2 July 2014 Copyright 2014. Platts. All Rights Reserved. Bogota, Colombia (Platts)--2Jul2014/249 pm EDT/1849 GMT

ANALYSIS: Colombia's oil industry, government facin g declining output, investment Declining oil production caused by terror attacks, community protests and a drop in foreign investment has the Colombian government concerned it will miss its 2014 fiscal goals, according to analysts.

Top industry and government officials have met over the last two weeks in the presidential palace to discuss solutions to an alarming drop in barrels produced so far this year that has been only partially mediated by a recent rise in oil prices, sources said.

Also of concern to the industry and government is the decline in direct foreign investment in Colombian energy projects this year, according to the central bank. The slowdown is a continuation of a trend seen last year when foreign investment in oil and gas totaled $4.9 billion, off 10% from the previous year, according to the Colombian Petroleum Association.

According to exploration indicators, 2014 is shaping up as a disappointing year at a time when the country has made expanding its crude reserves a national priority. A recent CPA report said only 26% of the projected 51,657 square km of seismic exploration studies had been carried out as of May 21. Of the 233 exploratory wells projected to be drilled in 2014, only 60 had been drilled as of that date.

Colombia's crude production in May averaged 950,000 b/d, a 6.3% decline from the same month in 2013. For the year to date, the country's average output is running at more than 100,000 b/d under the 1,095,000 b/d target for 2014 set by the finance and planning ministries last year.

Gone are the days when Colombia's oil output was increasing by annual double-digit percentage gains, with growth driven mostly by the spike in heavy oil production in the eastern Llanos region in fields operated by state-controlled Ecopetrol, Pacific Rubiales Energy and Gran Tierra Energy. PIPELINE CLOSURE HIGHLIGHTS CHALLENGING SECURITY ENVIRONMENT

Much of this year's drop-off is due to the 93-day shutdown of the 900-km Cano Limon pipeline, which has a peak capacity of 220,000 b/d. Bombed at least 20 times this year by rebels, the pipeline reopened May 25 -- but not before Colombia lost more than 5 million barrels of oil sales,according to Orlando Hernandez, president of Agora Consultorias, a Bogota-based risk analysis firm.

Colombia's challenging security environment was highlighted by the bomb attack by suspected guerrillas Tuesday on state-controlled Ecopetrol's critical oil pumping station at Banadia in eastern Arauca province. No injuries or damage to oil pipelines or other infrastructure was reported.

The attack in Banadia was especially troublesome because it is the point where the 110,000 b/d Bicentennial Pipeline, completed last year, joins with the Cano Limon line, Hernandez said. On Sunday, suspected guerrillas struck again, launching cylinder bombs inside the Cano Limon oil field operated by Occidental Petroleum, also in eastern Arauca province, injuring 13 people. While rebels routinely bomb the pipeline connecting the Cano Limon field with the Covenas offloading port on the Caribbean, the bombing inside the security walls of the heavily guarded installation was a rare event.

Although President Juan Manuel Santos won re-election on June 15 after running a campaign touting his peace initiative with FARC rebels now being negotiated in Havana, rebel control in certain rural communities where oil companies are exploring and producing has been made evident by recent attacks.

Over the first six months of 2014, attacks by rebels and criminal bands on oil infrastructure in Colombia totaled 64 bombings, down 44% from the 113 attacks over the same period in 2013,according to a study released Wednesday by Hernandez's Agora Consultorias. But Hernandez said attacks have picked up in recent weeks and noted that the effect of the bombings has never been more negative.

"Despite the reduced number, the [negative] impact has been the most significant in history,"Hernandez said, pointing to the impact of Cano Limon pipeline's shutdown. The lengthy Cano Limon closure was also extended by an indigenous community's refusal to allow repair crews on its reservation to restart the line until certain conditions were met.

For many oil executives here, including Chris Spaulding, who heads Talisman Energy's Colombia operation, the rising number of community blockades of oil installations is of more concern than rebel bombings.

Communities increasingly block access to oil fields in rural areas, particularly in the eastern Llanos region, to demand a higher share of oil royalties, more inclusive local hiring or a reduction in environmental damage or truck traffic over rural roads.

Oil companies have also been put off by extended delays in the permitting process for exploratory wells, Spaulding and others have said, although the government insists the permitting process is slowly improving. OIL, GAS EXPORTS ARE CRITICAL TO ECONOMY Officials of the mining and energy, finance and national planning

ministries first met June 25 to discuss the impacts of the production slowdown as well as measures that might be taken to enable the oil and gas industry to recapture its former dynamism.

The importance of oil and gas sales to Colombia's economic well-being was reflected by last year's export sales of Colombian crude, natural gas and products that ballooned to $32.5 billion, nearly 10 times the $3.38 billion Colombia collected in 2003. Petroleum sales last year accounted for 56% of all export dollars, up from just 26% of the total in 2003.

Some oil executives have said on condition of anonymity that the government should take a harder line with communities that block access to oil fields, noting that the Colombian constitution gives ownership of all natural resources to the state.

Others favor a frequently mentioned but still hypothetical "omnibus agreement" that would cover hiring, permitting, truck traffic and environmental standards and which the government, labor unions, local communities and oil companies theoretically would sign off on.

In addition to a possible short-term fiscal crunch resulting from declining production and investment, the government is also facing a longer-term challenge of boosting reserves. The total proven reserves as of December 31 of 2.445 billion barrels represents only a 6.6-year inventory at current production levels.

Although the Colombian oil boom is nearly a decade old and has seen billions invested in exploration, the country has yet to record a major new oil strike of 1 billion barrels or more to compare with the development of Oxy's Cano Limon field in the 1980s or BP's Cusiana-Cupiagua complex of fields in the 1990s. Chris Kraul, Edited by Jason Lindquist, Platts, una división de The McGraw-Hill Companies Inc.