Jul 2, 2002 | 04:59 GMT

16 mins read

Violence and Old Rivalries in the Andes

Executive Summary

Two dominant issues will haunt the Andean region in the latter half of 2002: the intensifying Colombian civil war and the development of Bolivian natural gas reserves. All other regional issues — such as privatization protests in Peru, Chile's efforts to achieve energy security or fears of instability in Ecuador — can be linked to these two themes.

In Colombia, guerrillas threaten to break down the already weak civil authority by stepping up a campaign of death threats against municipal governments. The likelihood that direct conflict will widen threatens oil and gas assets and could halt new development in Colombia — simultaneously raising fears of a spillover into Ecuador and, to a lesser degree, Venezuela.

Meanwhile, the clock is ticking for Bolivian President Jorge Quiroga's decision on a natural gas pipeline route that will prove key to his country's future. If he does not choose — and soon — to route the Pacific LNG pipeline through regional rival Chile, the consortium likely will cancel the $5.8 billion project, leaving Bolivia's immense but stranded natural gas reserves underground for at least another decade.


Colombia's main leftist guerrilla group, the Revolutionary Armed Forces of Colombia (FARC), is expanding its campaign of political intimidation and murder, seeking to undermine civil control in large parts of the country. Bogota likely will respond by further militarizing municipal governments — a move that will aggravate the overall intensity of conflict, especially after tough-talking President-elect Alvaro Uribe Velez takes office Aug. 7.

The renewed campaign (directly related to Uribe's resounding election victory May 26) signals an effort by the FARC to seize control of as much territory as possible — including areas along Colombia's borders with Venezuela, Ecuador and Peru — before the regime change. In late May, the FARC began demanding that municipal authorities in 12 departments (see map) either resign or become military targets — which amounts to a death threat to local officials.

The FARC regularly threatens and sometimes kills political candidates and elected officials as a means of destabilizing the government and seizing territory. One mayor in Caqueta state was killed June 5 while en route to a meeting to discuss the rebel intimidation campaign, and another mayor in neighboring Cauca department was kidnapped June 25. Just this year, the FARC has kidnapped a senator, a governor, a former defense minister and six congressmen, and it barely failed to assassinate Uribe in April. Since late May, more than 100 officials have either resigned or fled their municipalities.

And the FARC plans to extend the campaign. On June 24, federal officials intercepted a communiqué to various fronts that expanded the death threats to include municipal authorities in nine departments as well as Bogota, Colombian daily El Tiempo reported. Of Colombia's 32 departments, officials in 22 are currently under threat.

The federal government has promised to protect officials who stay at their posts, but the promises ring hollow due to Bogota's abject lack of control over much of the country. During one weekend in late June, 23 mayors from the central department of Antioquia and 97 municipal officials in the state of Arauca quit en masse despite assurances of protection. Bogota's control in Colombia — and its ability to protect the people and infrastructure in the cities and countryside — will only weaken as more municipal officials quit.

More Attacks and Stalled Investment in Colombia

In Colombia, the threat to oil and gas facilities will rise during the next three to six months. The FARC will expand attacks against key infrastructure — possibly in cooperation with the country's other left-wing guerrilla group, the National Liberation Army (ELN) — to undermine government finances and spread thin military forces. Greater instability in border provinces also compounds the risk of a spillover into neighboring countries, with the greatest threat to the oil and gas sector likely to be in Ecuador.

The further breakdown in civil authority in key states like Putumayo, Arauca, Casanare, Meta and Antioquia will make it even easier for guerrillas to attack infrastructure there. Colombia's four main oil-producing regions — the southern Putumayo Basin, central Magdalena Basin and northeastern Catatumbo and Eastern Llanos basins — as well as the fields, pipelines and refineries in those areas are now at greater risk. Likewise, the general atmosphere of insecurity will postpone new investments in exploration and production as foreign companies await a resolution to the war. That could be a long time coming.

Both the FARC and ELN have targeted oil infrastructure for years, seeking to undermine the federal government's authority and power. Since oil accounts for about one-quarter of total government revenues, anything the FARC can do to disrupt production also will hinder Bogota's ability to wage war. That will make it difficult for Uribe to carry out his pledge to double defense spending, something that is necessary to please the United States. Attacking oil assets is also a useful diffusion tactic: It forces the government to protect simultaneously pipelines and natural gas distribution systems as well as bridges and water reservoirs.

