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Colombia's Oil Industry Stuck in Death Spiral

In a controversial move, Colombia's leftist President, Gustavo Petro, banned awarding new hydrocarbon exploration contracts. He also sought to ban hydraulic fracturing in the conflict-riven country, which is economically dependent on petroleum extraction. Those government policies, coupled with tax hikes for Colombia's extractive industries along with a lack of major oil and natural gas discoveries, sparked considerable speculation that the economically crucial hydrocarbon sector is in terminal decline. The last decade has been particularly turbulent for Colombia's economically vital oil industry, especially since the 2020 pandemic, with production stuck in what can only be described as a death spiral. The outlook for Colombia's beaten-down oil industry is bleak, despite recent efforts to lift production to one million barrels per day. The hydrocarbon sector is being buffeted by headwinds that have the potential to spark a grave energy crisis.

Data from Colombia's oil regulator, the National Hydrocarbons Agency (ANH - Spanish initials), shows the country lifted an average of 779,626 barrels per day for March 2024. While this is 2% greater than a month prior and 1% higher year over year, it is well below Colombia's pre-pandemic output of 884,876 barrels per day for March 2019. Natural gas production also appears incapable of recovering. Output of the vital fuel, considered to be the transitional fossil fuel of choice, averaged one billion cubic feet per day during March 2024 or 2% less than a month prior and 6% lower year over year. That number was also lower than the 1.04 billion cubic feet of natural gas pumped during March 2019. 

The decline of Colombia's hydrocarbon output has the potential to sharply impact the Andean country's economy, particularly weaker natural gas production. Government data shows oil is Colombia's largest export. Petroleum shipments for 2023 earned $15.8 billion, compared to $9.2 billion for coal, the second largest export, which amounted to a third of all exports by value during that year. Those numbers emphasize the economic importance of Colombia's hydrocarbon sector. There are also fears declining natural gas output could lead to a broader energy crisis. You see, the El Niño weather phenomenon is responsible for a drought that is severely impacting water flows at Colombia's hydro-facilities, which generate 70% of the country's electricity. To compensate for the sharp decline in electricity production, Bogota is seeking to bolster output from natural gas-fired plants.

Recent developments indicate Colombia's hydrocarbon production will never return to pre-pandemic volumes, with various headwinds buffeting the oil industry's outlook. A sharp downturn in foreign investment is materially impacting petroleum output. Private sector spending on upstream oil and natural gas operations during 2023 is estimated to have plunged by a third compared to 2022, primarily because of Bogota's controversial plans to cease awarding exploration contracts and November 2022 tax hikes. Despite this marked decline, overall hydrocarbon spending rose by 4% because Colomba's national oil company Ecopetrol boosted upstream expenditures. Reduced private sector investment is responsible for a decline in exploration and development activity. ANH statistics show 41 exploration wells were completed in 2023, which is 26 less than the 67 wells drilled a year prior and seven less than the 48 wells completed in 2019. Development wells also fell sharply, with 597 drilled in 2023 against 657 a year earlier.

Softer exploration and development activity is further reflected by Colombia's rig count. Baker Hughes counted 19 active drill rigs at the end of March 2024, representing a sharp decline from the 34 rigs operating during the same period a year earlier. This number is also substantially lower than the 33 active rigs recorded for March 2019. These developments are responsible for not only declining hydrocarbon production but also Colombia's chronic shortage of oil and natural gas reserves. The ANH announced that Colombia's proven oil reserves (Spanish) at the end of 2023 totaled 2.02 billion barrels, which was 2.6% lower than a year prior. Meanwhile, in a devastating development, proven natural gas reserves plummeted 16% year over year to 2.4 trillion cubic feet. 

For a decade, the Andean country's reserves have been declining, with 2023 proven oil reserves 12.5% lower than 10 years earlier, while natural gas reserves are down a whopping 49.6%. Of greater concern is that Colombia's current oil reserves can only support another seven years of operation, while the sharp decline in natural gas means there are only six years of production remaining. This underscores the dire state of Colombia's hydrocarbon sector, with questions arising over its long-term viability, especially if no significant oil and natural gas discoveries are made soon. The country's main industry body Colombia's Oil and Gas Association (ACP - Spanish initials) warned in an April 2024 statement (Spanish) that natural gas supplies were around half of their original capacity. This the ACP warned, will trigger an energy crisis with domestic natural gas supply incapable of meeting demand by 2028, further highlighting the considerable uncertainty surrounding the long-term outlook for Colombia's hydrocarbon sector.

A chronic lack of exploration success over the last two decades, with the last world-class oil discovery occurring during the 1990s, indicates Colombia is incapable of boosting its proven hydrocarbon reserves any time soon. This demonstrates that Colombia does not possess the oil potential of its neighbors like Venezuela and Ecuador. Recent natural gas discoveries in Colombia's Caribbean waters, including the Uchuva-1, Kronos-1, Gorgon-1, Purple Angel-1, Gorgon-2 and Glaucus-1 exploration wells, which were heralded as potential game changers have proven disappointing. The greatest expectations were held for the Orca-1 natural gas discovery located in the Tayona Orca Block, operated by Ecopetrol, in Colombia's Caribbean waters.

Colombia Map of Offshore Hydrocarbon Blocks

Source: National Hydrocarbons Agency (ANH).

Those discoveries in Colombia's Caribbean waters near Venezuela sparked considerable speculation that the country possessed the potential to enjoy a mammoth offshore natural gas boom. The Orca-1 discovery was touted as a game changer with the potential to significantly boost Colombia's hydrocarbon reserves at a crucial time with a shortage of fossil fuel looming. While recent drilling by Ecopetrol in the Tayrona Orca Block with the Orca Norte-1 deepwater well, which was completed in January 2024, overall results were disappointing. Colombia's national oil company announced it had identified two additional bodies of natural gas in reservoirs outside of the original Orca discovery. Nevertheless, Ecopetrol was unable to confirm the commercial viability of the project, and there are emerging concerns that the Orca discovery is significantly smaller than initially believed.

Those events delivered a bittersweet outcome for Colombia, which is facing a domestic natural gas shortage and emerging energy crisis at a time when the leftist Petro administration is seeking to wean the country off its hydrocarbon dependence. There are, indeed, fears the Andean country, which is heavily reliant upon hydropower will be forced to ration electricity. This is because of the confluence of falling electricity production at Colombia's hydro-plants due to plummeting water levels triggered by an El Niño induced drought and the inability to bolster electricity production from natural gas-fired facilities. The threat of a major energy crisis is worsening, with Colombia's oil industry seemingly caught in an endless decline spiral, with hydrocarbon output not only failing to return to pre-pandemic volumes but continuing to decline. If a crisis occurs, it will sharply impact Colombia's oil-dependent economy.

By Matthew Smith for Oilprice.com 

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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… More