A Colombian Adventure : Oxy Finds Oil--and Guerrillas, Drug Lords and Taxes--in South America

Occidental Petroleum relishes its reputation for discovering oil and making money in politically turbulent environments. The late Chairman Armand Hammer’s cloak-and-dagger adventures in Libya are part of oil industry lore.

And Colombia, where Oxy’s Cano Limon oil field is now that country’s largest-producing deposit, has offered up a rich complement of trouble: guerrilla wars, narco-terrorism and a rugged Andean terrain that boosts drilling costs tenfold and drove the price tag for Oxy’s 470-mile oil pipeline to $1 billion.

Guerrillas have blown up the pipeline from the Amazon basin to the Caribbean more than 400 times since it came on line in 1985--including 26 times this year alone--because the company refuses to pay protection money.

Despite elaborate and costly security precautions, an Oxy engineer was kidnaped in 1988 and held for a year before being ransomed safely at a reported cost of $6 million. Families of all Occidental employees were later moved out of the country when the late narco-kingpin Pablo Escobar threw Colombia into chaos with assassinations and car bombs.

It is, of course, a symbiotic relationship. Los Angeles-based Oxy has become Colombia’s leading oil producer, helping the country achieve energy self-sufficiency and become Latin America’s fourth-ranking producer after Venezuela, Mexico and Brazil. In turn, Colombia has come to account for 15% of Oxy’s global oil production, its second-largest source of foreign crude after Peru.

Now, after weathering extraordinary pressures, this happy connection is--from the oil industry’s perspective--being gummed up by ordinary politicians struggling to maximize the government’s take on a resource that, unlike illicit drugs, they can tax,

Oxy and other foreign oil producers complain that Colombia’s government has threatened future oil production with tax rates that have helped make it one of the world’s costliest places to produce oil.

Colombia’s rationale is that oil revenue--which representd about 1.6% of the nation’s gross national product--is crucial to its effort to diversify the economy. Oil recently surpassed coffee as its leading legal export and is seen as essential to building an economy based on growth industries other than illegal narcotics.

By hitting up the oil companies, Colombia’s politicians have also sought cover from charges that they have allied themselves with a new generation of economic colonizers. Oil is a hot political issue here: The National Liberation Army, one of the strongest guerrilla groups, has made the oil companies its prime target for mayhem.

In any case, Colombia’s taxes--it takes some 85% of oil revenues--make it “one of the seven most onerous” countries in the world in which to develop oil, said Rafael G. Quijano, director for Latin America at Petroleum Finance Co., a Washington, D.C.-based consulting and risk analysis firm.

Back in 1978, the biggest risk was failure. But Occidental’s Hammer thought Colombia was worth a try, despite the repeated “dry holes” drilled by Exxon and Mobil in previous exploratory efforts. After four years, just before Occidental was ready to give up, its engineers indeed hit the jackpot at Cano Limon, a 1.1-billion-barrel reserve in Colombia’s Arauca state.

Defying the naysayers, Occidental built an oil pipeline from Cano Limon, on the edge of the Amazon basin just a few hundred feet above sea level, up over 7,000-foot Andean mountains, back down to sea level to the Caribbean port of Covenas, all in just over two years.

With the pipeline complete, Oxy ceded a 50% interest in the Cano Limon oil field to the state-owned oil company Ecopetrol as required by Colombian law. It then sold half of its remaining interest in the oil field to Royal Dutch-Shell for $1 billion.

Occidental also turned over ownership of the pipeline to the Colombian government, which relieved Oxy of the responsibility of guarding and repairing the pipeline after the numerous guerrilla attacks. All the practice has reduced the average repair time to 36 hours, said Stephen T. Newton, president of Occidental de Colombia, which is based here.

“The National Liberation Army is the group that does it. Their position is that the oil companies are robbing the people of their oil, despite the fact that 87 cents of every dollar produced goes to the government,” Newton said. Occidental employs 640 people here.

