RICE University

POLI 461 Spring 2011

Country Report: Colombia

Anastazija Ristovska
Rice Class of 2013
April 2011

COUNTRY RISK ANALYSIS: COLOMBIA

OIL PRODUCTION INVESTMENT RISK ASSESSMENT

SUMMARY AND KEY POINTS

Economy
Over the last ten years Colombia has proven to be the most stable economy in the
region with constant GDP growth and economic expansion higher than Worlds and Latin
Americas average. In 2002, Colombia received US$2.1 billion FDI inflow, and in 2009 the
FDI increased to 7.2 billion. Even when there is FDI inflow reduction in the region as a
whole, the FDI reduction in Colombia is less significant than in other Latin American
countries.
Economic Risk
Economic risks have been low recently due to the governments efforts to reduce the
vulnerability to external shocks by improving the public-debt profile and fiscal policies.
Colombias greatest weaknesses are the problem of social security, the complicated tax
system and the entangled bureaucratic practices that constrain business procedures. The
independence of the Central Bank and its proven skills in inflation targeting go into saying
that the current overall short-term economic risk is fairly low.
Oil Production
Improved security and large inflows of foreign direct investment caused Columbias
crude oil production to rise from 785,000 bpd in March 2010 to 884,000 bpd in March 2011,
an increase of 14% according to data released from the Colombian Hydrocarbons National
Agency. Columbias state-owned oil company expects to reach production of 750,000 barrels
per day in 2011, whereas the Colombian Mining and Oil Ministry sets a target of producing
one million barrels per day by the end of the year, and 1.15 million barrels per day by
December 2014. The increased inflows of foreign investment in the oil and gas industries are
a result of the governments market-friendly policies and gaining the territory once held by
guerrillas.

Social Security Risks

Americas military presence in Colombia has focused mainly on the war on drugs,
and recently also on Columbias decades old civil conflict with 400 troops and special forces
detachment intended to contain the oil wealth-funded Left-wing guerrillas and right-wing
paramilitaries in Saudi Arauca, the war-torn oil-rich north part of the country. Even though
urban areas are relatively safe under the governance of President Uribe and President Juan
Manuel Santos Calderon, half of the country is controlled by warring factions. Marxist
guerrillas are especially present in Arauca both prior and after the oil discovery in 1980.
Since 1980 guerrillas have been profiting from the oil pipeline to the Caribbean coast, and
even though a fifth of all oil profits is given to the local government, much of the provincial
administration is controlled by the National Liberation army, Colombias second-largest
Marxist paramilitary group. The threat of disruption of oil production by the guerrillas is
constant, and the 450-mile long pipeline to the Caribbean coast has been blown up 170
times, which along with other guerrilla-caused incidents has spilled 2.5 million barrels of
crude on the soil, underground water and rivers, which is more than many oil spill incidents
on open sea. The only way of reducing the threat of disruption international oil companies
have found is compensating and buying off the paramilitaries.
Risk Mitigation
Risk can be mitigated in two primary ways: increasing the security of companys
infrastructure as well as joining forces with other companies, the government and U.S. forces
to increase the security of the pipelines, along with adopting an investment portfolio
economic strategy of asset allocation and diversification.
Asset allocation will be one of the central focuses of the investment strategy as part of
strategically diversifying the portfolio and finding the right mix of assets among U.S. and
foreign equities, bonds, cash equivalents, and real estate. The strategy will comprehensively
seek to benefit from changing market cycles through a higher degree of diversification,
reduced overall portfolio risk, automatic diversification and risk management, and quarterly
tactical rebalancing.

INTRODUCTION: APPROACH TO INVESTMENT

Investment Strategy
The investment strategy will be set-off with signing of one of the seventy explorationand-production contracts the Columbian government hopes to sign in 2011. The project will
target the acquisition, exploration and production of large hydrocarbon reserves in accord
with the emerging global and country-specific economic and political trends. An investment
strategy should be holistic, taking into account not only factors such as the funded status of
the plan, but also the circumstances that surround the investment plan and the way these
circumstances can in an unpredictable manner alter and shape the investment project, often in
negative ways. Most of the external environment issues the project deals with are changes in
resource supply and demand, regional stabilization, energy security dynamics, transportation
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development and disruptive technologies. The likelihood of counterproductive circumstances

arising and affecting the investment project is estimated in risk assessment analyses, and on
the capacity to achieve risk-balanced exploration, cost-efficient development, and high
margin production. Depending on the funded status and materiality, the investment strategy
may have the potential to take more or less risk.
The main goal is a responsible development of oil and natural resources, and at the same
time pursuing sustainable and profitable growth. The investment and exploration areas will
include natural gas, shale gas, oil, heavy oil, and other hydrocarbons, and the development of
utilities and infrastructure to support our project in emerging Columbian oil and gas regions.
The investment process framework builds upon the general concepts of building unique
relationships with Columbian governance, private sector and the national oil company
Ecopetrol, identifying and acquiring promising assets in regions of emerging interest such as
the oil-rich Arauca province to the north (which came to be called Saudi Arauca), create a
business environment that attracts management talent and capital which will be used to
incubate the company, and guiding the investment to success and full development over time.

Geographic and Regional Planning

The company will build three crude oil and natural gas wells in Columbian Saudi
Arauca, and have the oil processed at the Columbian Cartegina Oil Refinery and
subsequently shipped to the North Pacific Ocean exporting to Japan, China, Far East Asia,
Central Asia, West South America, Canada, Mexico and the U.S., as well as through the
Caribbean Sea and the North Atlantic Ocean to Europe and North and South Africa. The
natural gas will be both piped to most countries in South and Central America, and liquefied
to LNG at Columbian, Pacific Basin or U.S.A. natural gas liquefying facilities.

