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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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Colombia Looks To Ramp Up Coal Mining As Economy Struggles

Despite the intensifying fight against global warming and climate change, which is supported by some of the world’s largest energy companies, Colombia’s president Ivan Duque is determined to expand the country’s coal mining. The strife-torn Andean nation is South America’s largest coal producer and the national government is seeking to bolster output as part of its plans to reactivate the economy after it shrank nearly 7% during 2020 due to the COVID-19 pandemic.

Duque intends to expand Colombia’s thermal coal production regardless of the environmental consequences and the government’s obligations as a signatory to the 2015 Paris Agreement on Climate Change. A key component of the agreement is that the 196 signatories, including Colombia, will implement greenhouse gas emission-reducing strategies to limit global warming to well below two degrees Celsius. It is recognized that this can only be achieved if thermal coal is removed from the global energy mix because it produces more carbon emissions than any other fossil fuel. U.S. EIA data shows anthracite coal emits 228.6 million pounds of carbon dioxide per million British thermal units produced, whereas bituminous coal pumps out 205.7 pounds when burned.

Those emissions are nearly double the 117 million pounds of carbon dioxide emitted by natural gas, considered to be the cleanest of the fossil fuels, and around 40% greater than either gasoline or diesel. Bogota intends to expand coal production despite 94% of Colombia’s proven coal reserves, which amount to more than 5 billion tons, according to the U.S. Geological Survey being comprised of anthracite and bituminous coal, the most polluting types of fossil fuel. This is because coal generates 85% of mining royalties, making it a key driver of government revenue, and is Colombia’s second-largest export, after crude oil, accounting for 11% of export earnings.  Related: Oil And Gas Rig Count Jumps As Oil Nears 3-Year High
The desperation of the Duque administration to kickstart economic growth, regardless of the cost or its international obligations, is underscored by the ongoing weakness of Colombia’s economy. Despite lifting the strict lockdown instituted across Colombia in March 2020, to mitigate the spread of the pandemic and implementing a series of measures to promote growth, first-quarter 2021 GDP contracted by (Spanish) a worrying 9% compared to the previous quarter. Unemployment remains stubbornly high with the government statistics agency DANE reporting that nearly 16% (Spanish) of Colombians were unemployed at the end of May 2021. Those shocking numbers can be attributed to the impact of a third viral wave on the economy which forced many of Colombia’s major cities into partial lockdowns. That makes it difficult to see the Andean country’s economy expanding by 6.5% as its central bank predicts. Even the more modest 5% 2021 GDP growth forecast by the IMF appears difficult to achieve.

The nationwide anti-government protests sparked by Duque’s inept attempt to hike taxes at the end of April 2021 sharply impacted the economy. Heavy-handed repression by authorities, with independent thinktank Indepaz reporting 44 protestors were killed by police and security forces, caused the protests to explode. Not only are they continuing into their third month, but anti-government protestors established roadblocks that prevented the transportation of food, water, medicines and other crucial supplies in Colombia. Those roadblocks were so significant by mid-May 2021 that Colombian onshore petroleum producers, including national oil company Ecopetrol, were forced to shut-in production.

This sharply impacted Colombia’s economically crucial oil output, which is responsible for 3% of GDP, nearly a third of exports by value, and almost a fifth of fiscal income. According to data from Colombia’s petroleum regulator, the National Hydrocarbon Agency (ANH – Spanish initials) petroleum output (Spanish) fell to a low of 650,884 barrels daily by 25 May 2021 and had only recovered to 696,672 barrels daily on 24 June 2021. Such a sharp decline in oil production will impact Colombia’s economic recovery and Bogota’s fiscal income. While most roadblocks have been lifted, Colombia’s economy is struggling to reactivate because of heightened political turmoil as well as insecurity along with limited protests continuing in some cities.

Related: OPEC: From “Increasingly Irrelevant” To Ultimate Market Mover

That is only further fueling the Duque administration’s desperation to boost economic growth and increase fiscal revenue, with some analysts estimating Bogota’s budget deficit could blow out to more than 9% of GDP this year. Those events further emphasize the Duque administration’s desperation to reactivate the economy and spark growth by any means available, explain why boosting coal output is perceived to be an important economic lever. Bogota is making good on its plans regardless of the global fight against climate change and Colombia’s obligations under the Paris Agreement.

The energy ministry reported (Spanish) that first quarter of 2021 coal output soared by a whopping 52% compared to the previous quarter to 13.9 million tons, although that was 28% less than the 19.4 million tons produced a year earlier. Colombia’s energy minister Diego Mesa foresees increased production because of greater coal demand from China and India. This is despite globally diversified miner Glencore, through its Colombian subsidiary Prodeco, seeking to hand back the licenses for the open pit Calenturitas and La Jaguar coal mines in the department of Cesar.

Glencore determined that after mothballing operations at the mines because of the pandemic it was uneconomic to restart the mines. Initially, the miner sought to keep Calenturitas and La Jaguar on care and maintenance, a plan initially vetoed by Colombia’s mining regulator the National Mining Agency (ANM – Spanish initials). So far, the regulator has rejected Glencore’s requests to hand in those mining contracts, although a final decision is expected by mid-July 2021.

Mesa expects Asian mining companies to consider acquiring the licenses and investing the capital required to recommence operations at the affected coal mines after the matter is settled with Glencore. Not surprisingly other major miners are seeking to reduce their carbon footprint by divesting their coal mining assets. As part of that strategy global mining giant BHP and Anglo American each agreed to sell their 33.3% interest in Cerrejon, Colombia’s largest coal mine, to Glencore for a total of $588 million.  This will make Glencore sole owner of the controversial Cerrejon mine. The operation suffered a three-month work stoppage from the end of August 2020 until the start of December, sharply impacting Colombia’s coal output. Earlier this year, the OECD committed to an investigation into human rights abuses and environmental damage at the Cerrejon mine. The ongoing turmoil and uncertainty surrounding Cerrejon’s operations indicate that further stoppages could occur impacting Colombia’s coal production.

The desperation of the Duque administration to reactivate Colombia’s economy and promote growth is easy to understand considering the harsh financial impact of the pandemic, the recent protests, and a ballooning government budget deficit. Nonetheless, by furiously expanding coal production Bogota is not only investing in what is fast becoming a stranded asset, which could eventually become a costly liability, but it is working against the Paris Agreement and the global fight to prevent climate change. Any expansion in coal production will likely only deliver a short-term benefit with many countries, including those Duque’s government has pinned their hopes on China and India, focused on phasing it out of their energy mix. The resources dedicated to expanding Colombia’s coal production could be better used to rebuild the crisis-driven country’s hydrocarbon sector which was sharply impacted by the 2020 oil price collapse, the COVID-19 pandemic, and turmoil triggered by recent anti-government protests.

By Matthew Smith for Oilprice.com

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Leave a comment
  • George Doolittle on July 04 2021 said:
    These coal prices have more than doubled and are in awesome demand in the USA at the moment.

    The USA Federal Government had a massive carbon capture unit fully functioning in Mississippi when Trump got elected but prior to taking office ... well, we all know now what Plan Alabama was and of course still is.

    Sadly that has turned the entire States of South Carolina and Georgia into two of the biggest superfund sites in the USA. How neighborly and genteel!

    Long $nee Next Era Energy strong buy
    Long $xel Excel Energy strong buy
    Even $mdu MDU Resources has suddenly been saved.

    Moar bazillions!

    Move along..

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