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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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Will Colombia’s New President Upend Its Oil Industry?

  • Colombia has just elected Senator Gustavo Petro as its new president.
  • Petro has been particularly outspoken against the country’s oil industry, especially hydraulic fracturing.
  • Petro’s election could have a significant impact on the country’s already-struggling oil industry.

Leftist candidate Senator Gustavo Petro emerged victorious from Colombia’s June presidential run-off as the strife-torn country’s president elect. On 7 August 2022 Petro will be sworn into office becoming the 34th president of the Republic of Colombia. This has roiled Colombian financial markets and the Andean country’s currency the peso. Since Petro beat multimillionaire businessman Rodolfo Hernandez the Colombian peso has tumbled by almost 6% while the domestic stock market has shed 6.1%. The president-elect’s proposed policies of reforming the economy, boosting taxation, and ending extractivist industries, including ending contracting for petroleum exploration have unnerved financial markets and investors. Petro has also made it clear (Spanish) that hydraulic fracturing, known as fracking, and the exploitation of unconventional hydrocarbon deposits will not be permitted in Colombia. Colombia’s highest administrative tribunal, the State Council, has already placed a moratorium on fracking, although pilot projects are allowed. That, along with Petro’s intention to end the development of offshore hydrocarbon deposits spells the end of Colombia’s oil industry, which even before his victory was facing an extremely uncertain future. 

Petro’s policies have sparked a frenzied debate in Colombia about the future of the Andean country’s oil industry which is a key driver of the economy. For the first four months of 2022 petroleum exports (Spanish) generated $6.6 billion, making crude oil responsible for 36% of all export earnings for that period. Total petroleum and derivative products exported represent around 70% of Colombia’s petroleum production. During 2019 Colombia’s oil industry was responsible for (Spanish) 3.4% of the Andean country’s gross domestic product, while for the last four quarters from the second quarter of 2021 that fell to 2.7% despite the latest oil price rally. According to Colombia’s peak hydrocarbon industry body, the Colombian Petroleum Association (ACP -Spanish initials) crude oil is responsible for nearly a fifth of the central government’s fiscal income. Those numbers emphasize how critical the oil industry is to Colombia’s economy and for ensuring the crisis-driven country’s energy security. For these reasons, Petro’s plans to end contracting for oil exploration have triggered considerable conjecture that it will significantly impact government revenues, preventing the president-elect from implementing his economic reforms. It is estimated that the president-elect’s plans will be impacted by a massive budget black hole which will worsen if Petro ends extractivist industries in Colombia. 

Petro’s plans essentially mean Colombia’s petroleum industry will gradually wind down as proven reserves are depleted. At the end of 2021, it was calculated that Latin America’s third largest oil producer only had meager proven reserves of 2 billion barrels, which at the current rate of production will only last for a further seven years. That production life falls to less than six years if Colombia’s oil output returns to one million barrels per day, which was last witnessed in 2015. While Colombia’s 23 basins are under-explored for the presence of hydrocarbons there has been a notable absence of significant oil discoveries over the last two decades. That points to the Andean country not possessing the substantial oil potential required to sustain production of 700,000 barrels per day or more, nor the long-term operation of its petroleum industry. For these reasons, the future of Colombia’s oil industry, even without Petro’s policy to end contracting for hydrocarbon exploration, is questionable. 

That uncertainty is only magnified by the looming arrival of peak oil demand, which analysts expect to trigger a sustained decline in oil prices, and the intensifying push to decarbonize the global economy. The main crude oil grades extracted in Colombia are heavy and sour. There is Castilla which has an API gravity of 18.8° and 1.97% sulfur content, Magdalena with an API of 20° and 1.6% sulfur, and Vasconia with an API of 24° and sulfur of 0.83%. Those characteristics coupled with elevated levels of metals and other contaminants make them more difficult, carbon intensive, and costly to refine compared to lighter sweeter crude oil such as that produced in offshore Guyana and Brazil. Such attributes, along with high breakeven prices averaging $40 to $45 per barrel, which are some of the highest in South America, act as a deterrent to foreign energy companies investing in Colombia’s oil industry.

A key aspect of Petro’s plan for Colombia’s oil industry that is often overlooked is his plan to allow existing contracts to continue operating for as long as Colombia’s proven reserves are sufficient to justify commercial operations. That means, over the short to medium term, there will likely be little to no material impact on Colombia’s oil production. Data from Colombia’s Ministry of Mines and Energy shows for April 2022 (Spanish) that the Andean country pumped an average of 751,322 barrels of crude oil and 1.1 billion cubic feet of natural gas per day, giving Colombia total hydrocarbon output of 940,956 barrels of oil equivalent daily. While that represents the most oil pumped by Colombia since December 2020 production is still well below pre-pandemic volumes. In 2019 the Andean country produced 885,863 barrels per day which were 2.4% greater than a year earlier and significantly higher than the 745,530 barrels per day produced on average for the first four months of 2022.

Indeed, there are signs that with the oil rally driving greater investment in Colombia’s industry that production will expand even after Petro takes office on 7 August 2022. The ACP stated at the start of 2022 that forecast investment in oil and natural gas production will reach $4.4 billion during the year, which is 42% greater than a year earlier. According to the industry body spending on hydrocarbon exploration during 2022 will reach $1.1 billion, which is 2.2 times greater than in 2021 and the highest since 2014. This is reflected by the forecast 2022 budgets of drillers operating in Colombia. National oil company Ecopetrol, which is 88.5% owned by the state, announced plans to invest up to $5.8 billion in 2022, which represents a 45% increase over 2021. Colombia’s largest privately owned oil producer Parex Resources boosted 2022 capital spending by 98.6% year over year to $550 million with most of that amount directed to exploration and development drilling.

That marked increase in exploration and development drilling is reflected by the latest Baker Hughes rig count, which shows that at the end of May 2022 there were 29 operational drill rigs in Colombia. While that is one less than a month earlier it is significantly higher than the 16 operational rigs for the same period a year earlier and the 25 rigs operating at the end of May 2019. Those numbers indicate Colombia’s oil production will grow over the immediate future, even once Petro takes office and is able to successfully implement his plan to end contracts for oil exploration. It is likely that Colombia’s crude oil output will return to over 800,000 barrels of crude oil per day at some time in the immediate future. While Petro’s electoral victory has, rightfully so, unnerved financial markets, investors, and Colombia’s petroleum industry, his plans to end oil exploration the immediate fallout is likely to be minor because of his intentions to allow existing contracts to continue operating.

By Matthew Smith for Oilprice.com

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