Investment: Assets and the Market

The investment comprises a number and variety of assets proportional to the risk
assessment, with the flexibility of modifying the strategy as investment circumstances and
surroundings change. The strategy looks at a thirty-year investment horizon incorporating a
short-term goal of developing primarily oil and natural gas, and a long-term goal of including
all forms of energy exploitable on Columbian soil, at the same time focusing on improving
energy efficiencies and inventing new technologies to reduce emissions. The strategy is based
on a global outlook on global equity, fixed income and currency markets, with a quarterly
assets shift away from the strategic location and their long-term weights in order to benefit
from changing conditions it the global capital market, and an overweight to global stocks
versus global bonds, small-cap versus large-cap stocks, developed versus emerging equities,
high yield versus investment grade fixed income, and international versus U.S. fixed income.
Location of Oil and Natural Gas Wells
Three oil and gas wells will be drilled horizontally and seven wells will be drilled
vertically for expected production of 270 bpd, and pump jack technology will be used to
produce fifty wells in existing shallow oil formation, with a planned total oil production of
1,600 bpd. The annual percentage growth rate is estimated at 25% if the expected minimum
daily production is obtained at all wells. The strategy plans for a horizontal black shale well
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with an estimated flow rate between 100 and 500 bpd. All wells will be drilled in Columbian
Saudi Arauca.
The investment strategy intends to cooperation with the Colombian National Oil
Company (NOC) Ecopetrol, farming in some of the blocks which were awarded to Ecopetrol
and other companies as part of Colombias 2007 Caribbean Licensing Round. The blocks are
of 1000-2000sq km approximate area. A farm-in deal means that Ecopetrol will remain the
operator of the blocks, and an approval from Colombias National Hydrocarbons Agency
(ANH) will be needed. At least one block will be farmed-in which is close to the Venezuelan
border, an area that is believed to have similar potential to the Gulf of Venezuela where the
largest Venezuelan gas discovery was made in 2009.

COUNTRY HISTORY & DEVELOPMENT:

POLITICS, ECONOMICS & RESOURCES
Introduction
Located in Northern South America as the only country bordering the Caribbean Sea
as well as the North Pacific Ocean, Columbia is one of the three countries that emerged after
the collapse of Gran Columbia in 1830, the other two being Ecuador, Venezuela.
Independence from Spain was obtained on 20 July 1810. In January 2011 Columbia assumed
non-permanent seat in the United Nations Security Council for the 2011-12 term.
History
The Spanish settled on the north coast of todays Colombia in the 1500s, forming the
New Granada colony with Santa Fe de Bogota as its capital. In 1717/73 the Viceroyalty of
New Granada was created Bogota soon became one of the three main administrative centers
of the Spanish colonies in the New World, the other two being Lima and Mexico City. When
southern Spain was conquered by Napoleon in 1810 and the Spanish Supreme Central Junta
dissolved itself, many provinces of the Spanish colonies in Latin America including Quito,
Gran Colombia, Venezuela and Paraguay, declared independence and established sovereign
governments. Simon Bolivar of Venezuela united Colombia, Venezuela, Panama, and
Ecuador in the Republic of Greater Colombia (1819-1830).
Two political parties were dominant in Greater Colombia, the Conservatives who
believed in a strong government and a powerful church, and the Liberals who believed in
decentralization of power, strong regional power, and less significance for the role of the
church. Bolivar was the first president and he was a Conservative, whereas his vice president
Santader was a Liberal. Ecuador and Venezuela very very soon lost to separatists and broke
off from Greater Colombia, the remaining two countries in the federation being Panama and
Colombia. In 1861 the country changed its name to the United States of New Granada due to
constitutional changes. The same was repeated in 1863 when it became the United States of
Colombia, and in 1885 when it was called the Republic of Colombia.

In 1899 the War of a Thousand Days broke out, a brutal civil war that, along with a
U.S.A. moderated skirmish over the Canal Zone, resulted in Panamas declaration of
independence in 1903. In the so-called La Violenca period from 1946-1958 insurrection and
banditry claimed thousands of lives. The conflict was triggered by a failure of Liberal
administrations to solve the countrys problems via social reforms. The Liberals came to
power in 1930 supplanting the conservatives. Marxist guerrilla groups organized in the 1960s
and 1970s, most notable of which are the National Liberation Army (ELN), the
Revolutionary Armed Forces of Colombia (FARC), and the May 19th Movement (M-19),
throwing the country back into violence.
By the 1980s Colombia was well established as one of worlds most notorious centers
for drug production and trafficking producing 75% of worlds cocaine, with the Medillin and
Cali drug cartels having great control over the country. The 1990s witnessed the formation of
even more paramilitary organizations under the common authority of the United Self-Defense
Forces of Colombia (AUC). President Belisario Bentacur Cuartas assumed presidency in
1982 and made an unsuccessful effort to curb drug trafficking and violence, opening an
official war on drug cartels and the guerrillas. This benevolent act on behalf of the presidency
has turned Colombia into a battleground of killings and kidnappings. In 1999, 2,787 people
had been kidnapped, more than in any other country in the world. Two million Colombians
have emigrated from the country as a result of the violence. The U.S. government intervened
with Plan Colombia, a $1.3 billion worth of aid to fight drug trafficking, a plan that was
later extended to fight guerrilla oil theft which caused disruptions and shortages in crude oil
production.
Demographics
Colombia is the third most populous country in Latin America after Brazil and
Mexico. Four decades of civil war and urban violence have caused millions to leave the
country, however economic growth in the 2000s improved living standards for Colombians.
Most of the economic improvement was seen in urban centers, leading to massive migration
from rural to urban areas, so Colombia today is perhaps the most urbanized country in Latin
America with 77% of the population living in urban centers.
The three main ethnic groups that constitute Colombian demographics are indigenous
Amerindians, European immigrants, and African-Americans. Most indigenous people have
merged in the mestizo population, and there is less than a million that represent 85 distinct
cultures. Most European immigrants were Spanish colonists, as well as Basques, Italians,
Germans, French, Swiss, Poles and Russians, with significant numbers moving to Colombia
during World War II, the Cold War and the Spanish Civil War of the 1930s. The religious
breakdown is 90% Roman Catholic, and 10% Protestant, Eastern Orthodox, Jewish and
Muslim. Colombia has the third largest Spanish speaking population after Mexico and Spain,
and Spanish is the official language of the country.
Economy
Over the last ten years Colombia has proven to be the most stable economy in the
region with constant GDP growth and economic expansion higher than Worlds and Latin
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Americas average. In 2002, Colombia received US$2.1 billion FDI inflow, and in 2009 the
FDI increased to 7.2 billion. Even when there is FDI inflow reduction in the region as a
whole, the FDI reduction in Colombia is less significant than in other Latin American
countries.

