Colombia Gets Crude Awakening as Oil Price Slump Hits Economy

Politics Reuters

As fewer and fewer oil trucks roll through the streets of Puerto Gaitan, Mario Romero crunches the numbers. Unless crude prices pick up and Colombia's oil firms invest again in exploration and production, his hauling company will soon go bust.

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Just six months ago, Transportes Paraiso Regional had 320 drivers moving oil, machinery and personnel around Colombia's booming energy industry. Now, his 16 remaining drivers are looking for jobs.

"I told my staff we can hold out two months, and if things don't improve, I'll let them go," said Romero, 49, in Puerto Gaitan, the nearest town to oilfields operated by Pacific Rubiales and other producers.

Romero is far from alone. In a town until recently awash with cash to pave roads and host pop stars like Marc Anthony and Daddy Yankee, many businesses are now shuttered.

The mayor's office says Puerto Gaitan, home to 45,000 people and set along the lazy Manacacias River in central Colombia, will see oil royalties fall by about two-thirds this year.

The entire oil industry chain - from drillers and engineers to geologists and hotels - is in trouble, threatening consumer spending, tax revenue and broader economic growth.

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Colombia is not a major producer - it has less than seven years of reserves - but oil is its largest export and typically accounts for about 20 percent of government revenue.

Security gains against Marxist rebel groups drove a decade-long boom as areas previously too dangerous to operate in were opened up.

The industry pulled in $34.6 billion of foreign direct investment in the last 10 years, up from just $3.1 billion in the previous decade, and oil output doubled to about 1 million barrels per day.

That helped fuel economic growth at or above 4 percent in all but two of the last 10 years.

Latin America's fourth-largest economy probably grew at least 4.5 percent in 2014 but a 50 percent plunge in oil prices since June has taken a toll and economists expect growth to drop as low as 3.3 percent this year and 2.6 percent in 2016.

Producers like state-run Ecopetrol and Canada-based Pacific Rubiales are Colombia's biggest source of tax and export revenue but have had to slash investments, stall exploration projects, lay off thousands of contract workers and tell employees their jobs may not be safe.

Union leaders estimate as many as 25,000 jobs, or 20 percent of the industry, could be lost in coming months. Ecopetrol has cut overall spending by 26 percent to $7.9 billion for 2015 and Pacific Rubiales has reduced its by 27 percent to $1.1 billion.

Nearly a dozen contractors have sought bankruptcy protection since January, regulators say, and half of all oil firms have canceled or reduced exploration. A fifth have cut production.

"Colombia is getting hit by a tsunami," said Sergio Clavijo, head of economic think tank Anif. "We're seeing the havoc of the first wave."

BUDGET CUTS

For each dollar that oil falls, the government loses about $120 million in revenue. It has already cut $2.4 billion from the budget this year and royalties - which help fund education and healthcare in the $375 billion economy - could shrivel 40 percent.

Oil companies and contractors are scrambling to eliminate costs. Pacific Rubiales employees now share bedrooms at the oilfields, they are bused instead of flown in, and have fewer canteen delicacies.

Pacific Rubiales has also stopped sponsoring Colombia's national soccer squad and no gifts will be distributed at Ecopetrol's shareholder meeting this month.

"The price drop means we have suspended or frozen all sorts of activity," said Carlos Bello, a Pacific Rubiales union coordinator.

Investment cuts mean seismic tester EGS has laid off 75 percent of its 300-strong workforce since December. Other firms like Montajes JM, which builds oilfield infrastructure, say they have also lost contracts.

After years of higher-than-average wages, workers from executives to pipeline laborers are paying off loans and cancelling gym memberships, Pacific Rubiales workers say.

Emails circulate at its Bogota office offering BMWs and other luxury cars for sale.

Real estate prices are also dipping as the economy slows. Prices are off 10 percent in Medellin and 5 percent in Bogota, economists say.

The government says infrastructure investment, solid manufacturing output and consumer spending will support the economy and the finance minister still expects growth of above 4 percent a year over the medium-term.

But the decline in oil revenue puts stress on state coffers, especially as the government estimates it will need to spend roughly $40 billion on new development projects if negotiations with guerrilla leaders lead to a peace deal.

In Puerto Gaitan, small businesses from hotels to restaurants feel the worst of the slump.

Bar owner Juan David Mogollon jokes that debt collectors outnumber his regulars and that customers have stopped drinking imported rum and whisky. "Now it's just beer, and that's it."

(Reporting by Helen Murphy and Nelson Bocanegra; Editing by Kieran Murray)