type of coal with a higher calorific value used in the iron and steel industry, but it is promoted for national consumption, to less sophisticated fields. There are more appropriate export programs, but that use would require the construction of a railway line and that seems economically impractical at the present time. For this reason, future plans focus on the performance of two major projects located in the north of the country, projects involving over 30 million tons each. These are open-air mines that incorporate exclusive rail and port transportation and have competitive costs on an international level. This cost factor is crucial for the long term, as, due to limitations imposed on greenhouse gas emission, coal is used less and less, especially in Europe. If global consumption remains unchanged over the next 15 years, as projected by the International Energy Agency, it is difficult to consider growth scenarios for coal. The closure of less productive mines is a reality, in Great Britain, China, and Colombia. Commitment is necessary if coal is to continue to play an important role. “We have a natural competitive advantage,” said Santiago Ángel of the Colombian Mining Association. “However, we cannot ignore the economic pressures on the consumption and production of coal that oblige us to limit costs while keeping efficiency standards high," he concluded.

The future lies in hydropower

The three branches of the Andean Cordillera form an obstacle to communication and transportation for the Colombian economy. Assessments prepared by the World Economic Forum indicate that the costs of moving a container from Colombian ports to the main consumer centers greatly exceed the costs found in Chile and Peru. However, Colombia’s combination of mountains and abundant precipitation provides advantages in other sectors. One of these is the production of energy based on hydropower, which, in installed power, amounts to 70 percent of Colombia’s total power output. This is why Colombia insists that it is a regional energy power, since much of the energy used by Central American and Caribbean countries comes from here. There is, in fact, a network interconnection plan with Panama that should be developed in the future. In the planned expansion to 2030, hydroelectric resources will have the largest impact on the additional installed power. A study conducted in 2015 by the Mining and Energy Planning Unit (UPME) of the Colombian Ministry of Mines revealed the potential for 56 gigawatts of power through water generation, more than five times the current capacity. Nonetheless, the effects of climate change have affected future development programs. The presence of the "El Niño" phenomenon as a result of the increase in occasional temperatures in the intertropical convergence zone in the Pacific Ocean has dramatically increased episodes of drought. Without going too far back, in the first half of 2016, a hypothesis was reached on the rationing of electricity that was eventually avoided. This problem is in addition to the pressures of communities opposed to the construction of dams. The costs for compensation and environmental management constitute an increasing burden on projects, greatly affecting the internal rate of return and creating political turmoil in the region. According to the calculations of the UPME, additional installed power of between 4,090 and 5,760 megawatts will be required by 2030, the level depending on the cases used for these scenarios. Most of the increase will be beneficial to hydrogeneration, but proportionally slightly less when compared with the current level. In turn, there will be new gas and coal thermal plants that will exploit local supply. The most significant aspect, however, is the emergence of other renewable alternatives, such as wind and solar power. In the most aggressive scenario, wind could provide up to 3,131 additional megawatts, while photovoltaic panels could contribute 130 megawatts. A much smaller amount would be expected from biomass (such as bagasse from sugar cane) or geothermal power. The projection on wind power is linked to ideal natural conditions in the Guajira Peninsula, located in the north of South America. Several studies confirm that the area's potential is unique, although the management of indigenous communities that reside in the area, whose rights are protected by the Colombian Constitution, is a source of uncertainty. There are, therefore, no clear signs for identifying projects for expanding the electricity generation park. However, the operating system is recognized by entities including the World Bank, as it operates through energy supply contracts in exchange for the payment of an availability commission. The bottom line is that Colombia is a privileged country in terms of energy. This is proven by its hydrocarbon resources and its major coal reserves, combined with the presence of sources that contribute to the expansion of its electricity generation park. Added to this is the presence of a biofuels industry which, thanks to diesel obtained from palm oil and ethanol obtained from sugar cane, has a weighting of just under 10 percent in the mix of gasoline consumed. The international price scenario is not advantageous at present, but what matters are the opportunities for growth in this area if circumstances change. Undoubtedly, there will be difficulties, but the bottom line is optimistic. "Colombia's natural riches lead to suggest that the country will consolidate itself as a regional energy power, if the right decisions are made," said former Minister Guillermo Perry. "There is still a lot of work to be done. It is also important to be able to do it because we have the resources to grow, " he concluded.