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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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The Death Of Fracking In Colombia

  • Colombia’s left-wing President Petro plans to end contracting for hydrocarbon exploration and officially ban hydraulic fracturing known as fracking.
  • Various Colombian governments have long viewed fracking as a viable solution to the country’s shortage of proven oil and natural gas reserves.
  • The anti-fracking bill, after being debated and approved by the Senate, has moved to the lower house of Congress for review, inching Colombia ever closer to prohibiting fracking

Colombia’s beleaguered oil industry is facing a series of volatile headwinds as it struggles to return to a pre-pandemic tempo of operations. Petroleum output despite rising during March 2023 to 771,332 barrels per day remains well below 2019 pre-pandemic production of nearly 900,000 barrels daily. Meagre proven oil reserves of just over 2 billion barrels with a production life of eight years are also weighing on the crucially important hydrocarbon sector. The Andean country’s first leftist President Gustavo Petro, a former socialist guerilla, plans to end contracting for hydrocarbon exploration and officially ban hydraulic fracturing known as fracking. There are signs that the legislative prohibition of fracking is close to being enacted, which could spell disaster for Colombia’s economically crucial oil industry. 

Various Colombian governments have long viewed fracking as a viable solution to the country’s shortage of proven oil and natural gas reserves, which at the end of 2021 stood at 2.4 billion barrels and 3.164 trillion cubic feet respectively. Those reserves possess a relatively short production life of 7.6 years and eight years, even with production volumes at far lower levels than before the pandemic. It is for those reasons that fracking has long been considered a solution for an industry that is a key driver of the economy and government finances. That is highlighted by data from Colombian government statistical agency DANE showing that during 2022 oil generated $19 billion of export earnings which is 33% of exports by value. 

Oil is responsible for nearly a fifth of fiscal revenue, making it an important source of income for a country with a narrow tax base where the government is battling ballooning budget deficits. Indeed, Colombia’s government has long fought to broaden the tax base and bolster fiscal income, with Petro’s predecessor Ivan Duque seeking to hike taxes as part of a broad 2021 reform package that triggered violent nationwide protests. Despite recent reforms, including Duque’s revised 2021 tax increases and Petro’s $4 billion tax package approved in November 2022, Colombia still has one of the lowest tax-to-GDP ratios in Latin America. OECD data shows that by the end of the 2022 it was a mere 18.7%, which is nearly half of the OECD average of 33.5%, placing Colombia 12th lowest in Latin America behind Ecuador and ahead of Mexico. A long-term chronic shortage of tax revenue is weighing heavily in Colombia’s government, especially since the 2020 COVID-19 pandemic when the budget deficit blew out to 7% of GDP, remaining elevated ever since despite falling to 5.3% for 2022. For these reasons prior administrations have sought to introduce fracking to Colombia, which is estimated by the U.S. EIA to contain around 92 billion barrels of shale oil and 153 trillion cubic feet of shale gas in place. That underscores the tremendous unconventional oil and natural gas potential of the Middle Magdalena Valley and Llanos Basins which could resolve the risks created a by lack of hydrocarbon reserves. Related: Saudi Arabia, Russia May Cut Production, But Don’t Expect Exports To Plunge

It is for those reasons that various energy companies, the industry regulator the National Hydrocarbon Agency and national government were exploring shale hydrocarbon potential over a decade ago. A decade ago, Bogota introduced regulations aimed at attracting unconventional hydrocarbon investment, the most notable being a 40% tax reduction for shale oil and gas. Between 2012 and 2015, the first shale blocks were allocated by the ANH to various energy companies including Ecopetrol, ExxonMobil, ConocoPhillips, Canacol Energy and Parex Energy. Since then, shale hydrocarbon exploration in the Andean country has been fraught with difficulties and failed to take off. A key problem being considerable community dissent and protests regarding the controversial hydrocarbon lifting technique. That eventually saw Colombia’s highest administrative tribunal the State Council place a moratorium on fracking during 2018 which prevented the technique from being employed in Colombia.

While the moratorium was upheld in 2019 the tribunal did, that year, exempt projects aimed at testing the controversial technique from the ruling, allowing Ecopetrol and ExxonMobil to proceed with the Kale and Platero fracking pilots. During July 2022, the State Council rejected a lawsuit (Spanish) seeking to abolish the regulations that made fracking viable in Colombia, essentially overturning the 2018 moratorium and consenting to the controversial hydrocarbon extraction technique being used in Colombia. By August 2022, newly inaugurated President Petro had introduced a bill to Congress to officially ban fracking in Colombia. Petro is seeking to prohibit fracking, which is outlawed in Germany, France, Spain and Australia, because of its association with groundwater contamination along with the tremendous amounts of toxic wastewater produced. Fracking is also believed to cause frequent minor earth tremors sparking concerns about its use in Colombia’s unstable geology. 

The anti-fracking bill, after being debated and approved by the Senate (Spanish), has moved to the lower house of Congress for review, inching Colombia ever closer to prohibiting fracking. While that is pleasing many community and environmental groups opposed to the hydrocarbon extraction method it has sparked considerable fallout for Colombia’s economically crucial oil industry which has yet to recover from the 2020 pandemic. 

Many of the energy companies holding fracking licenses are seeking to shelve them while global supermajor Exxon is exiting upstream operations in Colombia. Already the integrated energy company has announced its withdrawal from the VMM-37 Block in the Middle Magdalena Valley Basin where it was participating in the Platero fracking pilot which required an investment of $53 million. Exxon is also in the process of ditching several other blocks it holds interests in and is attempting to recover the investment already made in the Platero pilot from the Petro administration.

Exxon’s decision is understandable given the considerable success it is enjoying in Guyana, a lower risk South American jurisdiction, where it secured extremely favorable terms for the prolific offshore Stabroek Block. In that block alone the supermajor has discovered over 11 billion barrels of oil. Given the considerable risk now associated with operating in Colombia, other energy companies could very well follow suit creating a legal and financial headache for Petro’s government. Falling energy investment also threatens Colombia’s oil dependent economy, the value of the peso and government coffers with Bogota reliant upon income from oil rents, especially after Petro’s tax reforms boosted revenues from the petroleum industry. 

By Matthew Smith for Oilprice.com


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