There is considerable speculation that the end is drawing close for Colombia’s economically vital hydrocarbon sector. The Andean country’s petroleum industry is facing significant headwinds, notably a deteriorating social license and a resurgent civil conflict, mostly in remote oil-rich regions where coca is cultivated. Colombia’s President Gustavo Petro, who recently reached the milestone of 100 days in office, has previously announced plans to end contracting for hydrocarbon exploration and ban hydraulic fracturing. He also recently signed into law substantial tax hikes for Colombia’s energy patch, which have brought into question the oil industry’s commercial viability. This is occurring at a crucial time for a country, and a hydrocarbon sector, which is still grappling with the economic and social fallout from the pandemic. It is feared these events will trigger a sharp decline in industry spending, with some drillers purportedly considering exiting the country. This will sharply impact Colombia’s oil-dependent economy at time when the government must boost fiscal income to arrest a spiraling budget deficit and expand spending on social programs to combat rising poverty, crime and violence.
During his electoral campaign, former leftist guerilla and long-time senator Gustavo Petro indicated that, if victorious, upon taking office as Colombia’s 34th president, he will significantly increase the state’s take from extractive industries. That saw his administration table a series of tax proposals that sought to hike taxes for Colombia’s hydrocarbon sector. A package of tax reforms, which will generate an additional $4 billion annually for Bogota over the next four years, was passed into law on 3 November 2022. Aside from increased taxes for high-income earners, additional levies were imposed on Colombia’s coal mining and oil industries. Those two industries will fund roughly half of the increased government revenue through the imposition of additional taxes.
A scalable tax surcharge payable by oil producers when the international Brent benchmark oil price reaches certain levels were implemented. When Brent is selling for between $67.30 and $75 per barrel, a 5% levy is applied, which then rises to 10% if the benchmark price is $75 to $82.20 per barrel and 15% when it exceeds the final threshold. This will sharply impact the profitability of energy companies operating in Colombia. Many drillers were enjoying the considerable windfall delivered by significantly higher oil prices over the last year, with Brent gaining 9% over that period, after persevering for years with low margins, even losses, because of substantially softer prices and production interruptions. While the surcharges will significantly impact the bottom line of drillers operating in Colombia the price thresholds which trigger the levy are well above the oil industry’s estimated average after-tax breakeven price of around $44 per barrel. Another costly change to Colombia’s tax code for the hydrocarbon sector is that energy companies can no longer claim royalties as an income tax deduction. Those changes, according to Colombia’s peak oil industry body, the Colombian Petroleum Association (ACP – Spanish initials), could cost the hydrocarbon sector (Spanish) up to 6 trillion pesos or around $1.2 billion annually. Colombian economic think tank Fedesarrollo asserts (Spanish) those changes will cause the effective tax rate for oil companies in Colombia to nearly double from the 36%, that existed prior to the reforms, to a whopping 70%. Colombia’s new tax regime will significantly increase the financial burden for energy companies operating in the Andean country, severely impacting their profitability. That will cause investment in developing Colombia’s hydrocarbon resources to plummet. Already, onshore natural gas producer Canacol Energy and Colombia’s third and fifth largest oil producers, Frontera Energy and Gran Tierra Energy, respectively, are evaluating their 2023 budgets with the substantially higher tax burden in mind. Analysts are expecting 2023 industry investment to be significantly less than just over $4 billion made during 2022, which was among the highest level of industry spending for some years.
As part of the push to move Colombia away from hydrocarbons, Petro promised to end contracting for oil exploration. There are signs, however, that may not occur with the government flagging when the tax changes were enacted that it may back away from plans to end new oil contracts. That offers some welcome relief for an oil industry buffeted by multiple headwinds and has yet to recover to a pre-pandemic tempo of operations. Looming large among those headwinds is heightened insecurity with conflict, violence and crime, notably oil theft, spiraling higher in recent years. That is occurring hand in hand with surging cocaine production, which hit another record high in 2021. It is the tremendous profits generated by cocaine, thought to be as much as $12 billion annually or around 4% of Colombia’s GDP, which is fueling the terrifying increase in violence. Many of Colombia’s top coca-growing regions, such as Catatumbo as well as the departments of Arauca and Putumayo are rich in petroleum and important contributors to industrial production.
The social license for Colombia’s oil industry continues to disintegrate. Community blockades are a persistent problem, as are oilfield invasions. The most recent was an assault upon the facilities (Spanish) of Colombia’s second-largest oil producer Parex Resources in the department of Arauca earlier this month. There was also an explosives attack upon the administrative headquarters of Ismocol, a key contractor to national oil company Ecopetrol, in Barrancabermeja in early November 2022. These events can sharply impact oil industry operations, causing production to fall as nationwide protests from April 2021 to July 2021 demonstrated. Blockades of key roads prevented energy companies from accessing oilfields and continuing operations causing Colombia’s oil output to plunge to a multidecade low of 694,000 barrels per day during May 2021 protests. Indigenous communities in the Llanos and Putumayo Basins, Colombia’s key producing regions, view the petroleum industry with considerable distrust primarily because of the environmental damage caused by industry operations. Widespread community resistance to the introduction of hydraulic fracturing in Colombia has reinvigorated opposition to the hydrocarbon sector.
While Bogota is starting to recognize the role that Colombia’s petroleum industry can play in boosting fiscal revenue to fund urgently needed social programs and bring a runaway budget deficit under control, recent tax hikes have put its future under the spotlight. The sharp increase in taxes and inability to claim royalties as a deduction has made Colombia an uncompetitive jurisdiction for energy companies, particularly in comparison to many of its regional neighbors. There is a very real risk that not only will industry investment plunge and that international energy companies shun Colombia, but existing players will choose to exit the country. That will have a disastrous impact on an economy where oil, according to government statistical agency DANE, was responsible for just over a third of exports by value (Spanish) for the first nine months of 2022 and 4% of GDP for that period (Spanish). With petroleum responsible for around a fifth of annual fiscal income over previous years, Bogota can’t afford the industry to decline.
By Matthew Smith for Oilprice.com
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