Although risk tolerance is high among multinationals operating in Colombia after 38 years of civil war, the upsurge in violence over the five years clearly has taken its toll. Total oil production dropped 25 percent between 1999 and 2001. Exports to the United States fell 19 percent.

The U.S. Energy Information Administration estimates that without significant new discoveries and investment, Colombia could become a net oil importer in the medium term. However, barring a rapid, dramatic — and highly unlikely — victory by the government, the growing threats will continue to undermine new investment and put assets at risk.

Venezuela: Domestic Concerns Outweigh Colombian Threat

Colombia's civil war also poses some risk to the fragile political balance in Venezuela. There is ample evidence that FARC guerrillas actively seek refuge in Venezuela, and of more general drug trafficking out of Colombia through that country. Venezuelan President Hugo Chavez has been accused at home and abroad of turning a blind eye to guerrilla camps in Venezuelan territory due to shared political sentiments.

This has led to tensions between Chavez and the current administration in Bogota — tensions that could grow even more strained when Uribe takes office. The paramilitary United Self-Defense Forces of Colombia (AUC) has threatened to cross into Venezuela if Chavez does not clamp down on FARC camps there. Meanwhile, the FARC's efforts to drive government officials out of Arauca, Casanare and Norte de Santander are likely to speed the tempo of cross-border militant activity. Clashes involving Colombian guerrillas and/or paramilitaries within Venezuela could cause serious political problems for Chavez and could exacerbate divisions within Venezuelan national armed forces.

From a security standpoint, Colombian guerrillas do not pose an immediate threat to significant Venezuelan oil and gas assets. The country's key assets are far from the Colombian border: The closest are the fields and flow stations in the Lake Maracaibo area, some 75 to 100 miles (120 to 160 kilometers) away.

Even if attacks were feasible logistically, the FARC lacks motive. Attacks on Venezuela could turn Chavez against the guerrilla group. Therefore, as long as Chavez hangs on to power and remains an ideological ally, Venezuela's oil assets will not be strategically valuable targets to the FARC.

Reasons to Worry in Ecuador

Compared to Venezuela, Ecuador's oil and gas industry is much more vulnerable to contagion from Colombia. Most of Ecuador's oil is concentrated in the eastern Amazon region along the Colombian border. FARC and AUC units are active just across the border, especially in the coca-growing areas of Putumayo and Caqueta. The further breakdown in civil control and heightened fighting in these provinces could threaten Ecuador's oil production and put more pressure on Quito to defend its border.

Quito is finding it difficult to stay out of Colombia's civil war, especially with the southward flow of drugs and refugees, the northward flow of arms and the frequent border crossings of Colombian militants and refugees. The estimated 3,500 rebels and paramilitary fighters are outnumbered by the 8,000 to 10,000 soldiers Ecuador has deployed to the northern border in response. Nevertheless, the U.S. State Department has described Ecuador as a "strategic corridor" for FARC weapons and has criticized Quito for doing too little to seal its borders.

It is highly likely that the FARC and the Ecuadorian government are both going out of their way not to antagonize one another.

The FARC's beef is with Bogota, not Quito. The guerrillas would gain little from antagonizing the Ecuadorian government, which could be forced to respond with a more intense crackdown on possible avenues of retreat and important drug-trafficking routes.

Likewise, Ecuador does not wish to turn itself — or its oil sector, which accounts for 20 percent of its economy — into a target. The country already has to worry about its own anti-oil opposition groups — mainly hybrids of indigenous groups backed by non-governmental organizations. The most recent protests in the Amazon province of Napo forced Petroecuador's president to decree force majeure on crude exports June 26, after protests halted the flow of crude through the Trans-Ecuador Crude Pipeline (SOTE). The protests also have disrupted construction of the new 450,000 barrel per day Oleoducto de Crudos Pesados (OCP), Platts reported. Construction of the $1.1 billion heavy crude pipeline started a year ago and is scheduled for completion in late 2003.

Beyond disruptions from peaceful protests, officials in Quito also must worry that protesters could adopt more militant tactics — perhaps even in association with Colombian militants, if their goals were to come into alignment. There have been incidents of violence against the energy industry in the past: Domestic terrorist attacks damaged SOTE several times in 2000 and 2001, and villagers cut a valve on the pipeline in October 2001, threatening to interrupt oil production if their demands for economic and job assistance were not met.

