In a surprise move roughly one month ago Colombia’s Supreme Court ordered the house arrest of former President Àlvaro Uribe after allegations of witness tampering. The considerable controversy this has triggered could not occur at a worse time for Colombia, which is reeling from the harsh impact of the coronavirus pandemic and the March 2020 oil price crash. The controversial former president is credited with creating the conditions which reinvigorated Colombia’s vital oil industry and sparked the economic miracle that saw the Andean country report some of the strongest rates of growth in Latin America. Crucially, this includes suppressing the leftist guerillas who by the time of Uribe’s ascension to Colombia’s top job had control over large swathes of the country. This latest event comes on the back of growing fears that the landmark 2016 peace deal with the largest guerilla group, The FARC (Spanish acronym), is unraveling leading to greater insecurity, notably in rural regions.
It is believed up to 15 percent of the FARC combatants who demobilized in 2017 have rearmed. This along with estimated record cocaine production in Colombia, which is now the world’s number one supplier of the narcotic, has precipitated a sharp decline in the security environment. The last remaining leftist guerilla group the ELN (Spanish acronym) also stepped up efforts to seize control of former FARC territory and lucrative drug trafficking routes, as it persecutes its own war against the Colombian state.
These events have seen a sharp uptick in the volume of attacks on Colombia’s oil infrastructure, including a June 2020 assault on 31 wells on national oil company Ecopetrol’s La Cira-Infantas oil field. While well-head attacks were commonplace prior to the 2016 peace agreement, they had fallen significantly in recent years. That along with a rising number of pipeline bombings has the potential to disrupt Colombia’s economically crucial and increasingly vulnerable petroleum industry.
Oil and derivative petroleum are Colombia’s single largest export, accounting for almost 30 percent of all exports by value for the first six months of 2020, according to national statistics agency DANE. The extraction of petroleum and natural gas was responsible for 3.5 percent of Colombia’s second-quarter 2020 gross domestic product. The ongoing oil slump is responsible for a sharp decline in the value generated by the Andean country’s crucial hydrocarbon sector.
At the height of the last oil boom, crude oil and natural gas produced almost 5 percent of Colombia’s GDP, which is 1.5 percent greater than in the second quarter of 2020. It is this decline in the contribution of petroleum to Colombia’s economy which is responsible for the marked decline in growth. This will only be worsened by the COVID-19 pandemic, with Colombia among the 10 worst affected countries globally with over 534,000 cases and 16,183 deaths. The IMF estimates that Colombia’s economy will contract by almost 8 percent during 2020, compared to expanding by 3.3 percent in 2019.
If the outlook for the Andean country’s all-important petroleum industry worsens because of sharply weaker oil prices, reduced production, and increased security risks, the economic fallout will be amplified. By July 2020, Colombia’s oil production had fallen 15 percent year over year to a near-decade low of 734,897 barrels daily and natural gas plunged 11 percent compared to a year earlier to 933 million cubic feet daily.
Source: Colombia Ministry of Mines and Energy.
At the end of July 2020, there were six oil rigs operating in Colombia, according to Baker Hughes, a fifth of the number of operational rigs a year earlier. The sharp decline in spending on exploration and development activities because of the March 2020 oil price collapse does not bode well for sustained production growth during the foreseeable future.
Related: Bullish EIA Inventory Report Pushes Oil Prices Higher Of greater concern, however, is that Colombia’s proven oil reserves are drying up.
At the start of 2020, the Andean country was determined to have just over 2 billion barrels of proven reserves, which amounts to around six years of oil production at current rates. There have been no major onshore hydrocarbon discoveries in Colombia since 2009 and if production dwindles because of a lack of reserves, it will have a sharp impact on the South American country’s oil-dependent economy. This highlights the urgency for Bogota to attract investment into the economically vital petroleum industry. In late 2018 President Duque stated Colombia needs to double its oil reserves if the country is to remain energy self-sufficient.
Growing insecurity, violence, and civil unrest is hampering that effort and will continue to impact oil production and vital exploration activities. Toward the end of 2019 Colombia, like many Latin American countries, was rocked by anti-government protests. The issues driving those civil disturbances are far from resolved. They are centered on human rights, the murder of social leaders, state-sponsored oppression and a lack of equitable access to resources. Protests are expected to recommence once Colombia’s COVID-19 lockdown is lifted. There are fears that Uribe’s detention will magnify civil unrest in Colombia, potentially even triggering armed conflict between pro and anti-Uribe groups. That would be a devastating outcome for a Colombia that is still reeling from almost seven decades of low-level asymmetric conflict and now the deep economic impact of the COVID-19 pandemic.
The impact of violence on the vital oil industry and ultimately the economy is highlighted by the attacks on energy industry infrastructure, notably oil pipelines. Between January 2020 and the end of May, there were 27 attacks on national oil company Ecopetrol’s oil pipelines. In a report compiled by Colombian think tank Fundación Ideas para la Paz (FIP), it was identified that there have been over 3,600 attacks on the Andean country’s petroleum infrastructure during the last three decades. Most of those were committed by the leftist ELN and FARC guerilla groups.
Community blockades also remain an ever-present risk that could escalate after Uribe’s detention and proposed fracking pilots proceed. Upstream producer Gran Tierra Energy was forced to shutter operations and declare force majeure at its Suroriente and PUT-7 Blocks in Southern Putumayo because of local farmer blockades.
Many people in the localities where petroleum companies operate are opposed to the industry because of the potential for environmental damage and antagonism towards the central government in Bogota. This was amplified by royalty reform which saw oil revenues more broadly distributed, causing income for those departments where the petroleum industry operates to fall. The Constitutional Court’s 2018 decision that local community referendums which ban oil extraction cannot halt energy projects further magnified regional resentment toward the Andean country’s hydrocarbon sector.
Heightened security risk, notably in the remote countryside where most oil companies operate is weighing heavily on Colombia’s petroleum industry. Uribe’s recent detention could spark further conflict in a country that has been wracked by low-level asymmetric warfare for decades. That would act as a significant deterrent to urgently needed foreign investment in Colombia’s waning oil industry, which will cause production to fall damaging an already fragile economy.
By Matthew Smith for Oilprice.com
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