Trying to spend a pile of oil-driven cash in Colombia

Managing Colombia’s rising tide of oil dollars is a problem any government would love to have. And Mauricio Cardenas, a UC-Berkeley PhD and former think tanker who has been the country’s finance minister since September 2012, admits he is only too happy getting his feet wet.

What a tsunami it’s been. Export sales of Colombian crude, natural gas and products ballooned to $32.5 billion in 2013, nearly 10 times the $3.38 billion Colombia collected in 2003, he said. Petroleum sales last year accounted for 56% of all export dollars, up from just 26% of the total in 2003.

“I can’t think of any downsides…The challenge is sustainability. That’s why we are investing heavily in oil and gas exploration and streamlining” the permitting process, said Cardenas in an interview at his Bogota office. “We need to raise reserves, no doubt.”

During his career, Cardenas, 51, has moved back and forth from the ivory tower to the trenches, a long-standing tradition among the country’s elite technocrats. A wunderkind who got his first cabinet post at age 30, he then moved to the Fedesarrollo think tank in Bogota, and later to the Brookings Institution in Washington, before returning to Colombia in 2011 as energy minister.

Cardenas is getting ample opportunity to put theory into practice. He has helped President Santos overhaul the distribution of royalty and tax revenues, while ram-rodding a 2012 reform of the tax code that he says is helping reduce informal employment, the bane of many developing countries.

Part of the cash avalanche is earmarked to underwrite President Santos’ plans to improve long-neglected education and transportation infrastructure. Another portion has been diverted to a “rainy day” stabilization fund that Cardenas helped design as energy minister. The fund’s balance now totals $3 billion.

The windfall comes from the rise in Colombia’s crude output to 1,007,000 b/d last year, 90% more than in 2007. In addition to improved security, Colombia’s relatively low “take,” or royalties and taxes figured as a percentage of gross oil receipts, also has attracted explorers.

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Despite some legislators’ demand for a bigger tax and royalty bite on oil companies, Cardenas hinted the government in fact may soon make terms even more attractive for companies that drill offshore. Last year, the government began offering a 40% discount to explorers of unconventional crude and gas, or reserves associated with coal and shale.

“There is a clear need for more investment there,” he said of offshore exploration for gas and crude. Despite the exploration boom of recent years, reserves have stubbornly refused to rise significantly and current 2P levels amount to just 7 years of inventory.

In addition to export sales, Colombia’s fiscal accounts have been strengthened by foreign direct investment, which last year totaled about $17 billion, compared with the $3 billion annual average during most of the 1990s, Cardenas noted. Investment by oil and gas companies accounted for at least one third of 2013’s FDI.

“When foreign exchange is coming in, the economy does well. When it has been scarce as it was in the late 1990s, it does not do so well,” said Cardenas. He was referring to the time when long running conflict with leftist rebels brought Colombia to the verge of failed statehood.

The influx of foreign cash and the solid management of the country’s finances by Cardenas, his predecessors and the central bank have produced enviable economic stability in Colombia. (The country lost its investment grade bond ratings in 1999 but regained them in 2011).

Colombia’s economy last year surpassed Argentina’s as Latin America’s third largest behind Mexico and Brazil and is expected to expand by 4% this year. Per capita incomes have doubled over the last decade thanks largely to the oil boom and also rising prices and export volumes of coal and other commodities.

With a possible end in sight to 50 years of civil conflict with FARC rebels, Cardenas is optimistic for chances of a peace dividend and even more dynamic growth. The government has been negotiating with the rebels in Havana since November 2012 and although progress has been agonizingly slow, the two sides have reached partial agreements on several peace points.

More foreign cash could be raised later this year if and when the government sells its 57% stake in electric power generation company Isagen, a sale that could raise $2.5 billion. But Cardenas rules out a sale of part of the government’s 88.5% stake in state-controlled Ecopetrol whose shares have plummeted over the last year.

Asked about the hardest part of being finance minister, Cardenas said: “It’s saying no. That’s hard because this is a country with many needs and one would like to say yes to a lot of good initiatives. But fiscal responsibility is the pillar of the strong economy we now have.”

— Chris Kraul in Bogota

Platts