Colombia’s beaten-down oil industry is struggling to recover from the 2020 COVID-19 pandemic, with the tempo of operations and production lower than in 2019. The 2022 electoral victory of former guerilla and senator Gustavo Petro which saw him become Colombia’s first leftwing President, cast a cloud of uncertainty over the hydrocarbon sector’s future. Petro, as part of transitioning Colombia to cleaner renewable forms of energy, plans to end contracting for hydrocarbon exploration in the Andean country and ban hydraulic fracturing. This will threaten Colombia’s energy security and economic well-being because of the strife-torn country’s dependence on fossil fuels for exports and government revenue.
Even after two years, Colombia’s oil industry has been unable to return to overcome the 2020 pandemic and return to a pre-pandemic tempo of operations. For May 2023, the petroleum-dependent country lifted an average of 773,789 barrels per day, which was 1% lower than a month earlier but 3.6% higher year over. Despite that solid year-over-year growth, the May 2023 production volume was still significantly lower, by 13.5%, than the 894,519 barrels per day pumped for the same month during 2019, indicating production has not returned to pre-pandemic volumes. Natural gas output has also yet to recover, which is creating considerable consternation in a country already facing shortages and a potential natural gas crisis. July 2023, natural gas output of 1.1 billion cubic feet per day, while nearly 4% higher than a month earlier, was 4% less than for the same period in 2023 and lower than in 2019.
There are a range of reasons for this, the key is a sharp drop of investment in Colombia’s energy patch. The Colombian Petroleum Association (ACP – Spanish initials) earlier this year stated investment by private oil companies in exploration will plunge 33% year over year to $700 million. Ecopetrol’s decision to substantially boost spending on upstream operations in Colombia during 2023 will compensate for the significant reduction in spending on exploration activities by private drillers. For that reason, the total annual investment in hydrocarbon exploration in Colombia during 2023 will only decline by 4% to $1.24 billion. Overall, 2023 investment in the Andean country’s energy patch is forecast by the ACP to be just over $5 billion, with $3.81 million, or 75% of total capital spending, to be directed to production and development activities, representing a 6% increase year over year.
The decision by private oil companies to significantly slash capital spending during 2023 can be blamed on Petro hiking industry taxes during November 2022 and his plans to cease awarding new contracts for oil exploration. Those strategies form a key plank in Petro’s plan to wean Colombia off its fossil fuel dependence, with oil responsible for 29% of Colombia’s exports by value for the first six months of 2023 and accelerate the country’s transition to renewable sources of energy. Since the late 1990s, petroleum has been a crucial economic driver for Colombia, with it eventually becoming the largest legal export by value and an important source of government income.
Heightened insecurity, frequent anti-oil industry protests, the latest against Sinopec-owned Emerald Energy in Caqueta Department, a deteriorating social license and elevated geopolitical uncertainty are weighing on Colombia's hydrocarbon sector. The negative impact of these events is magnified by the scandals embroiling Petro’s administration and even the president himself, with his son Nicolas Petro arrested and charged with money laundering. During July 2023, allegations of misconduct claimed the scalp of Petro’s energy minister Irene Velez. These purported wrongdoings make it near-impossible for the president to gain the necessary support in Congress to implement his proposed reforms, including ending hydrocarbon exploration, seeing Petro’s activist agenda grind to a halt.
These events are not only preventing oil production from returning to pre-pandemic levels but are responsible for a decline in vital drilling activity. Despite the ACP predicting that 55 to 60 exploration wells will be drilled this year data from Colombia’s hydrocarbon regulator (Spanish), the National Hydrocarbon Authority (ANH – Spanish initials) shows only 28 wildcat wells were completed during the first five months of 2023. The data, thus far, indicates that a substantially lower number of exploration wells will be completed during 2023 when compared to 2022, when 68 were drilled. The latest Baker Hughes International Rig Count indicates drilling activity is in decline. During July 2023, there were only 24 active drill rigs in Colombia compared to 35 at the end of December 2022 and 33 for the same month a year earlier.
Declining investment and drilling activity will weigh on Colombia’s hydrocarbon production, and it is already being felt as production data shows with current output is less than was reported for 2019. This highlights the considerable risks posed by Petro’s plan to end hydrocarbon exploration in a country that economically depends on petroleum exports yet possesses limited proven reserves with no major oil discoveries in over a decade. There are fears the president’s policy will endanger Colombia’s energy security, especially with a natural gas shortage looming. By ending oil exploration, the ACP believes there will be a need to substantially boost natural gas imports and that Colombia, which is a net oil exporter, will be forced to start importing petroleum by as early as 2028. This will place considerable pressure on a fiscally weak Bogota, where oil is responsible for up to a fifth of government revenue.
By Matthew Smith for Oilprice.com
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