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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 Oil Industry Survive The 2022 Presidential Election?

  • Colombia’s oil industry is on the verge of collapse.
  • The country’s upcoming presidential election could be the final straw for its struggling oil industry.
  • Gustavo Petro has made no secret of his opposition to hydraulic fracturing along with plans to reform Colombia’s economy and end petroleum exploration.

The outlook for Colombia’s oil industry has never been more uncertain. Not only is rising violence, fueled by poverty and cocaine production, weighing on operations but the 2022 presidential election is sparking considerable consternation that the petroleum industry’s best days may be behind it. After an intense campaign leftist senator, Gustavo Petro emerged with 40% of the vote and populist center-right construction magnate Rodolfo Hernandez gained 28% placing them in a 19 June 2022 electoral run-off to decide who will lead Colombia. Petro, a long-serving senator and former M19 guerilla, has made no secret of his opposition to hydraulic fracturing along with plans to reform Colombia’s economy and end petroleum exploration. Hernandez, like Petro, has voiced opposition to fracking but recognizes the oil industry’s importance (Spanish) to Colombia’s economy and the need to better exploit the country’s natural resources. There are genuine concerns that if Petro emerges victorious on 19 June 2022 it will herald the end of what is currently Colombia’s economically crucial hydrocarbon sector.

Colombia, despite lacking the proven reserves of its Latin American neighbors, emerged during the 1990s as a major regional oil producer pumping an average over 500,000 barrels per day by the middle of the decade. As a result, petroleum emerged as a key economic driver for the war-torn South American country which has become synonymous with cocaine trafficking, drug cartels and civil war. By mid-2013 during the last great oil boom, Colombia’s oil output reached a record high, averaging just over one million barrels per day that year before descending into a terminal decline.

Source: Colombia Ministry of Mines and Energy, U.S. EIA.

For the first three months of 2022 Colombia’s production has risen slightly, by 1%, , averaging 743,599 barrels daily. Those numbers demonstrate that the Andean country’s petroleum industry is struggling to return to a pre-pandemic operational tempo despite surging oil prices and investment. That can be attributed to rising insecurity in many of the remote regions where the oil industry operates, disintegrating social license and a marked uptick in geopolitical risk because of the presidential elections. This is hurting Colombia’s oil-dependent economy. Before the COVID-19 pandemic data from the government statistics agency (Spanish) shows crude oil was responsible for 3.4% of Colombia’s gross domestic product, a fifth of the national government’s fiscal income and 40% of exports by value making it the single largest legal export. By the end of the first quarter of 2022 petroleum was only generating 2.7% of Colombia’s GDP, 17% of government revenue and 36% of exports by value. Those numbers highlight the importance of Colombia’s oil industry and the economic damage that can occur if petroleum exploration in the Andean country ends.

Petro asserts that his first decision as president, if he emerges the winner from the 19 June 2022 poll, is to end contracting (Spanish) for oil exploration. This forms a plank in his broader plan to finalize the operation of extractivist industries in Colombia, with coal mining earmarked as the first to go, and embrace the global transition to cleaner renewable sources of energy. While Petro’s plan appears foolhardy and likely to severely damage Colombia’s oil-dependent economy, ending contracting for oil exploration may not be as serious as it first appears. The senator intends to allow the nearly 150 exploration contracts currently in force in Colombia to remain in play. Petro also plans to allow Colombia’s petroleum industry to continue operating until the Andean country’s proven crude oil reserves are exhausted. That is especially important to note, because unlike many of its regional neighbors Colombia at the end of 2021 only held proven reserves totaling a meager 2.039 barrels of crude oil.

While that number represents a 12% increase over the 1.816 billion barrels determined at the end of 2020 it still only provides enough oil for 7.5 years of production at the current rate which averaged 743,599 barrels per day for the first quarter of 2022. It is also significantly less than the 2.445 billion barrels identified at the end of 2013. If Colombia’s petroleum output returned to pre-pandemic levels of 885,863 barrels per day for 2019, then the life expectancy of those reserves falls to just over six years. A lack of high-quality significant oil discoveries in Colombia since the 1990s despite greater investment and exploration activity both on and offshore signals that the Andean country lacks the petroleum potential of its South American neighbors. Those circumstances point to Colombia’s economically crucial oil industry being in a state of terminal decline, making now the time for the national government to boost other key economic sectors, notably agriculture and manufacturing. This forms a key part of Petro’s economic reforms with the senator calling for greater industrialization and agrarian reform as well as modernization to drive higher productivity.

While Hernandez is similarly focused on modernizing the economically vital agricultural sector he recognizes the importance of Colombia’s petroleum industry, although he has at times voiced opposition to fracking. The construction magnate, after considering Colombia’s meagre proven oil reserves and their short production life, has proposed ramping up investment in alternative energies while allowing the hydrocarbon sector to continue operating within existing guidelines. Hernandez also recognizes the need for Colombia to secure energy self-sufficiency and address the risks posed by the Andean country’s limited hydrocarbon reserves. He plans to do this by expanding hydrocarbon exploration to boost the Andean country’s limited proven reserves. There is, indeed, speculation that Hernandez may eventually support the introduction of fracking (Spanish) in Colombia because of signs that the country’s conventional hydrocarbon potential is extremely limited with no major discoveries in decades. In fact, he has made contradictory statements both for and against the controversial non-conventional hydrocarbon extraction technique during his campaign.

A Petro victory bodes poorly for Colombia’s economically vital petroleum industry. Such an event will herald the end of oil exploration and see industry operations gradually wound down as proven reserves fall to non-commercial levels. Whereas a Hernandez win will ensure that Colombia’s hydrocarbon sector will continue operating in an established manner with a focus on boosting exploration to expand proven oil and natural gas reserves to guarantee energy security. The latest polls show mixed results. Some have Petro well-ahead (Spanish) with up to 45% of the vote compared to 35% for Hernandez and 13% of respondents intending to cast a blank vote with the remaining 7% of those polled not responding. Other polls indicate the potential for a technical tie with respondents awarding around 46% of the vote to Petro and Hernandez. In such an event the candidate with the votes will win the election and become Colombia’s next president.

By Matthew Smith for Oilprice.com

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