Figure 1: Economist Intelligence Unit forecast on the FDI 2010 inflows of the CIVET; FDI inflows as a proportion of the
2010 GDP. Colombia stands out as the best investment opportunity in the Emerging Countries.
* Note: 2010 forecast
Source: Economist Inteligence Unit (EIU)

GDP Growth: Colombia vs. World (2000 2010)

(Percentage Change)

Source: DANE (National Accounts), EIU (Market Indicators & Forecasts)

Population
The population is a bit bellow 45 million with 75% of the population living in urban
areas, and 67% being between the age of 15 and 64. The capital is Bogota with a population
of 8.3 million and the second largest city is Medellin with 3.5 million. Columbias education
expenditures are 3.9% of GDP which ranks it 105th in the world in this category.
Columbia is a presidential democracy, meaning a republic where the executive branch
dominates the government. There are 32 administrative divisions and Bogota as the single
capital district. The present constitution was adopted on 5 July 1991 and has been amended
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many times since. The legal system is based on Spanish law. There is judicial review of
executive and legislative acts. A new criminal code was implemented in 2008. Even though
Colombia is party to the Statute of the International Court of Justice and has taken other
countries to the Court, it has not ratified its full jurisdiction. The current executive branch
establishment was elected in May and June 2010 and assumed office in August 2010. The
Colombian constitution merges the institutions of the chief of state and head of government,
forming an overall very strong executive branch. The present chief of state/head of
government is President Juan Manuel Santos Calderon, and Vice President Angelino Garzon.
In the last runoff elections the president was elected with 69% of the vote.

RISK FRAMEWORK

Country Constitution
Colombia is a presidential representative democratic republic. It is a multi-party
system where the executive power is exercised by the government and the president of
Colombia is both the head of state and head of government. Legislative power is vested in the
two chambers of Congress, The Senate of Colombia and The House of Representatives of
Colombia, as well as the government. The judiciary is independent of the legislature and the
executive. The present constitution was enacted on July 5, 1991, strengthening the
administration of justice, providing for dual nationality, election of a vice president, election
of departmental governors, and expanded citizen basic rights. The president is elected for a
four-year term and, since amendments to the Constitution introduced by President Uribe, the
executive can be reelected for one consecutive term. The vice-president succeeds the
incumbent president in case of resignation, illness, or death. The Senate of Colombia has 102
seats and the Chamber of Representatives has 161 members. Senate elections are nationwide,
whereas Chamber of Representatives members are elected in multimember districts within
the thirty-two administrative divisions. Members can be re-elected indefinitely. Congress
meets twice a year, and can be additionally summoned by the president. The judiciary is
independent from the executive and the administrative branches. The Judicial branch is
composed of four distinct jurisdictions, civilian, administrative, constitutional, and special.
The highest judicial organs are the Supreme Court, the Council of the State, the
Constitutional Court, and the Superior Judicial Council.
Head of State
The President is the head of state, head of government, and supreme administrative
authority. The office of the president was established in 1819 while Colombia was still part of
Gran Colombia. The first president was General Simon Bolivar. The current president is Juan
Manuel Santos. Symbolizing national unity, upon assuming office the President takes an oath
to the constitution of Colombia, swearing to defend and protect the laws of the country and
the rights and liberties of all Colombian citizens.
The government is composed by the Head of Government, the Council of Ministers,
and the directors of the administrative departments of Colombia. The President must be at
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least 30 years of age and a natural born citizen of Colombia. The president and vice president
serve a term of office of four years after being elected by popular vote.
The president and vice president serve four-year terms and are elected by popular
vote. The president could serve for one term only up until 2005 when the constitution was
amended and allowed for the president to serve two terms. In 2010, the Constitutional Court
of Colombia rejected a referendum proposal that would have allowed presidents to run for
more than two terms, even if they are nonconsecutive. If successful, the referendum proposal
would have allowed incumbent president Uribe Alvaro to compete for a third term in office.
All elections are regulated and controlled by the National Electoral Council. Colombia has
historically maintained a two-party system, which discouraged the formation of other parties,
and made it difficult for anyone outside the major two political parties to win seats in
Congress and the Chamber of Representatives. Since 2002, however, it is a multi-party
system with three major parties: the Social Party of National Unity, a liberal conservatism
party with 48 House seats and 28 Senate seats since the 2010 legislative elections; the
Colombian Conservative Party with 37 House and 22 Senate seats; and the Colombian
Liberal Party, a social democracy and social liberalism party with 35 House and 17 Senate
seats.
The current president Juan Manuel Santos was elected in the 2010 presidential
elections which took place under a two-round system, the first poll and second polls of which
were held on May 30 and June 20. The second poll happened after no candidate achieved a
majority of the votes, so the two candidates with highest percentages of votes share, Juan
Manuel Santos and Antanas Mockus, competed in a runoff election.
In 2002, Alvaro Uribe was elected president with a 53.1 per cent share of the vote,
and was re-elected in 2006 with 62.2 per cent of the vote, the runner up being Carlos Gavira
with 22 per cent of vote. All throughout his term Uribe fought fiercely against the violence in
the country, pledging to end the fourty-years old armed conflict using many methods
including strengthening the armed forces.
The increased street safety has led to increased
traffic and a triple increase in tourism over the last five
years, which has pointed to another problem, the need for
improved infrastructure of industrial backbones. President
Uribes efforts at reforming the country can be undermined
unless billions of US dollars arent soon invested in
infrastructure.
Americas military presence in Colombia has
focused mainly on the war on drugs, and recently also on
Columbias decades old civil conflict with 400 troops and
special forces detachment intended to contain the oil
wealth-funded Left-wing guerrillas and right-wing
paramilitaries in Saudi Arauca, the war-torn oil-rich north
part of the country. Even though urban areas are relatively safe under President Uribe, half of
the country is controlled by warring factions. Marxist guerrillas are especially present in
Arauca both prior and after the oil discovery in 1980. Since 1980 guerrillas have been
profiting from the oil pipeline to the Caribbean coast, and even though a fifth of all oil profits
is given to the local government, much of the provincial administration is controlled by the
Figure 2: Colombia Map

