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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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Is This The Beginning Of The End For Colombia’s Oil Industry?

  • Colombia’s oil industry has been in a death spiral since the beginning of the COVID-19 pandemic.
  • Growing community and political opposition to Colombia’s oil industry adds an elevated risk to its struggling economy.
  • The upcoming presidential election could seal the fate of Colombia’s battered energy industry.

Colombia’s economically crucial petroleum industry, which has been under pressure for some time from a combination of weaker oil prices and low proven reserves, is struggling to recover from the COVID-19 pandemic. The latest data from Colombia’s Ministry of Energy shows that crude oil production volumes remain below pre-pandemic lockdown levels, while foreign energy investment is weak despite government initiatives to reactivate the vital hydrocarbon sector. There are signs of further difficulties ahead for the Andean country’s oil industry. Key among them are the considerable risks associated with 2022 being a presidential election year where the leading candidate, leftist senator Gustavo Petro, is opposed to extractive industries and strong community dissent toward oil drilling. That coupled with rising security risks, dwindling proven crude oil reserves and the accelerating decarbonization of the global economy all point to a deteriorating outlook for Colombia’s petroleum industry. The latest energy ministry data shows that crude oil production for February 2022 remained flat compared to a month earlier and fell by nearly 1% year over year to 739,542 barrels per day.

Colombia

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

Natural gas output rose by 5.5% month over month to 1,079 million cubic feet per day but was still a worrying &% lower compared to the same period a year earlier.

Colombia

Source: Colombia Ministry of Mines and Energy.

February 2022 oil and natural gas output was 15.8% and 5.6% respectively lower than for that period during 2020, which was the last full month of hydrocarbon production prior to Colombia’s pandemic quarantine lockdown commencing. Colombia’s total February 2022 hydrocarbon output reached 925,523 barrels of oil equivalent daily, which while 1% greater than a month earlier was 2% lower year over year and 14% less than February 2020.

Surprisingly, the ongoing decline of Colombia’s petroleum output, which reached its highest post-pandemic lockdown volume of 760,940 barrels daily in November 2020, is occurring regardless of growing investment. Despite 2021 industry spending surged 46% year over year to $3.1 billion annual average petroleum output fell by 6% to 735,378 barrels per day. Even a marked increase in investment for 2022, which the Colombian Petroleum Association (ACP – Spanish) expects to reach $4.4 billion, is thus far failing to drive higher petroleum production as underscored by the numbers presented in the charts.. That is particularly worrying when it is considered that the ACP’s estimated investment for 2022 is 42% greater than 2021, more than double the $2.05 billion spent during 2020 and higher the $4.03 billion spent in 2019.

There are a range of reasons for this, including heightened security risks, which are weighing on petroleum industry operations. It also takes time to ramp up the activities required to boost oil production, notably drilling a new well and bringing them online as well as completing workovers of existing wells. That lag is reflected by Colombia’s soft production data in contrast to a steadily rising rig count. According to Baker Hughes there were 31 active drill rigs at the end of March 2022 or four higher than a month earlier, six greater than for that period during 2020 and only two less than March 2019.

Colombia

Source: Baker Hughes and U.S. EIA.

That data indicates the volume of active drill rigs in Colombia has reached pre-pandemic levels boding well for higher future petroleum production volumes.

Colombia’s energy ministry and the regulator, the National Hydrocarbon Agency (ANH – Spanish) are focused on attracting further private energy investment to boost exploration and development activities. Another oil auction (Spanish), on the back of the successful 2021 Bid Round where seven companies committed to investing $149 million to drill 30 blocks, is planned for the second half of 2022. To initiate that process the ANH invited energy companies to nominate areas of interest after updating Colombia’s exploration and production acreage map during March 2022. The Andean country has held four auctions since 2019 as the government urgently seeks to lift rapidly dwindling oil reserves and petroleum output. In November 2021 the head of the ANH, Armando Zamora, stated that by ramping up petroleum investment Colombia could add up to three billion barrels of crude oil to its rapidly depleting oil reserves by 2040. 

Related: The Numbers Behind A EU Ban On Russian Crude

That is a particularly important initiative for the Andean country because Colombia only possesses oil reserves (Spanish) of 1.8 million barrels which will only last six years at the current rate of production. The dearth of proven oil reserves, especially in comparison to other major producers in South America such as Brazil which has reserves of 1.27 billion barrels and neighboring Ecuador with 8.3 billion barrels, poses a key risk to Colombia’s economy. That shortage is troubling because oil rents are responsible for almost 4% of Colombia’s gross domestic product, while petroleum is the Andean country’s largest export generating a third of total export earnings. If Colombia’s crude oil output tumbles and production eventually ceases it will have a profound economic impact on the oil-dependent South American nation.

Other hazards are weighing heavily on the outlook for Colombia’s petroleum industry. A key risk is that leading candidate in this year’s presidential election, leftist senator Gustavo Petro, plans to ban extractive industries, notably coal mining and oil production, in Colombia if he wins the presidency. The leftist senator’s plan (Spanish) consists of banning petroleum exploration and winding down industry operations once Colombia’s limited proven crude oil reserves expire. Colombia’s latest poll (Spanish) shows Petro will win 38% of votes cast in the first electoral round to be held on 29 May 2022, with former Medellin mayor and conservative Federico Gutiérrez in second place with 23% of the vote. If that occurs second-round run-off vote will be held where it is predicted that Petro will emerge victorious as Colombia’s president.

Another significant risk is the deterioration of the social license for Colombia’s petroleum industry. Community blockades of industry facilities and oilfields, notably in the Putumayo and Llanos Basins are common as are oilfield invasions. Those types of events spiked during the anti-government protests which swept across Colombia from April to July 2021. Oilfield invasions in Puerto Gaitan, which is at the heart of industry operations, became such a problem in 2020 and 2021 that the industry struck an agreement to provide greater social services to local indigenous communities. Hydraulic fracturing, which maybe the only means of significantly boosting Colombia’s oil reserves and production, is highly controversial. While a moratorium suspending the use of fracking to extract hydrocarbons has been in place in Colombia since 2018 pilot projects were ruled by Colombia’s highest administrative tribunal, the State Council, to fall outside of the ban. That saw Colombia’s national oil company Ecopetrol along with partner ExxonMobil embark on developing fracking pilots in the Magdalena Basin which had received the require licenses to proceed. In a recent surprise move, the first court of Barrancabermeja ordered the suspension (Spanish) of the environmental licenses for the Kalé and Platero fracking projects. The operator of the projects Ecopetrol was ordered by the court to suspend operations and consult with the Afro-Colombian Corporation of Puerto Wilches with work only able to recommence once a satisfactory social license is established with the community.

Security risks in rural Colombia remain high with violent crime and massacres rising at an exponential rate despite the largest leftist guerilla group the Revolutionary Armed Forces of Colombia (FARC – Spanish initials) having demobilized in 2017. That rising violence can be attributed to various illegal armed groups fighting for control of lucrative smuggling routes and coca growing land. Many of the violent incidents associated with Colombia’s multi-party low-level asymmetric conflict, which is driven by poverty and cocaine trafficking profits, are occurring in the regions where the petroleum industry has substantial operations. Headwinds for Colombia’s economically crucial oil industry abound, especially with geopolitical risk spiking significantly because of this year’s presidential election. That is magnifying existing risks associated with a deteriorating social license for the petroleum industry in Colombia as well as the impact of an escalating internal conflict on operations, notably urgently needed exploration activities in remote hydrocarbon basins.

By Matthew Smith for Oilprice.com

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