The growing instability along the Ecuador-Colombia border eventually could make it impossible for Quito and the FARC to keep out of each other's hair, despite their twin desires to do so. Ecuador could determine that the risk to its northern provinces is too great — or succumb to U.S. and Colombian pressure — and get more directly involved. Its actions could include more direct military and security operations against border crossings or drugs- and arms-trafficking routes, as well as renewed cooperation with the United States on counter-narcotics efforts.

A spillover of heavy fighting from southern Colombia also could force Quito's hand. On June 27, a temporary border outpost in the northern province of Carchi was demolished during a firefight between Colombian military units and the FARC. Colombian soldiers followed when guerrillas fled across the border, engaging the FARC unit in Ecuadorian territory for at least 45 minutes, Quito daily El Comercio reported. In the confusion, both the FARC and Colombian army units reportedly fired on the Ecuadorian military outpost, which the Colombian soldiers also mortared.

A greater Ecuadorian military buildup along the border, designed to counter such spillovers, could force the FARC to defend its interests by striking at Ecuador's abundant and vulnerable petroleum assets. Targets include the fields and workers of the eastern Amazon region, the SOTE pipeline and the OCP pipeline. There is also the smaller Transandino-to-Colombia export line, which carries about 45,000 bpd of Ecuadorian crude through Colombia to the port of Tumaco. It already is the target of frequent Colombian guerrilla bombings.

Bolivia's Gas Woes

While Colombia battles the destructive power of the FARC, politics farther south are muddling what should have been a clear economic decision.

Bolivian President Jorge Quiroga is struggling to decide the route for a pipeline stemming from a $5.8 billion project planned by the Pacific LNG consortium — a group formed in July 2001 by Repsol-YPF, BG and BP that seeks to deliver Bolivian gas to the U.S. market. He must choose between a route ending in Chile, with which Bolivia has a history of acrimonious relations, or one terminating in Peru — a less politically dicey but more expensive option.

Intense political opposition to the Chilean route prompted Quiroga to delay the decision, originally due in mid-May, until after the June 30 presidential election, in which no candidate won a clear majority. But he cannot delay much longer: Pacific LNG partners warned Quiroga in a private June meeting that if he does not make a decision before his successor — to be chosen by Congress — takes office Aug. 6, then the entire project could be aborted. If that happens, Bolivia would lose its only meaningful opportunity to export natural gas to North America — or any other markets — on a large scale for at least a decade.

Given the nature of coalition politics in Bolivia, the pressure is rising for Quiroga to announce his decision before Congress votes to elect his successor.

Bolivian Natural Gas and Pacific LNG

Although Bolivia has been producing natural gas since the 1960s, its proven natural gas reserves were only 110 billion cubic meters as recently as 1997. Aggressive exploration has since pushed that number to 1.5 trillion cubic meters, according to the Bolivian government.

Since Bolivia currently consumes only about 1.25 bcm annually, the country must export its gas if it is to monetize its reserves — but regional options are limited.

A primary problem is competition. Argentina has about 750 bcm in reserves and existing export links to Brazil and Chile. Meanwhile, Peru has 250 bcm of its own that it would like to tap. That leaves importers Brazil and Chile as the only local options.

Despite advantages of size and geographic proximity, regulatory, pricing and other hindrances keep Brazil from being a reliable export option in the near- to medium-term. Hydroelectric plants generate almost all of Brazil's electricity. A long-running drought had forced officials to consider switching to natural gas, but the combination of much-needed rains earlier this year and the scandal of Enron's collapse removed both the impetus and the cash needed for such a move. It also dimmed prospects for any expansion in Brazilian demand — particularly for expensive Bolivian gas. Therefore, the $2.1 billion, 2,000-mile (1,250-kilometer) Bolivia-Brazil pipeline is unlikely to be used at more than its current 40 percent capacity in the foreseeable future.

That leaves Chile as the only realistic consumer. For its part, Santiago is keenly interested in cutting a deal regarding the Pacific LNG pipeline before Quiroga leaves office.