National Liberation army, Colombias second-largest Marxist paramilitary group. The threat
of disruption of oil production by the guerrillas is constant, and the 450-mile long pipeline to
the Caribbean coast has been blown up 170 times, which along with other guerrilla-caused
incidents has spilled 2.5 million barrels of crude on the soil, underground water and rivers,
which is more than many oil spill incidents on open sea. The only way of reducing the threat
of disruption international oil companies have found is compensating and buying off the
paramilitaries. Guerrillas also puncture the pipeline to draw out oil which they then sell at
very low prices, making tens of millions US dollars a year. Arauca is the main focus of antiterrorist operations conducted by Uribe, making it permissible for security forces to arrest
without a warrant, search property and restricts movement in the area. Uribe has joined forces
with the U.S. in the war on terrorism, especially Colombian domestic terrorism. This required
military enforcement and the establishment of an information and spying agency, the funds
for which were secured by raising taxes. Uribe has the goal of curbing Colombias drug
industry which exports 500 tons of cocaine and 10 tons of heroin to the U.S.A. every year,
but the primary goal is protecting trade and boosting the economy, therefore the drug industry
came second to defeating the guerrillas and paramilitaries.

Oil Production
Colombias oil production is on the steady increase and 1.2 million barrels are
expected to be produced by the end of 2012, leading to increased exports to the U.S., which is
welcomed by U.S. consumers, since most of worlds oil is produced by nations with
mercurial governments hostile to the U.S., whereas Colombia is an ally with a stable
government constantly seeking to develop trade relations with the United States. Colombia
has a relatively low tax and royalty rates, and a generous policy on foreign companys
ownership of oil projects, as part of the open-door policy in regards to oil drilling, which has
attracted billions in outside investment.

Oil Pipelines
The countrys second largest oil pipeline, the Cano Limon-Covenas pipeline, has been
a popular target for militants, and because of its latest attack it operates at only 35% of its
225,000 bpd capacity. The pipeline is now fully owned by the National Oil Company
Ecopetrol which bought Occidentals 44% stake in the pipeline, placing a crucial part of
Colombias oil transport infrastructure in the hands of the government-owned Ecopetrol.
Restoring the capacity of the pipeline is critical to transporting the increased production from
the east of the country to the Caribbean coast, for which purpose the Ecopetrol will invest
20% of its US$6.7 billion of its 2011 spending. For Occidental the deal means not having to
invest in the pipelines security and maintenance and maintaining full access to the pipeline.
Apart from investing in the Cano Limon-Covenas pipeline, Ecopetrol will focus on
developing the Oleoducto Bicentenario oil pipeline which allows for oil transportation from
the heavy oil fields in the Casanare region in the west to the main export port on the Atlantic
Coast. This second pipeline is not fully owned by Ecopetrol as 45% of it was recently sold to
local and international companies. The two pipelines reconstruction and development project
is scheduled to be finished in December 2012.

Criminal Activities
Columbia has always been associated with high crime rates, low safety, constant
guerilla violence, kidnappings and drug trafficking. In 2010 there was a 22% rise in
kidnappings compared to the previous year, and 220 people were kidnapped in 2010 as
opposed to 180 in 2009. Most of the kidnappings occurred in Arauca (29), and the rest were
in Antioquia, Cauca, Valle del Cauca and Casanare. Most of the kidnappings are committed
by regular street criminals and only some by guerilla groups as FARC. The rate of
kidnappings is much lower than in 2000 when more than 3,500 people were kidnapped.

Government Efforts to Curb Criminal Activities

The 2002 presidential elections, though, have contributed to a steady reduction of
violence in many parts of the country. The two main guerilla groups have since reduced from
a total of 24,000 in 2001 to 9,500 in 2010 as a result of the Democratic Security policy. As
a result of the increased strength of the security forces and as a result of the reduction of
violence, many parts of the country have become safe, there is newly-recovered freedom to
travel using policed routes among significant destinations, and an increase in cruise and
seashore foreign tourists choosing Colombia as a holiday destination with 1.5 million foreign
visitors in 2010 as opposed to 925,000 in 2005. Foreign travel magazines recommend
Colombia as one of worlds best tourism destinations, although not without the precaution of
avoiding Choco on the Pacific coast, Putumayo in the far south, the area east of the Andes, as
well as all rural areas where both leftist guerillas and right-wing paramilitaries are still
present.