Newton, who directed Oxy’s successful exploration effort in Peru amid guerrilla activity in the late 1980s before taking over the Colombia operation, added: “If you confine yourself to places where you have the luxury of total security, you may not find a lot of oil.”

The pipeline has been equipped with numerous devices to assure immediate shut-off after bombings so as to minimize oil spills, said Newton, a 43-year-old Australian. Oxy also built several barriers that catch and contain oil spills around rivers and tributaries.

More than 190,000 barrels of crude now flow daily through the Cano Limon pipeline, representing 36% of Colombia’s average daily production, according to Oil & Gas Journal, a trade weekly based in Tulsa, Okla.

Despite all the woes, the Colombian oil fields have grown steadily in importance to Oxy--even with the company’s increased focus on petrochemicals over the past seven years and its transformation since the 1990 death of oil-hunter Hammer at age 92. He was succeeded by Ray R. Irani, a chemical engineer.

With various petrochemical acquisitions and the sale of such non-energy assets as a big meat-packing subsidiary, Oxy by last year had become a company that relied on chemicals for fully half its $9.4 billion in revenue, compared to 16% in 1987. Occidental’s overseas oil revenues, meanwhile, were reduced by Oxy’s departure from Libya in 1986 and the sale of its North Sea wells in 1991.

A surge in chemical earnings was the main reason Oxy reported net income of $365 million for the first six months of 1995, a dramatic turnaround from a year-earlier loss of $59 million.

But over the past three years, Oxy has begun returning to its oil roots, boosting its offshore oil production by 25%. Morgan Stanley oil analyst Doug Terreson expects Oxy to resume its adventuresome ways by pinning much of its hopes for future growth on overseas oil and gas exploration, “where Oxy has had tremendous success relative to its competitors over the years.”

Gabon, Egypt, the Philippines, Vietnam and Albania are some of the places Oxy might drill.

Wall Street has generally applauded Irani for refocusing the company on its core energy and chemicals businesses and for cleaning up the balance sheet. For the first time in 14 years, Occidental is earning its shareholders dividends, said Bear, Stearns & Co. energy analyst Fred Leuffer.

“Wall Street’s assessment of how the company is managed [since Hammer’s death] is that it’s an entirely different ballgame,” Leuffer said. “You can really see where they are going. There is a strategy to grow the business they are in, to improve earnings and further strengthen the company’s finances.”

Meanwhile, as at other U.S. energy firms, overseas operations--from the Amazon to the Congo to Qatar--have become increasingly important to Oxy in recent years, accounting for 75% of the company’s crude oil production last year.

And for all its difficulties in Colombia, Oxy is sinking yet more money into its troublesome bedrock.

“This is just a core country for us,” Newton said.

Early next year, it will begin drilling in a prospective oil field called Samore that could prove as big as Cano Limon. Terreson says initial studies indicate that Samore is “on a trend” with the recently discovered Cusiana field, which measures 1.5 billion barrels in reserves and boasts of oil quality commensurate with that of industry benchmark West Texas light crude. Samore is also conveniently near Oxy’s existing pipeline.

Although the company refuses to say how much of its earnings are contributed by Colombian oil or any other regions, analyst Terreson says the operation is lucrative and “significant. . . . Colombia has been a very, very important area for Occidental.”

Oxy’s success brought on a wave of Colombian oil exploration in the mid- and late 1980s, resulting most spectacularly in Cusiana, due to be fully on line by 1997. Colombia’s proven crude oil reserves now stand at about 3.5 billion barrels.

Those reserves are dwarfed by Venezuela’s 64.4 billion and Mexico’s 51 billion barrels, but they are enough to rank it 31st in the world, according to Petroleum Intelligence Weekly. Colombia has been energy self-sufficient since 1985.

But as Colombia’s production has grown, so has the government’s appetite.

In 1992, Colombia slapped on a $1.20-per-barrel “war tax” to finance its anti-guerrilla efforts, a levy that was supposed to be temporary but was later extended indefinitely. This is on top of the government’s “remittance tax” of 12% on all profits taken out of the country.

