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Feb 8, 2013 | 11:45 GMT

4 mins read

Colombia: Overcoming Challenges in the Coal Sector

Colombia: Overcoming Challenges in the Coal Sector
Christopher Furlong/Getty Images

Colombia's coal sector, one of the driving forces behind Colombia's economic growth over the past decade, is off to an inauspicious start in 2013. Indeed, a litany of environmental, labor and security concerns appear to be undermining an otherwise successful operation. But these obstacles are relatively minor and ultimately will not impede the overall growth of the mining sector significantly. In addition, Bogota frequently intervenes to resolve issues before they can harm output, so those with interests in the coal sector are insulated somewhat from any potential instability.

In mid-December 2012, the Regional Autonomous Corporation of Cesar, or Corpocesar, restricted the hours during which Colombia's largest coal railway, Fenoco, could operate. If enforced, the restriction would have prevented roughly 50,000 tons of coal per day from reaching Colombia's ports, costing the country as much as $1.3 million per day.

But the ban was not enforced. Unlike other countries in the region, such as Argentina, where provinces have comparatively more control of mineral extraction regulations, Colombia governs its energy and mining sector centrally. Soon after Corpocesar issued its restriction, Bogota intervened, bringing together the major stakeholders to resolve the issue. Meanwhile, Fenoco continues its operations unfettered as all sides resolve the issue.

About a month after the Fenoco debacle, the second-largest coal producer in Colombia, Drummond, dumped approximately 500 tons of coal from a barge into the Caribbean Sea to prevent the boat from sinking. On Feb. 6, the National Environmental Licensing Authority suspended Drummond from loading or unloading its ships until a new contingency plan was developed. This delay will cost Drummond roughly $6.4 million per day, and the company probably will be fined $1.7 million. Colombian President Juan Manuel Santos and the mining and environment ministers approved the decision before it was even announced.

The penalties incurred from the coal dump are hardly catastrophic for Drummond. In fact, they are meant to assuage domestic concerns rather than significantly pressure the company, whose commitment to Colombia is indisputable. Around 90 percent of Drummond's coal reserves are located in the country, and the company currently is trying to increase output to 32 million tons per year from 26 million-27 million tons per year. They also have invested hundreds of millions of dollars in an effort to expand mine, rail and port infrastructure.

In addition to environmental issues, coal companies are also facing significant labor unrest. The most recent episode of unrest took place at Colombia's largest coal mine, El Cerrejon, where workers began to strike Feb. 7. In Colombia, labor unions threaten to strike nearly every year to negotiate better contracts; this current round of strikes is no different. Negotiations typically begin in December and are usually resolved by the beginning of February.

The Cerrejon company and the union planning the strikes, Sintracarbon, have avoided strikes in the past, and the Colombian government, which receives hundreds of millions of dollars from coal royalties, has a strong incentive to prevent disruptions. In negotiations in 2011, workers were set to strike until Vice President Angelino Garzon intervened and helped mediate an agreement. But if the government cannot help the two sides reach an agreement soon, Bogota may no longer be counted on to mediate disputes.

Finally, security is a perennial problem for the mining and energy sector. The Revolutionary Armed Forces of Colombia's unilateral cease-fire has ended, and attacks against mineral and energy infrastructure have resumed. El Cerrejon was attacked seven times in 2012, and it succumbed to its first attack of 2013 on Jan. 22, when the Revolutionary Armed Forces of Colombia blew up a section of its railway. Companies in Colombia are protected by the national police and the military but are largely incapable of preventing hit-and-run attacks and acts of sabotage against fixed infrastructure. Extortion and kidnappings are an ever-present threat to companies operating in the northern departments of Cesar and La Guajira, where the vast majority of Colombia's coal reserves are located and where the Revolutionary Armed Forces of Colombia and the National Liberation Army are particularly active. These attacks will not result in large-scale disruptions, but they will continue to be a nuisance for foreign firms.

A 'Locomotive of Growth'

While important in their own right, environmental, labor and security issues should not detract from the larger phenomenon: Colombia's coal production has doubled over the past 10 years and is projected to continue to grow in the years to come. The growth is so impressive that many in Colombia have begun to refer to coal production as a "locomotive of growth." The industry will no doubt encounter obstacles as it continues to grow, but so far the obstacles have proved easily surmountable. 

Colombia: Overcoming Challenges in the Coal Sector
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