Economic Risks
Columbias stock market increased by 1400%, capital inflows by 200% and real
estate prices by 300% since 2001. There is intense interest in Colombian investments is
fueled by the trends of the enormous amount of money pouring from global markets and
investors increased risk tolerance. Global investor risk tolerance has been on the steady
increase as witnessed in the increased investment rate in risky countries such as Brazil,
Russia, India, China, Turkey, Poland, Vietnam, and of course, Colombia. If it is history on
the repeat then the greatest fear lies in another Asian economic crisis. Many of these
nascent markets barely have what it takes to parlay the mercurial enthusiasm of investors into
long-term development. This is especially the case in Colombia where the stock market has
an aggregate capitalization of $59 billion. Instead of precise Wall Street measures of
investment risk, Columbias stock market has a dangerously fuzzy measure called confianza
defined as confidence, trust, and intuitive sense that business can be safely transacted and the
company can make it through the day unharmed. Wall Street analysts that cover Colombia
base their main investment risk analysis on rate of killings and kidnapping, therefore when
security in Colombia rose to a decent level due to President Alvaro Uribe who took office in
2002, risk analysts witnessing the reduction in kidnappings and killings estimated risk
reductions and encouraged all type of investment, from stocks and bonds to real estate,
deriving a direct correlation between the decline in killings and investment gains. It is hard to
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buy this correlation without further evidence, though. The nation as a whole has never
defaulted on debt or experienced hyperinflation; its $130 billion economy is growing at 6.8%
a year, and has recently slashed its inflation rate from 18% to 5%, with unemployment falling
from 16% to 13%. Columbia is a world leader in the production of coffee, petroleum, textiles,
and flowers. 70% of Colombias stock market value is made up of Colombian companies
with a global outlook. But all of investments in Colombia are based on the single risk
coefficient of confianza.

Drug Trafficking
Columbia still produces the majority of worlds cocaine, and even corporate crime is
used to fund guerilla groups, some of these paramilitary groups being on the U.S. list of
terrorist organizations. Columbian market keeps surging but it is still not certain whether its
financial and physical infrastructures can accommodate the flood of investment. The stable
economy is highly dependent on the stability of the Uribes presidency, however once
elections come the risk soars since elections outcome is never certain. If Uribe stays in power
then the confianza risk value should resume its low value, but if a change in the presidency
happens then the international community would lose its confianza in Colombias stability.
Uribe (whose father was murdered by kidnappers) is the only president that has succeeded in
driving out drug traffickers and leftist guerillas out of urban centers, but nothing guarantees
he would stay a fourth term in power. Even the President himself has been accused of being
involved with right-wing paramilitaries. Uribe meets the accusations with strong denial.

Aid Received from the United States

Colombia has received five billion in aid from the U.S.A., which makes it the fifth
country in the size of aid received after Iraq, Egypt, Afghanistan and Israel. Uribes goal is
attracting foreign investment and nurturing investor confidence. A major effort towards this
goal is gaining full free-trade benefits with the U.S.

RISK ASSESSMENT
Risk Assessment Strategy
Todays business world involves risk of many types, including changes in customer habits,
emergence of new competitors, tax increases, and many other external circumstances your company
is unable to control. In order to prevent such outside influences from causing negative effects on your
investments, formal risk analysis and risk management is used to assess the risks of unpredictable
hinges disrupting your plan, advising what actions you should take in order to create a cost-effective
buffer in case any of the possible negative scenarios materializes. Risk can be defined as the perceived
extent of possible loss, that is, the probability of an event happening times the cost of the event. The
first step in assessing risk is identifying threats, which can be human, operational, reputational,
procedural, project, financial, technical, natural, or political. Human threats come from individuals or
organizations, epidemics, deaths, kidnapping, etc.; operational risk comes from disruption in supplies,
operations, distribution, access to assets; reputational risks come from any outcome that could
potentially damage the reputation in the market; procedural risks come from internal organizational
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and accounting failures; project risks come from poor investment strategy, over-runs,
underproduction, failure to meet contact terms; financial risks come from stock market, interest rates,
national economies; and political risks come from foreign influence, government policy, changes in
tax regimes, and so on. After the list of potential threats is compiled, the threats are compared to the
actual situation in the country, in this case to the threats in Colombia. The threats are then compared
against the internal environment of the company and its contractors. The likelihood of any threat
materializing times the cost of the impact of the threat materialized is the estimate of risk. Once
estimated, risk can be managed with several general approaches: using existing assets to improve
methods and systems already in place, contingency planning as in crisis management plans and
business continuity management, and by investing in new resources.
Risk Analysis
Internal Armed Conflict
The country has been in a four-decade long armed conflict between government
forces and anti-government insurgent groups. The principal insurgent group is the
Revolutionary Armed forces of Columbia (FARC), which is heavily funded by drug trade and
lacks the general military and public support to overthrow the government, which doesnt
prevent the guerillas from attacking civilians and controlling large areas of the countryside.
Even though large numbers of the paramilitary have recently demobilized, many of them
have joined criminal groups in a perpetual cycle of violence, which has concerned
neighboring countries about violence spilling over on their territory.

Oil Production
Improved security and large inflows of foreign direct investment caused Columbias
crude oil production to rise from 785,000 bpd in March 2010 to 884,000 bpd in March 2011,
an increase of 14% according to data released from the Colombian Hydrocarbons National
Agency. Columbias state-owned oil company expects to reach production of 750,000 barrels
per day in 2011, whereas the Colombian Mining and Oil Ministry sets a target of producing
one million barrels per day by the end of the year, and 1.15 million barrels per day by
December 2014. The increased inflows of foreign investment in the oil and gas industries are
a result of the governments market-friendly policies and gaining the territory once held by
guerrillas.

