If Colombia does not take advantage of China’s changing energy demands, it could miss out on a transformative source of wealth.
Since former President Alvaro Uribe opened up the oil and mining sector in the early 2000s, Colombia has gone from FDI inflows of $2.1 billion in 2002 to nearly $15.8 billion in 2012, more than half of which was destined for oil and mining. And 68% of Colombia’s $369 billion annual GDP in 2012 came from the oil and mining sector. But earlier this year the IMF cautioned that Colombia was particularly vulnerable to a downturn in oil prices, warning of “over-dependence on the volatile oil and mining sector.” Colombia, like many Latin American economies, is highly exposed to commodities. More than 80% of Colombia’s exports are commodities. And roughly 50% of that is oil. Meanwhile, China’s energy appetite is booming and changing. Is Colombia set to take advantage of it?
China’s appetite: new fuel for an old fire
Despite a drag on growth, China is hungry for more and different energy to fuel its economy. But its energy consumption is set to change. JP Morgan Head of Commodities Research & Strategy Colin Fenton found recently that central planners want to diversify away from coal and toward oil and natural gas over the next five years. Many commodities-rich economies in Latin America have already turned to China and reaped the benefits of its massive double-digit growth over the past decade. Peru’s share of commodities exports to China went from 10.9% in 2002 to 16.8% in 2012, and Chile’s climbed from 11.4% to 22.7%.
But Colombia has only just started to make the shift. Colombia’s exports of 1.1% grew to just 5.5% in 2012. “When there were a lot of opportunities to take advantage of the growth of China, Colombia didn’t,” says Mr. Gaitán.
But China’s energy appetite could still be an opportunity for Colombia. Last year, President Juan Manuel Santos signed the initial plans to arrange financing from China’s development bank for a pipeline that would out-size the 80,000 barrel per day Caño-Limon Covenas pipeline. It could link Colombian and Venezuelan oil to the Pacific.
Christian Gómez, the Americas Society Director of Energy says that the move by China’s development bank reflects its energy interests in the region. “Infrastructure has to keep up with oil production,” says Mr. Gómez. “So China’s looking at this as an interesting opportunity.” On top of China’s interest, the possibility of peace with rebels – who are notorious for attacks that pile on millions of dollars in costs onto Colombia’s oil infrastructure, could mean an advance in infrastructure that Colombia desperately needs.
And beyond oil, the world’s second largest economy could offer up another opportunity: China’s growing demand for natural gas will require additional imports in order to meet its 2015 consumption goal. Colombia is exploring its natural gas potential, but an inside source close to the industry says that right now Colombia only exports to Venezuela and the sector is underdeveloped. “We still don’t know how much [natural gas] we have,” he said.
If Colombia uses this nascent partnership with China to keep the boom going, the wealth it derives from royalties could be transformative for the economy. But there are still structural troubles that Colombia has to take care of at home before it lets China in.
Royalties & efficiency: Saving for a rainy day and some development too
When taking on the task of transforming oil and mineral wealth into development, Economist Jorge Restrepo of Javeriana University in Bogota says Colombia has Chilean envy. “What we don’t have are two things: putting oil and mineral wealth into education and putting it into infrastructure,” says Mr. Restrepo. “Those are major bottlenecks. We’ve tried, but failed. We still don’t know how to do it.”
Colombia would do good to follow Chile. The way Chile managed its mining royalties has resulted in development in science, technology and infrastructure in a way that Mr. Restrepo says Colombia needs to figure out. But Mr. Restrepo says that local-level rent-seeking behavior has meant a lot of lost opportunity. Though a recent reform promoted by President Juan Manuel Santos that moves the control of royalties from local politicians to central authorities could reverse that loss in the future.
If the future outlook is good, it’s the past that’s worrisome. Not getting its royalties management under control might have already starved Colombia’s chance at competitiveness. Not having invested enough in competition after the boom is what worries Economist and Strategic Consultant Jorge Gaitán.
He says, “Colombia hasn’t taken advantage of 10 years of energy bonanza. So now there aren’t highways. There aren’t ports.” Even though Colombia is more diverse than it used to be – the Andean nation went from 60% of exports coming from food in the 1970s to having a relevant 18% exports coming from industrials in 2012 – Mr. Gaitán sees a Colombia that has lost its opportunity to make investments toward competitiveness, especially developing higher education.
A wave of free trade agreements that have opened Colombia up to compete with foreign companies could foster greater efficiency, but Mr. Gaitán says that Colombia is still lacking too much in key areas, like human capital and business sophistication, to catch up. “The productivity gap is the biggest problem for Colombia,” says Mr. Gaitán. Some efforts to fill that gap on the infrastructure side are underway, like completion of the Ruta del Sol mega-highway project. But the World Economic Forum still finds that infrastructure is one of the top three tripwires for Colombia, just after corrupt institutions and institutional bureaucratic inefficiencies.
Governance: Colombia’s good (oil) man
For all the things holding Colombia’s energy-fueled development back, Mr. Restrepo says that one thing Colombia has got going for it is an efficient governance structure in the energy sector. The state-directed energy giant Ecopetrol has what Mr. Restrepo believes is a “good governance structure, with independent members that don’t function by following the interests of the government.”
That is a bright spot for Colombia’s model and one thing others in the region could learn from: Ecopetrol doesn’t suffer from the bureaucratic meddling that has scared away investors from Brazil’s Petrobras. And the firm’s independence when it comes to leasing blocks has kept it from getting swallowed up by the kind of PEMEX-style corruption that Mexico’s President is now (painfully) trying to reform.
Earlier this year, C.F.O. Andrea Echeverri gave investors news that Colombia’s state-directed oil giant saw sales shrink in the first quarter of 2013, but she quickly assured them that “a shipment of 2 million barrels of oil is on its way” to Asia and would go on the second quarter books. The demand from Asia’s emerging economies is there. And despite volatile markets, Colombia has weathered the global financial crisis relatively well. While other economies faced the full gale of crisis, Colombia was enjoying the breeze of an oil and mining boom that has been quieter than Brazil’s pre-salt development but still powerful enough to propel Colombia’s traditionally agrarian-based economy onto its next stage of development.
Naysayers doom the boom to be over. Giving more than just a spoonful to feed China could reverse that. If it does, the rising Asian economy will likely want to see Colombia’s infrastructure in better shape. With the U.S. feigning interest in Latin America, Colombia should take advantage of China’s interest.