Just a few short weeks after filing its fiscal year-end results, Canacol reported its 3Q12 calendar (1Q13 fiscal) results and the story was not a happy one. Revenues were down and the company reported a net loss of US$6.2M, its worst since 2010. Revenues were down because production was affected by a number of community blockages. The shift from so-called “Tariff” to normal production (which the company labels NRI) in the Rancho Hermosa block also had an impact.

The company’s explanation of production problems was

Downtime during the first quarter of fiscal 2013 was 5% in July, 3% in August, and 37% in September, resulting in an overall average downtime of 15% for the quarter. Of the 37% downtime reported in September, 34% was related to a blockade of the main oil trucking route by the community, which was resolved in the first week of October 2012.

Normal production was in fact only down by about 2% and so within normal variation. The unnamed community issues must have been at Rancho Hermosa and affected “Tariff” production dramatically, dropping it by nearly 2/3.

What Canacol calls “Tariff” production is essentially an outsourcing or services contract where the company earns a flat fee or tariff for each barrel of oil independent of price or costs. In 3Q12, this fee was US$17.36 – well below the price of oil and well below Canacol’s netback on normal production. The company is shifting production at Rancho Hermosa from Tariff to normal (NRI) and the disruptions had a significant impact on that process. The fact that the tariff rate is so low mitigated the production impact on revenues and profits.

The company’s outlook is brighter – assuming community issues are behind it – from Ecuador production coming on line, a farm-out with Sagres and the pending merger with Shona, a gas producer in the Colombian state of Cordoba.

Bottom-Line: This problem is getting worse. Prior community consultation might have prevented the specific Canacol situation but maybe the community would have blown up anyway. We continue to put the blame on the new royalty scheme which – from a local community perspective – took away the direct benefit of having an oil well in your back yard. Agitators step in like the Farc or the USO – whose propaganda plays directly to the royalty theme by saying that oil companies give nothing to the community. We believe oil companies should not replace the “lost” royalties (as Simon Gaviria wants to by letting municipalities charge ICA) but do need to engage more with the community, investing in selected projects to restore the lost line of sight.