Environmental Issues and Natural Hazards

Potential natural hazards in Columbia are occasional earthquakes, periodic droughts,
and volcanic eruptions on the highlands, with several recent eruptions by volcano Galeras in
2009 and 2010, Nevado del Ruiz in 1991 and in 1985 killing 23,000 people, Nevado del
Huila in 2007 and several other active volcanoes (Cumbal, Dona Juana, Purace etc.).
Colombia is also exposed to floods and hurricanes, with El Nino often damaging the
infrastructure causing floods in certain areas of the country, leaving 48 people dead in the
north of the country in 2005, killing 1,185 and leaving 200,000 homeless in 1999. Most

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volcanoes are located far from the main cities and economically dynamic areas and the last
major eruption happened in 1952.
Deforestation is a major environmental issue, along with soil and water quality, and
vehicle emissions air pollution in Bogota. Columbia is party to the Antarctic Treaty, the
Climate Change Kyoto Protocol, desertification, biodiversity, hazardous wastes, marine life
conservation, ship pollution, wetlands, and ozone layer protection environmental
international agreements.
Economic Risks
Colombias economy has undergone considerable improvement over the last decade,
reinforcing its status as one of the most dynamic, diverse, and flexible Latin American
economies. The countrys fiscal position has been strengthened and its public-debt profile
improved, reducing its vulnerability to external shocks. Colombias present executive and
head-of-government establishment policy has set a track of institutional framework
consolidation, firmly establishing Colombias position as an investment destination. A
number of issues remain to be addressed, including labor rigidities, unemployment and
underemployment levels, fiscal weaknesses such as the social security system position, as
well as a complicated tax system. The present government in office is trying to address most
of these issues through new fiscal policies that guarantee creditworthy fiscal management,
debt reduction, and good management of oil resources, at the same time guaranteeing central
bank independence and inflation targeting.

Security Environment
Even though the security situation has improved greatly over the last decade, the
present government continues to face the challenge that the effectiveness of the security
policy is slowly declining. The right-wing militias have been officially demobilized only to
witness their combatants joining drug-trafficking and extortion criminal gangs. The left-wing
militias on the other hand are being effectively suppressed. Nevertheless the urban security
continues deteriorating, mostly due to the criminal gangs drug-trafficking operations. The
gangs rebel activities have cause a deterioration of the interstate relations between
Colombia, Ecuador and Venezuela, an issue that is being effectively addressed by Colombian
governments efforts to both contain the rebel movement and achieve regional integration.

Key issues to watch

The urban security is unstable with the city-district rival-gangs war continuing to
escalate, causing a doubling in the number of homicides in 2009 in Colombias largest cities
and a continually increasing murder rate in 2010 as well. Areas that were once purged from
urban paramilitary groups are now plagued by newly emerged gangs and their turf wars, and
the government hasnt yet been able to form an effective policy to respond to the security
threats posed by these criminal gangs. Security risks are high in the regions bordering
Panama, Ecuador and Venezuela, as well as some areas of the Pacific coasts, especially the
port city of Buenaventura. It is highly recommended that official authorities be consulted
before travelling outside major urban centers. Domestic violent crime occurs mainly in
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poorer neighborhoods of urban cities and rural areas. Foreigners are seemingly safe from
armed attacks if they stick to the more affluent parts of urban centers; however no matter
where they are they are still liable to unarmed street robbery and other types of ordinary
crime.
The crime of drug trafficking is especially hard to contain, since all major cartels from
the 1990s have become fragmented into numerous smaller factions difficult to track down,
many of which are associated with the paramilitaries. Internal national security is to be
maintained by the police, nevertheless the task of tracking down and shutting all separatist
groups - the criminal gangs, the drug cartels, the right and left-wing armed militias is too
overwhelming not only for the police, but also for Colombias national police and military
combined, and the help of the U.S. military was needed, which, for these reasons as well as
for protecting domestic trade and war-on-illegal-drugs interests, has stepped into yet another
military mission on foreign soil. The containment of criminal factions is made additionally
difficult by the culture of impunity fostered by Colombias inefficient judiciary.
What is even more worrisome for investors, are the extortion methods practiced by
the paramilitaries including bomb attacks, abductions and physical attacks, or just threats in
order to obtain payments from businesses. The demanded extorted payments are locally
known as la vacuna (vaccine).

Business Registration
New firm registration in Colombia increased by 5.2 per cent after the introduction of
the Centros de Atencion Empresarial (CAEs), one-stop business registration centers that have
somewhat reduced the procedures to start a business. A business that promises success in the
long run is one that is formally registered. Formally registered businesses grow larger and
more productive than informal ones, being able to double operations immediately after
registering due to the ability to access courts and credit, supply formal and foreign customers,
be less liable to government and police inspections and consequent business interruptions,
and take advantage of the business sector reforms that have eased new businesses entry.
Even though there is no minimum capital requirement for starting a business in
Colombia, the procedures are relatively onerous, on the average taking ten procedural steps,
twenty days and the cost of 16.3% of the national income per capita (US$8,600); on the
average, Colombia ranks 80th among 183 economies in terms of doing business. The one-stop
shops, CAEs, simplify the procedures to two steps, the first being providing advice to
entrepreneurs who want to open a new business, providing guidance through registering the
accounting books and company statutes, and issuing a formal document of business existence
and legal representation, merging the municipal, departmental and national agencies
registration procedures into one.

