Earlier this month, it was confirmed by Colombian President Juan Manuel Santos and the Marxist Farc guerrilla movement that an agreement had been reached on a road map that may end Latin America's longest running insurgency. The country's second guerrilla group, ELN, may also join the talks.
Economists estimate that the ongoing conflict costs Colombia's economy two percent of GDP each year. So after announcement of the talks, it should come as no surprise to investors that the two Colombia ETFs - the Global X FTSE Colombia 20 ETF (NYSE: GXG) and the Market Vectors Colombia ETF (NYSE: COLX) - both rose roughly 5 percent.
In particular, the peace talks should give an additional boost to the country's already booming energy sector led by its partially privatized oil company, Ecopetrol SA ADR (NYSE: EC). According to Colombia's defense ministry, there were 67 attacks on oil infrastructure from rebels in the first six months of this year. This compares to 84 such attacks for all of 2011. This year's attacks have caused national oil production to decline recently, from 936,000 barrels of oil a day in May to 929,000 barrels of oil a day in July. Ecopetrol's CEO Javier Gutierrez said that the attacks is costing his firm in excess of 10,000 barrels a day of oil in lost production.
If the attacks do stop, it will only add to a strong performance by Colombia's energy sector as a whole and more specifically Ecopetrol. Colombia is now the region's fourth largest oil exporter, having almost doubled its oil production from 2006 levels. Oil output in the country rose by nearly 450,000 barrels of oil a day between 2007 and 2011. This compares very favorably to neighboring Brazil where oil output, over the past three years, has risen a disappointing 150,000 barrels a day.
Ecopetrol itself has dome very well and is leading Colombia's oil sector with a production level increase of 16 percent a year since 2008. The company has also been helped by its strategy of tapping fields discovered years earlier. Currently, Ecopetrol has an $80 billion investment plan aimed at hitting a production level of one million barrels a day by 2015 and 1.3 million barrels a day by 2020. In 2012, the company is expected to contribute about 780,000 barrels a day toward Colombia's overall oil production of one million barrels of oil per day.
The company has provided much of the 'fuel' for Colombia's current economic boom and expects to do so in the future. Investors have begun to catch on to the potential that lies with Ecopetrol. Its current market capitalization is around $118 billion, having more than doubled since it was partially privatized in 2008. In May 2012, in fact, it briefly surpassed the market capitalization of Brazil's oil giant, Petrobras SA ADR (NYSE: PBR).
Investors should not be surprised if this happens again in the future and perhaps becomes permanent. Even though Ecopetrol is still 88.5 percent owned by the Colombian government, it is being managed like a private company. Ecopetrol is being given lots of room to run and take advantage of the best opportunities, even internationally (Brazil, Peru, Gulf of Mexico). At the same time, Petrobras is being choked by the government reasserting increasing control in the company and imposing restrictions, such as local content requirements on Petrobras equipment. So, as has often happened in the past, its ambitious oil production targets will likely fall far short. On the other hand, Ecopetrol's targets are likely to be exceeded in the years ahead.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.