Via CNBC, a report on Colombia’s oil sector:

Investors—Canadian ones, in particular—may recall Colombia as one of the hottest oil plays in the world.

Paul Smith | Bloomberg | Getty Images The Ecopetrol oil refinery stands in Cartagena, Colombia.

That was just a few years ago. Huge wells in these plays created huge valuations—and some strong runs for stocks like Pacific Rubiales and Petrominerales.

Today of course is a different story, with stock prices having fallen off the map—despite favorable oil prices. So what happened that caused these sharp share price drops? And are there good reasons for investors to turn back again to Colombia’s oil plays?

We asked Fred Kozak for his insights—He’s an independent oil and gas analyst, formerly with the Canadian brokerage firm Canaccord Genuity.

“Colombia still has FARC issues, environmental permitting is still a big problem and pipeline constraints are all impacting the investment climate,” he said in an interview.

FARC is the Spanish acronym for the left wing guerrilla movement in Colombia. Former President Alvaro Uribe was able to secure billions of dollars in US aid in the last decade, which was used for the military and other means to reduce the FARC’s impact on the country.

With the FARC risk down considerably, foreign investors felt secure in investing billions of private capital into the country’s energy sector—especially the upstream oil and gas producers.

The Canadians were quite active then, led by companies like Frank Giustra’s and Serafino Iacono’s Pacific Rubiales and John Wright’s and Corey Ruttan’s Petrominerales.

Both companies had great success developing assets in the Llanos Basin in the middle of the country, and both had exceptional stock runs. PRE skyrocketed from $2-$34 in 2009-2010, and PMG rose from $6-$40.

A Perfect Storm of Oil Exploration

It all happened at the same time: There was a perfect storm of exploration success, a lower royalty rate, and the sense that this under-explored country could continue its string of high profile discoveries for years. Promoters created new junior exploration companies with bloated share counts—hundreds of millions of shares out—and investors jumped all over these opportunities.

These days? In what I would refer to as the senior Colombian stocks—Rubiales, Gran Tierra—they’re just above 50 percent of their highs, and the rest are anywhere from 20-50 percent of their highs. That second round of bloated share-count juniors quickly lost 80 percent of their value, and have only recently popped their head up.

Did anybody get the license plate on the truck that ran over these stocks?

It was actually several trucks, says Kozak. He says one of the big factors hitting these stocks was the Arab Spring of 2011—all international juniors the world over sold off after institutional and retail investors lost their appetite for foreign risk, as dictators got toppled one after the other starting in early 2011.

And sadly for everyone, FARC violence has increased this year. After several years of declining activity, brokerage firm Raymond James reports in an Aug. 13 report that there has been a “material” increase of security incidents reported since the beginning of the year. Pipeline attacks increased three-fold year-over-year, and five Ecopetrol contractors were killed in Putumayo this summer, near the Colombian/Ecuador/Peru border.

FARC pipeline attacks don’t help an already difficult situation—increased oil production in Colombia has strained pipeline capacity.

“As much as 100,000 barrels a day of oil production (bopd) could be shut in, I’m not exactly sure, but it means that you have to truck oil,” says Kozak.

This means higher transportation costs, and companies can’t produce new discoveries at full throttle. In a negative market, that’s deadly to a company’s share price.

Colombia’s daily oil production currently exceeds 900,000 bopd, having risen more than 60 percent since 2006, but pipeline constraints have not allowed it to crack the magic 1 million bopd mark.

Barriers to Progress

Producers in Colombia are also experiencing long delays in permitting. Wells are not being drilled as fast as before, with companies being left waiting for up to a year without knowing when they’ll be able to drill.

That has hurt exploration activities, and several of the leading Colombian juniors are now spending a big chunk of their exploration in Brazil, Ecuador and Peru—and sometimes even farther afield.

Another factor, Kozak adds, is that the new discoveries in Colombia just aren’t coming as quickly as they did a couple years ago.

“Colombia had great success at one point—but today look at Petrominerales and GranTierra Energy. PMG is now struggling while GTE is focused on developing discoveries. New discoveries are still limited,” he said.

Colombia reported that 34 percent of all wells were successful in the first half of 2012, compared with a 48 percent average from 2008-2010.

Canadians formed a big portion of the foreigners who entered into the Colombian oil and gas sector in 2008-2009. I asked Kozak why that was, and he answered: “We in Canada are entrepreneurs. We have so many teams chasing so many opportunities, and recent success with our ‘resource plays’ here has been technology-related. Then guys say, hey, we can apply that somewhere else. We go apply our best practices and use our technology and turn things around.”

The Canadians focused on the Llanos Basin, which looks geologically a lot like Alberta’s foothills (light oil) and the Putamayo in the south which is similar to Alberta’s plains (heavy oil).

Colombia is one of a few countries in South America where you could go into the country and do business a lot like you would do in the west. The country is out of favor right now but Fred believes the question is when do you invest in the country, not if.

“With $100 Brent oil, you have $60-$70 netbacks—you can make phenomenal money in that country, but there are short term issues” Kozak said, adding that those short-term issues reflect growing pains, as the oil and gas sector continues to mature.

“Success is responsible for the delays we’re seeing now—Colombia redefined its fiscal regime to attract new investment and kicked FARC out of most of country since President Uribe started his second term in 2006,” he said.

Recently, the army has increased its size and activity in the oil-producing regions, improving security. That may lead to an improved perception regarding security in 3-6 months.

Permitting times have been slowly improving—the government is adding more people here as well. That should allow several companies to carry their plans of drilling high impact wells in the second half of 2012.

Catalysts for Colombia’s Junior Oil Companies

A new pipeline starting in the first quarter of 2013 is expected to carry more than 490,000 bopd. As that new capacity becomes imminent, it could be a huge catalyst for Colombian juniors.

An intriguing potential catalyst will happen sooner, however. The government has a new bid round in October for 115 blocks including 1/3rd for shale exploration in the Magdalena Basin.

Says Kozak: “There have been a number of wells drilled that have seen shale but nothing like western Canada. Remember that the drilling density in this part of Colombia is a fraction of what North America is used to. Both Exxon [XOM  87.30    0.10  (+0.11%)   ] and Shell [RDS  Unavailable      ()   ] are scheduled to drill a well each on Canacol farm-in lands, but depending on the bid round results in October, those results are not likely to be a 2012 catalyst.”

Kozak concludes that addressing the country-specific risks will help (FARC, permitting delays, pipeline constraints) but the tide that would lift all boats requires the risk on trade to come back. But he says investors should not sit on their hands waiting for the tide to come in:

“There’s going to be opportunity there especially through mergers & acquisition. These companies are very cheap. At these levels it’s almost cheaper to buy than to drill. The acquisition of PetroMagdalena by Pacific Rubiales being an example.”

So how should investors approach investing in Colombian juniors? 

“Remember it’s always about the people. When looking at companies to invest in, who are the people involved—and projects—how quickly can they take it to production,” Kozak said.