Attacks on the Oil Pipelines

One of the attacks on the oil pipeline happened in 2001 by leftist FARC guerrillas
who tried to blackmail two U.S. and Colombian oil companies by remorselessly bombing the
pipeline whose profits cover more than ninety percent of the entire regions government
budget. FARC has bombed the pipeline 110 times in the first half of 2001 only, completely
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shutting it down, causing a loss of US$400 million in crude sales income, an enormous
decrease in municipal royalties coming from pipeline incomes, as well as environmental
damage surpassing most open sea tanker spills. As a result, the local public economy has
been forced to kibosh all public and infrastructure development, and lay off hundreds of
workers. Local authorities have long concluded that the region is completely dominated by
paramilitaries, and it is impossible to guard the 483-mile pipeline from being attacked,
comparing the complexity of the situation to the difficulty of guarding the U.S. border with
Mexico. FARC numbers 17,000 guerrillas nationwide and 1,100 in Saudi Arauca, with other
rival paramilitaries such as the leftists National Liberation Army, or ELN, which numbers
3,500 guerrillas nationwide and 800 in the region. Both factions yield a large political control
in the region, providing their funding from pipeline bombing, blackmailing, extortion of
profits, sipping from the pipeline through punctures, alongside with the commonplace drug
trafficking.

RISK MITIGATION STRATEGY

Risk Management Framework

Risk analysis is based on a structured approach to evaluating the risks a company
faces by thinking through threats, the probability and costs of an event happening. Risk
analysis is the basis for risk management, crisis prevention, cost effectiveness, contingency
planning, and good resource allocation. A risk oversight and management framework sets a
strategy, measures performance, establishes and maintains internal control, and manages risk
in the business. It also sets policies and minimum standards, objective oversight, and
challenges the initial risk management strategy.
The risk appetite is the degree of uncertainty and the amount of risk that an investor is
willing to face in his business ventures. Risk policy statements define the minimum
operational standards to be maintained in order to be able to face and manage risk that is
consistent with the risk appetite. Company policies prescribe mitigation actions where risks
are outside the risk appetite. Some of the key categories of risk are insurance risk, reinsurance
risk, operational risk, credit, market and liquidity risk, and regulatory risk. Insurance
activities are concerned with pricing, acceptance and management of risk arising from
contracts with customers.
The reinsurance strategy sets a goal of monitoring all financial activities, purchases
and resource allocations to ensure that all dealings are capita efficient, cost effective, and
aligned with the companys risk appetite and risk mitigation strategy. Operational risk exists
in every segment of the company, therefore for purposes of simplification operational risk
mitigation strategy is categorized in risk and control self assessments, key risk indicators,
scenario analyses, incident management and loss reporting. Data of actual operational risk
incidents, near misses and past experiences is collected from within the company as well as
outside scenarios that occurred to other entities.
Investment and treasury activities within credit quality limits ensure risk exposure is
within the risk appetite and risk management capabilities. The investment strategy, portfolio
and asset management depict the market risk, whereas liquidity risk is managed by
contingency funding plans to ensure maintenance of a minimum level of cash or other highly
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liquid assets that can be liquidated within a certain time period. Regulatory risk tends to be
high within the international environment where different geographical locations have
differing regulatory requirements. The strategy responds to regulatory risk by ensuring an
arrangement for regulatory compliance and upkeep of fair and accommodative relations with
regulators.

The principle risks and uncertainties to delivering the strategy are prolonged

economic downswing, adverse financial markets and lower interest rates, rating
environment softening in key markets, insurance risk acceptance outside risk appetite,
and any adverse loss experience.
The companys focus will remain on targeted profitable growth, benefiting from the

actions taken to de-risk the underwriting portfolio, limiting the exposure to financially
tripped treaties, taking early action to mitigate any risks hinted by emerging trends.
The investment portfolio will be dominantly invested in high quality fixed income
short dated cash assets, with bond holdings diversified across different currencies and
non government bonds.
The objective of sustainable profitable performance is supported by the diversified

portfolio which exposes the investment to different markets at different stages of

development and insurance cycle, shifting capacity where best returns are perceived
and sectioning assets to target trades where competitive advantage is seen.
Key risk indicators are used to observe emerging trends, both in terms of risks and

opportunities, ensuring risks are underwritten to achieve target returns within the risk
appetite. The reinsurance strategy limits yearly net losses to a specified amount and
adjusts the risk appetite according to the causes, frequency, and severity of loses.

Exchange-Traded Funds (ETFs)

An exchange-traded fund (ETF) is an investment fund traded on stock exchanges,
holding assets in stocks, commodities, and bonds, trading them close to their net asset value.
As part of the risk mitigation strategy, Oil eschange-traded funds will be used to hedge oil
risk and increase oil exposure. Oil prices volatility can be used towards ones advantage by
investing in oil ETFs in cases where there is expectance of rise in oil prices, in this way
gaining an upside exposure with one complete transaction, purchasing a fund that consists of
several oil assets, without facing the need to go after numerous securities or futures and chase
prices, not having to go through multiple individual trade contracts and purchases, with all
the capital gain tax benefits this brings.
At times when the company is expecting a fall in oil prices, the option of selling oil
ETFs is always available, which is also a good way to mitigate downside risk because it
buffers any potential blows from losing profits on oil assets in the investment portfolio as oil
prices fall. The mechanism is simple: whenever there is a downside exposure, a short sale of
an ETF helps protect investments; on the other hand, in case of short oil assets, ETF
purchases help create a safe upside hedge.
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The option of inverse ETFs is also available. Inverse ETFs increase in value as the
investment declines. Option straddles in Oil ETFs are perfect for companies in countries with
market instability and oil prices volatility such as Colombia, because they provide exposure
to both downside and upside movement. On the other hand, selling a straddle in times of
market rigidity and stable prices in the oil industry can capture the inactivity and again
benefit the investment portfolio.

