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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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Could Fracking Save Colombia’s Energy Industry?

  • Crisis-riven Colombia is struggling to get its economically-dependent oil industry off the ground.
  • The country’s upcoming presidential election will be crucial for its energy industry.
  • Fracking offers a potential lifeline for the ailing energy sector, but resistance to fracking in Colombia is considerable.

Despite spiraling oil prices which see the international Brent benchmark up by a stunning 53% since the start of 2022 to be trading at over $109 per barrel, Colombia’s economically crucial energy patch is struggling to come to life. The crisis-riven Andean country, despite implementing a peace deal with the Revolutionary Armed Forces of Colombia (FARC – Spanish initials) finds itself crippled by violence and geopolitical uncertainty. Last year, 2021, was the most violent year in nearly a decade. The total number of homicides rose to a seven-year high, while massacres, as well as the murder of social leaders, continued to rise. Now an electoral year has arrived in Colombia with the first round of the presidential election to be held in May 2022 followed by a run-off vote later in the year if no candidate receives a majority of the vote. These events have substantially ratcheted up the degree of risk and uncertainty surrounding Colombia’s oil industry.  For decades Colombia has battled endemic violence with large swathes of the country falling under the control of various armed groups since the late-1970s as the Andean nation lurched from one violent crisis to the next. Colombia’s persistent low-level asymmetric conflict emerged from a 10-year period known as La Violencia, which was essentially a civil war between Colombia’s two main political parties the Conservative and Liberals. When that war ended in 1958, after a brief period of peace, the FARC and then a series of other leftwing revolutionary movements emerged, with many inspired by the Cuban revolution and nationalist Bolivarian ideology. During the 1980s the civil conflict exploded with the rapid rise of the major drug trafficking cartels and the inflow of massive cocaine-trafficking profits, seeing violence erupt across Colombia including in the capital Bogota. Over the ensuing years, various illegal armed groups including cocaine cartels, right-wing paramilitaries, and leftwing guerillas were dismantled or agreed to surrender leading to lower levels of violence and reduced risk for foreign energy companies. Those developments culminated in the 2016 peace agreement between Bogota and the FARC, Colombia’s largest non-government combatant force. That resulted in a dramatic drop in violence which saw Colombia’s homicide rate for 2017, the year when the FARC had completely demobilized, fall to 25 murders per 100,000 people, the lowest rate since 1974.  Related: Germany Gets Ready For Gas Rationing
Since then, violence, notably homicides and massacres in rural regions, has soared. Last year was the first year since 2013 that Colombia’s national police reported more than 13,000 homicides leaving the strife-torn country with 26.8 murders per 100,000 people, the highest since 2013. Massacres are seemingly spiraling out of control having surged in number since 2018 when hard-right President Ivan Duque was sworn into office. Data from Colombian independent peace thinktank Indepaz (Spanish) shows 22 massacres from (Spanish) 1 January 2022 to 11 March 2022 compared to 18 for the same period a year earlier and 12 during the first 10 weeks of 2020. Even more startling is that the number of massacres reported in Colombia for that period during 2022 is the same as for the full-year 2019 and 10 more massacres than the 12 reported all of 2018. That worrying news means Colombia will likely experience more massacres during 2022 than for any year in over a decade. There are fears the Andean nation is returning to levels of violence that marred the period from 1995 to 2005, one of the most violent epochs of recent times, where various illegal armed groups battled for control of territory and lucrative smuggling routes. This indicates that the rule of law is breaking down, notably in remote regions where the petroleum industry operates, which historically have long had a weak government presence. 

A key driver of the surge in violence is the significant uptick in cocaine production in Colombia over recent years. According to the UN Office on Drugs and Crime, or UNOCC, coca production reached another record high in 2020 despite the acreage under cultivation falling 7% year over year. The UN estimated 2020 fresh coca leaf, the core ingredient of cocaine, the harvest of 6.4 metric tons, which was 10% higher than a year earlier and the second successive year where cultivation grew. It is believed that allowed the manufacture of 1,228 metric tons of cocaine hydrochloride, which was an 8% increase over 2019. Those remote regions where much of Colombia’s coca is grown possess large oil reserves and have significant industry assets leading to a heightened security risk for onshore energy operations. That explains why there has been a surge in interest in offshore Colombia but investment in offshore Colombia from foreign oil companies remains muted.

Related: OPEC Sees Smaller Oil Supply Surplus For Q1 2022

The sabotage of petroleum pipelines, which are the only cost-effective means of transporting crude across Colombia’s rugged terrain, is a constant risk. Whenever pipelines are shuttered because of bombings drillers are forced to store oil onsite or transport it by road to key shipment points causing operating costs to spike. In 2020, according to Reuters, Colombia’s national oil company Ecopetrol recorded 51 assaults on energy infrastructure and there were more than 28 such attacks in 2021. Assaults against pipelines, oilfield invasions, and wellhead attacks have, however, fallen sharply since the demobilization of the FARC in 2017, although local community opposition to the hydrocarbon sector is rising.

A moratorium on hydraulic fracturing, which is highly unpopular in Colombia, remains in place, although this does not cover fracking pilots. Ecopetrol’s pilot in Puerto Wilches in which ExxonMobil is a partner recently received regulatory approval (Spanish) from Colombia’s Environmental Licensing Authority to proceed despite considerable community opposition. This will be Colombia’s first fracking project and is an important step in developing the Andean country’s petroleum industry because the Andean country’s limited proved reserves of 1.8 billion barrels only have a production life of just over six years. While there have been no major oil discoveries in Colombia for over two decades the Andean country is believed to have recoverable shale oil resources of up to 7 billion barrels and 30 trillion feet of shale gas. Those unconventional hydrocarbon deposits are primarily located in the Magdalena valley, where Ecopetrol’s Puerto Wilches fracking pilot is situated.

Resistance to fracking in Colombia is considerable. That is adding to the onshore oil industry’s woes placing further pressure on its social license which has been deteriorating in many of the communities near where there are major petroleum operations. Rising opposition to extractive industries in Colombia, notably coal mining and oil drilling, is reflected in the campaign platforms of this year’s presidential candidates. Leading candidate left-wing senator Gustavo Petro has made it clear that if he wins Colombia’s presidency, with voters going to the ballot box in May 2022, he will end coal mining and oil drilling in Colombia. Essentially, Petro plans to terminate (Spanish) the award of oil exploration licenses while allowing existing operators to continue pumping petroleum until Colombia’s reserves are exhausted. That has ratcheted up the political and regularity risk for Colombia’s oil industry at a crucial time when it is struggling to recover from surging violence and the COVID-19 pandemic, particularly with Petro leading in the polls.

By Matthew Smith for Oilprice.com

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