A Difficult Balancing Act

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Government of Colombia / CC BY 2.0

After winning a second term, the hard work now begins for President Juan Manuel Santos. And that applies not only to advancing the peace process but also to achieving broader social harmony. For the energy sector, Santos must build support from business and social movements for policies that promote investment while ensuring the greatest overall benefits for the country.

In his first term Santos identified the oil sector, which contributes 5.6% of GDP and about 40% of export earnings, as a key economic driver. But he also sought to address the environmental and social concerns that his predecessor largely ignored in the interest of attracting needed investment. Yet the balance between economic interests and public worries has not been achieved. Investment and production have stalled while other concerns remain unresolved.

After nearly doubling since 2007, oil production is flattening, and output is to drop slightly this year due to pipeline attacks, community protests and declining foreign investment. The long-term concern for the sector is the lack of new discoveries which calls into question whether the recent oil boom can be sustained. Rising production is surpassing oil reserve replacement. Reserves rose only 2.9% in 2013 and at this rate will run out in 7 years.

The only way to extend oil reserve life while increasing production is to incentivize new discoveries. That requires opening new areas for exploration, revising regulations, and improving infrastructure and security. Exploration is moving into more remote areas and the government is preparing regulations to auction blocks for unconventional oil, such as shale and coal bed methane.

However, expanding exploration of oil and other resources comes at a cost. Public opposition and conflicts over social and environmental impacts are on the rise. Colombia has the world’s second highest number of environmental conflicts after India and leads the Latin America ranking with about half of conflicts related to coal and gold mining, says the Environmental Justice Organisations, Liabilities and Trade project.

The Santos government has enforced stricter permitting rules, but this also delayed projects. The National Authority for Environmental Licensing has a huge backlog and the average wait for exploration permits has doubled since 2009. Mining and oil concessions are also increasingly encroaching on indigenous reserves and consulta previa, the process to obtain consent from affected communities, is slow or communities oppose projects altogether.

The spike in taxes and royalties from the oil and mining boom has also proved as much a challenge as a blessing. The 2011 reform to redistribute royalties and enhance central government oversight led to the loss for many municipalities of a key income source and to bottlenecks preventing dispersal of funds. Days before the second round election, Santos partially reversed the policy, announcing that local governments from producing regions won’t need approval to invest royalty revenues, but this has caused further uncertainty.

These concerns are not unique to Colombia. Many countries struggle with competing interests of developing natural resources while protecting the environment and local populations and distributing oil wealth efficiently. Experience elsewhere suggests conflicts can be reduced with ongoing dialogue and strong institutions. However, some trade-offs are inevitable. To achieve a balance in his second term Santos must set a clear energy strategy and use political skill to build support from industry as well as social and environmental activists. While he pursues peace he shouldn’t lose sight of this critical issue. Indeed, success in Havana depends on a strong government with public support as well as a thriving economy.