All told, Colombia on average receives 85% of the price of each barrel, Quijano said. That compares, for example, with the 50% to 60% that producers pay the state and federal governments for Alaskan oil, he added.

The upshot: New wells drilled here totaled a paltry 13 in 1994, down from 52 in 1988. Seismic studies conducted by exploration firms last year as a prelude to drilling amounted to only 20% of the measurements made in 1988, according to the Colombian Petroleum Assn., a trade group that is lobbying for tax rollbacks.

Colombia’s squeeze on foreign oil companies is a classic example of how oil-starved countries first roll out the welcome mat for oil explorers and then jack up taxes and revenue-sharing once the crude starts to flow, said Philip R. Caudill, managing director of marketing for the world petroleum group of Price Waterhouse in Houston.

“The early days of the historical cycle are marked by strong incentives. Then, in the succeeding epoch, the terms are invariably changed. They become less attractive to the companies and more favorable to the government. Think of it as a pendulum,” Caudill said.

And if the pendulum swings too far, the result is a decline in exploration and production because companies invest their risk capital elsewhere, Caudill said. Oil explorers fled Britain and Norway in recent years for just those reasons.

The obstacles are aggravated in Colombia, where oil companies have more than just tax collectors and guerrillas to contend with.

Most of Colombia’s oil deposits are situated on a fault line where the Amazon River basin abuts the Eastern Cordillera mountain range. Because of the unstable ground, wells cost an average of $20 million to drill, contrasted with $2 million elsewhere in Latin America, said Quijano of Petroleum Finance Co. So the pressure for success is greater.

“With the geological profile, there have been relatively few large discoveries and many small ones,” Quijano said, adding: “So either you hit the jackpot like Oxy or most likely the economics won’t work.”

Long-term, the high-tax policy could thus undercut rather than support Colombia’s diversification strategy. Unless new oil sources are found, Colombian oil production could decline after the year 2003, industry officials say, despite the Cusiana field that is to be fully on line by 1997.

Juan Maria Rendon, president of Ecopetrol, agrees that changes are needed. Last year, the Colombian government halved its pipeline fee and began reimbursing oil explorers for costs incurred in drilling dry wells. In an interview this month, Rendon said that he would push for further tax rollbacks in the Colombian legislative session that convened last week.

His prime objective: repealing the $1.20-per-barrel “war tax.”

It remains to be seen whether the tax cuts, if passed, would come soon enough to prevent Colombia from losing ground in the international oil business. Governmental policy incentives take as long as 10 years to translate into oil finds.

And when the government last year invited 150 companies to submit exploration bids in a special auction last year, it got answers from three.

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Oxy Production

Occidental Petroleum of Los Angeles relies on its foreign oil wells to provide three quarters of its annual oil and gas revenues. Thanks to the massive Can~o Limon oil field that it discovered in 1982, Colombia is the second-highest-producing country after Peru, among the company’s offshore operations. Average daily oil production (in barrels):

DOMESTIC

State 1994 1993 1992 California 5,000 6,000 7,000 Gulf of Mexico 11,000 10,000 11,000 Kansas 7,000 7,000 7,000 Louisiana 3,000 2,000 3,000 Mississippi -- 2,000 2,000 New Mexico 3,000 3,000 2,000 Oklahoma 5,000 5,000 4,000 Texas 22,000 21,000 22,000 Other States 3,000 2,000 3,000 Total Domestic: 59,000 58,000 61,000

INTERNATIONAL

Country 1994 1993 1992 Argentina 4,000 9,000 13,000 Colombia 28,000 30,000 30,000 Ecuador 18,000 10,000 -- Oman 12,000 11,000 8,000 Pakistan 7,000 8,000 9,000 Peru 61,000 63,000 62,000 Russia 21,000 23,000 10,000 Yemen 14,000 4,000 -- Other countries 13,000 -- -- Total Int’l: 178,000 158,000 132,000

Source: Company reports