While Chile has little fear that Argentina, currently its sole supplier, would intentionally disrupt supplies, Santiago would like a gas supply free of Argentina's raging economic chaos. For example, striking Argentine oil workers in February briefly shut down the GasAndes pipeline, which supplies thermoelectric plants in Chile's central grid. With Chile building 10 new gas-fired power plants over the next decade, this issue will become more and more salient.

Chile also hopes to host the Pacific LNG export terminal. Pacific LNG plans to pipe gas from the Margarita gas field to a two-train liquefaction plant on South America's Pacific Coast. The LNG then would be shipped to a $700 million receiving terminal and a regasification plant — with an annual capacity of 10 bcm — at the port of Ensenada in western Baja California.

U.S.-based Sempra Energy and CMS are partners in the Ensenada receiving terminal and re-gasification plant, and they already have signed a tentative long-term supply agreement with Pacific LNG's partners. Sempra-CMS may give Quiroga some extra leeway to decide on the pipeline route, but it cannot wait forever.

Old Grudges and Trans-Andean Pipeline Politics

The Bolivian government claims it is still studying competing Chilean and Peruvian government proposals. Competition for the LNG terminal reportedly has narrowed from six candidates to just two: Mejillones, Chile, and Ilo, Peru. Whichever country wins the competition would receive more than $2.7 billion of the projected $5.8 billion total investment.

A key sticking point is Bolivia's insistence that its tax, labor, environmental and other laws should apply at the terminal site exclusively. Peru has agreed to the demands, and Chile has not.

The problem is that Bolivian-Chilean relations have been on the rocks ever since Chile defeated Bolivia and seized its coastal access in the 1879-1883 War of the Pacific. Bolivians still resent the "seizure" of their former coastal province, much as Mexicans resent the United States for the "seizure" of Texas, California and the American Southwest. Bolivia and Chile formally severed diplomatic relations in 1978, a factor that has complicated discussions relating to Pacific LNG.

Politics aside, the project's economics argue loudly for the Chilean option. Government sources in Bolivia say that Pacific LNG's feasibility studies clearly call for a pipeline route to northern Chile. Not only would the Peruvian option take longer and cost hundreds of millions of dollars more, but Peru is also less stable than Chile. Over the past 18 months, there has been an apparent revival of Peru's Maoist Shining Path guerrilla organization, along with a surge in coca and poppy cultivation. Moreover, President Alejandro Toledo was forced in mid-June to declare a state of emergency in southern Peru after protests erupted over plans to sell two state-owned electricity companies.

Finally, Peru could emerge as an LNG competitor in the race to the North American market. Lima awarded Kellogg, Brown and Root an $8.5 million contract in February 2002 to develop a feasibility study for an LNG project that would supply gas to the United States' west coast.

Thus the project would be a done deal — if not for a revival of nationalistic anti-Chilean sentiment, inconveniently fanned to life by the current Bolivian presidential campaign.

For Bolivia, Politics or Progress?

With so much natural gas becoming monetized around the world, countries that allow domestic politics to disrupt projects like that planned by Pacific LNG will lose in the global competition. In Venezuela, for example, such complications have stalled the development of LNG export projects for nearly two decades.

There, the project in question is the $2.7 billion Mariscal Sucre LNG project — signed June 18 by Venezuelan President Hugo Chavez and senior officials of Royal Dutch/Shell and Mitsubishi. The project came to life nearly 20 years ago as the Cristobal Colon LNG project, but it failed to progress. Meanwhile, nearby Trinidad and Tobago aggressively developed robust LNG export industries and now exports more than 4 bcm a year. Venezuela finally has a framework for its first-ever LNG project, but construction will not begin until 2005, when a worldwide LNG glut is anticipated.

For landlocked Bolivia, the Pacific LNG project is its last chance. If Quiroga fails to select the Chilean option due to local nationalist feelings, then Bolivia will lose its opportunity to capitalize on its vast natural gas deposits in the foreseeable future.

That makes it a good thing that the project has personal as well as national implications for Quiroga. As an incumbent president, Quiroga was constitutionally barred from running in the recent election and therefore hopes to mount a presidential campaign in 2007. Achieving a successful Pacific LNG pipeline route during his current term would be the first major step in building the political and economic foundations for his next election bid, by which time the LNG project would be operating at full capacity.

And because Bolivia so badly needs the income the project would bring, the next president likely will accept Quiroga's decision — regardless of political complications.

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