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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’s Coal Mining Ambitions Could Backfire

As many developed and even emerging nations aggressively pursue renewable energy targets with a focus on winding down the extraction of fossil fuels, strife-torn Colombia reaffirms that fossil fuel production is crucial to its economic development. In a recent statement, Minister for Mines and Energy Diego Mesa declared that the extraction of thermal coal was an important driver of Colombia’s economy. The minister went on to state that coal mining was responsible for 120,000 jobs and generating 85% of all mining revenues earned by the central government in Bogota. This makes it an important source of revenue for a government struggling to broaden its tax base, boost income and restart an economy severely impacted by the COVID-19 pandemic.  That speech came on the back of the national government’s desperate attempts to reactivate Colombia’s economically crucial hydrocarbon sector, which for 2020 generated 17% of fiscal revenue (Spanish), 3% of GDP, and 28% of exports by value during 2020. Dwindling hydrocarbon production, a lack of proven crude oil as well as natural gas reserves, and ballooning budget deficits are causing the post-pandemic economic recovery to falter. This is applying considerable fiscal pressure to a cash-strapped and increasingly debt-dependent Bogota. The government’s 2021 budget deficit is expected to blowout to 8.6% of GDP, which is not only higher than the 7.8% reported for 2020 when the economy shrank 7.8% but is particularly worrying because it will occur during a year where the economy is forecast to expand by 4%. Those considerable economic and financial pressures are a key reason for Bogota talking up the prospects of coal mining in Colombia, with it already an economically crucial industry. During 202 the fossil fuel was responsible for around 1% of Colombia’s GDP and 13% of exports by value. Thermal coal is a more important export than either coffee or cut flowers for which Colombia is internationally renowned. Government statistical agency DANE reported that during 2020 coal exports earned $4.2 billion, almost double the $2.5 billion generated by coffee, and roughly half of the $8.8 billion earned by crude oil.

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Despite Colombia’s planned extensive commitment to mining and exporting thermal coal, there are considerable headwinds. Historically, Europe was a key market for Colombian coal receiving 50% of all exports between 2011 and 2013. That has plunged to around 10% because members of the European Union are aggressively shuttering coal-fired power plants and decarbonizing their economies to meet emission targets set out in the Paris Agreement on climate change. At the start of 2019 Germany, Europe’s largest economy chose to shutter all 84 of its coal-fired power plants by 2038. France, the third-largest economy, plans to phase out coal-fired electricity by the end of 2022 and enacted a ban, commencing in 2040, producing fossil fuels on its territory. Other European countries have implemented similar policies with some such as Belgium having already ceased producing coal-fired electricity. Countries around the world have taken similar steps to eliminate thermal coal, long considered the dirtiest fossil fuel, which according to the U.S. EIA produces up to 42% more carbon emissions than diesel.

This doesn’t augur well for a Colombian national government seeking to boost thermal coal production and exports to buoy a fragile economy. Bogota hopes that China and possibly India will become key export markets for Colombia’s thermal coal, with those countries being the first and second-largest consumers globally. That, however, could be wishful thinking. Beijing’s climate pledges coupled with an aggressive push to reduce chronic pollution and high levels of airborne particulates in cities indicate that coal-fired electricity needs to be phased out by 2050. The push to significantly reduce pollution combined with the shutdown of unprofitable state enterprises will see many inefficient and obsolete coal-fired power plants shut down. The transition from thermal coal to natural gas forms a key part of Beijing’s strategy to reduce pollution.

Regardless of Beijing’s efforts to reduce thermal coal consumption, China’s imports are massive, it is the single largest importer of fossil fuel followed by India. This coupled with Beijing’s ban on Australian coal imports is responsible for sparking Bogota’s hopes that Colombia can fill the gap. This appears forlorn because China’s government is determined to rein in thermal coal exports to shore-up domestic producers. Shipping coal from Colombia is also more costly than either Indonesia or Australia, China’s first and second-largest suppliers. India is also focused on restricting thermal coal imports and boosting domestic production, while Australia and Indonesia can ship the fossil fuel more cheaply than Colombia.

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Growing global pressure to eliminate thermal coal from the energy mix combined with falling demand because of the pandemic, which resulted in substantially softer prices, saw Glencore place its Colombian coal mines in care and maintenance. Glencore, which is the world’s largest exporter of thermal coal placed its Calenturitas and La Jagua mines, operated by subsidiary Prodeco, into care and maintenance in March 2020. When Colombia’s National Mining Agency rejected Glencore’s request for an extension to care and maintenance in early 2021 it elected to relinquish its contracts for those mines on the basis it would be uneconomic to restart operations. The Switzerland-based miner has committed to capping its thermal coal output in response to climate concerns and the drive to decarbonize the world economy. 

Glencore, BHP Billiton, and Anglo American each own a third of Colombia’s largest thermal coal mine Cerrejon in the department of La Guajira. The mine has a troubled history that has impacted its operations, the latest being a four-month strike that ended in December 2020 and prevented coal production for its duration. Aside from the significant headwinds faced by thermal coal, there is the threat of an OECD probe into Cerrejon’s operations after serious allegations of human rights abuses and environmental destruction. There is the potential for that investigation to force the mine’s progressive closure, which comes after a UN expert called for a halt to mining at Cerrejon in September 2020. BHP is seeking to sell its interests in several thermal coal mines, due to the considerable headwinds facing the fossil fuel, including Cerrejon. 

For these reasons, it is difficult to understand the latest statements from Colombia’s Minister for Mines and Energy nor Bogota’s desire to ramp-up thermal coal mining. It will be the first fossil fuel to be removed from the global energy mix, and Colombia’s thermal coal mines will become stranded assets in a relatively short time, a threat also being faced by the Andean nation’s struggling petroleum industry. Oil industry consultancy Rystad Energy anticipates peak oil demand will arrive in as little as seven years, while for thermal coal that point was reached some time ago. This will have a marked impact on Colombia’s economically crucial oil industry where relatively high breakeven prices, compared to other nearby jurisdictions, heightened security risk and environmental concerns are weighing on investment. If Bogota proceeds with its plans to boost thermal coal mining it will magnify the vulnerability of Colombia’s fragile economy to the commodity price cycle, with it already highly levered to crude oil prices. Such extensive plans will also act as a distraction taking resources and attention away from Colombia’s hydrocarbon sector as well as the push to allow fracking, which is key to boosting crude oil and natural gas reserves as well as production.

By Matthew Smith for Oilprice.com

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Leave a comment
  • George Doolittle on March 21 2021 said:
    The largest energy consumer on Earth is literally just a day away and called "the United States of America." With the collapse of the entire Texas electrical grid I don't see dirt cheap top of the line coal as a "problem looking for an impossible solution" at all for Columbia at the moment. Getting through the Panama Canal at the moment and in the alternative..

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