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Regional Report - Colombia: a change is gonna come

Published by
World Coal,

Amy Gibbs, JLT Specialty Ltd, UK.

In the last decade, Colombia has transformed from one of the world’s most dangerous countries into an important market for oil and mining investors alike. With the re-election of President Juan Manuel Santos in June 2014, the government’s peace negotiations with the militia group the Revolutionary Armed Forces of Colombia (FARC) will continue. Investors hope that the security environment will improve. However, it is in fact changing levels of political risk that present the greater challenge.

Traditionally, the primary risk facing investors in Colombia’s extractive resources industry was terrorism, specifically the threat posed by the FARC. For decades, the FARC undermined the country’s security, with bombings and kidnappings occurring almost on a daily basis, giving Colombia a reputation for being one of the most dangerous countries in the world. Alvaro Uribe, the previous president, was instrumental in addressing the threat posed by the FARC head-on. During his time in office (2002 – 2010), Uribe led an aggressive, counter-terrorism campaign.

Uribe’s offensive meant that the FARC’s efforts reached a plateau in 2008, when the group experienced a series of defeats. Their trophy hostages were rescued; their numbers were depleted; and their high profile leaders were killed. However, the group remained capable of avoiding capture and increasingly focused on attacking infrastructure. Oil pipelines were hit, while coal mining investors were impacted by attacks on railways – an essential piece of mine-to-market infrastructure – and on the national electricity grid, which periodically disrupted power.

When, in 2012, Santos embarked upon peace talks with the FARC, the move was met with scepticism. Yet by mid-2014, Santos’ election campaign centred on the progress made with the FARC and the president urged voters to re-elect him so that negotiations could continue. With analysts pointing to the possibility of a 1 – 2% increase in GDP growth should a peace deal be signed, investors breathed a sigh of relief when Santos secured a second term in June 2014.

With the re-election of Santos, many investors are hopeful that the security environment will improve as the FARC demobilises. In 2013, attacks on Cerrejón, the largest coal producer in Colombia, operated by a joint venture between Glencore, Anglo American and BHP Billiton, hit an all-time high. Cerrejón produces 32 million tpa coal and has been in operation since the 1970s. Last year, the project was hit by eight separate sabotage attacks, the worst being a hit on the railway that transports Cerrejón coal to the ports for export that saw 43 freight cars derailed. A further 31 attempted attacks against Cerrejón assets were foiled.

Yet even in the wake of a possible improvement in the Colombian security environment, for coal investors, the risk profile of Colombia is deteriorating in some respects, as political risks become an increasingly challenging part of investing in the country. Mining firms globally understand that operating in politically volatile territories requires confronting challenges rooted in country risk, such as unpredictable government interference, changing legislative, regulatory and fiscal regimes, as well as renegotiation of contracts. What has specifically changed in Colombia – and should serve as a red flag to coal mining investors – is the increasing level of scrutiny that the government is directing toward environmental concerns. As a result, the legal and regulatory environment for those companies that are either exploring or extracting coal is becoming more volatile. With Santos at the helm for another four years, investors should anticipate further government interventionism in the coal sector, as the president seeks to balance delivering sustainable economic growth with popular enthusiasm for tackling environmental issues.

Written by Amy Gibbs. Edited by . The full report appears in the December 2014 issue of World Coal. Subscribers can view the full article by logging in and downloading the issue here.

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