Risk Mitigation
Risk mitigation is the actions taken to prevent a foreseen adverse event from
happening, or to mitigate and/or minimize the negative effects the adverse event has caused
in case it did happen. Risk management planning is a continuing process that evolves even
after contingency levels have been set. Risk mitigation strategy includes characterizing the
root causes of risks that have been identified and quantified in earlier phases, evaluating
common risks causes and their mutual interactions, identifying risk mitigation tools and
methods for every identified risk, prioritizing among mitigation strategy alternatives, and
committing the resources for the selected risk mitigation plans.
Most risks are very difficult to mitigate, particularly the risk of high-impact, lowprobability events happening, something that cannot be covered by contingencies. Highimpact, low-probability events must be mitigated by reducing the likelihood and by forming a
strong strategy to reduce the potential impact. Even though mitigating the risk and providing
the tools for impact mitigation is costly and time-consuming, these activities must
nevertheless be included in the investment strategy and project budget allocation, and be
treated just like any other project investment activity is.

Risk Transfer and Contracting

Risk management often includes allocating risks to the parties best able to manage
them. Contractors usually embark on risks in exchange for adequate rewards, and in order to
determine a fair price the owner should pay the contractor, the risks must be quantified and
the full magnitude of all risks must be made known to all parties concerned. This risk transfer
strategy can be equally applied to contractors, warrantors, and insurance firms, each of which
can agree to undertake a part of the project under a certain degree of risk according to the risk
mitigation capabilities they possess.

Risk Buffering
Risk buffering, or risk hedging, is the establishment of a buffer able to absorb any
effects from an adverse event materializing without causing damage to the project as a whole.
Some examples of risk buffers include contingencies, allocation of additional time,
manpower and other resources, overestimating project quantities, costs and duration.

Risk Avoidance

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Risk avoidance is simply eliminating some risk by completely changing certain

aspects of the investment strategy, restructuring the project in such a manner that the risk in
question is completely removed from the picure, with the solution to the cause of the risk
often coming from a non-conventional field such as engineering, political, technical, or
simply financial.
Risk avoidance in Colombias oil fields case would mean drilling at fields that use the
shorter oil pipeline or the pipeline that is less attacked. Risk buffering would mean having at
least one or two non-operating wells at the alternative pipeline to meet the daily contracted
crude oil demands whenever the first pipeline is under attack. Portfolio diversification would
also mean investing in natural gas wells in the area of Casanare where British Petroleum
discovered large natural gas reserves in 1991.

Risk Control
Risk control involves embarking upon an activity in full awareness of the risk
involved, but taking steps at mitigating the risk along the way by, for example, data-gathering
and early warning systems. One form of risk control in the oil production investment in
Colombia would be establishing cameras and early warning systems and alarms, perhaps
electric wires, along the full length of the pipeline in order to ward off the paramilitaries.

Asset Allocation
Asset allocation will be one of the central focuses of the investment strategy as part of
strategically diversifying the portfolio and finding the right mix of assets among U.S. and
foreign equities, bonds, cash equivalents, and real estate. The strategy will comprehensively
seek to benefit from changing market cycles through a higher degree of diversification,
reduced overall portfolio risk, automatic diversification and risk management, and quarterly
tactical rebalancing. A certain percentage of the assets will be invested in funds such as the
Structured International Equity Funds, and will be a subject to the risk factors of those funds,
mostly the volatility of U.S. and non-U.S. equity investments, and the political, economic and
currency risks of non-U.S. securities.
Diversification differs from asset allocation in the sense that diversification spreads
money across different investments, whereas asset allocation adds to the diversification by
spreading money among different asset classes such as U.S. and foreign equities, bonds, real
estate, etc.. The decisions within the investment strategy concern asset class timing, regional
equity selection, regional bond selection, U.S. equity style timing, emerging equity country
selection, developed equity country selection, high yield timing, and U.S. equity size timing,
emerging markets debts, emerging market equity, International Real Estate, bonds and equity,
and portfolios.

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CONCLUSION
Even though Colombia is a relatively stable economy compared to its Latin American
neighbors, its fast economic growth in the last decade has been mostly based on the increased
security. Investors have been quick to flood the country with investment capital, causing an
even greater economic bubble. Even though it is early to say whether it is history on the
repeat, investor enthusiasm in Colombia greatly resembles foreign investor interest in Asian
booming economies, investor-friendly environment and low interest rates in several Asian
economies prior to the 1997 Asian economic crisis. Asian fast growing economies simply
werent able to hold and sustain the huge amount of capital inflow and the bubble finally
burst resulting in local and remote financial crashes, political upheavals, and a reverse wave
of investment interest in developing countries. As the memory of these events fades,
investors are again enthusiastic about the capital-inflow-friendly BRIC economies of Brazil,
Russia, India and China, the investor-attracting CIVETS economies of Colombia, Indonesia,
Vietnam, Egypt, Turkey and South Africa, as well as other EAGLES or Emerging and
Growth-Leading Economies.
Colombia is especially risky, since most of its recent decade economic stability is
owed to the newly achieved and precarious social security based on the success of official
police and military forces in keeping guerrillas outside of urban centers. Increased urban
stability has led to increase in domestic trade and tourism, making Colombia an (almost) safe
destination for both tourists and foreign investors.
This report might advise any other investor to think twice prior to committing capital
and resources in ventures in Colombia, except for the oil investor. Colombian oil is gushing,
and no risk analyst is likely to convince oil companies to refrain from taking part of the 2010
14% increase in crude oil production and the promising potential 25% increase in the next
half a decade. In addition to all the methods proposed so far, economic risks can be mitigated
by closely cooperating with the government, taking most precautious steps at following
Colombian laws, forming partnerships with other foreign oil companies present in Colombia,
investing in the pipelines security, getting familiarized with the local guerrilla factions,
figuring out various effective ways to either buy them off or ward them off, and lobbying the
U.S. government to undertake an even more active military involvement on Colombian soil
in fighting back paramilitaries.

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