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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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Colombia’s Oil Industry Faces Major Uncertainty

Post-FARC peace treaty violence is at an all-time high with 2021 on track to be the most violent year in Colombia in a decade. Massacres and violent crimes, including the murders of community leaders and former FARC combatants, have soared since President Duque took office in August 2018. That is being fueled by a weak economy, high unemployment, growing poverty and deep socioeconomic inequality, all of which were sharply amplified by the coronavirus pandemic and the Duque administration’s desperate measures to contain the disease.

The national government’s attempts at tax reform, which if approved by Colombia’s congress would have increased the tax burden for most Colombians, sparked nationwide anti-government protests in a country wracked by political turmoil. The marches swelled in numbers and lasted around six weeks as people from all walks of life protested the Duque administration’s violent suppression of protests which saw authorities linked to the deaths (Spanish) of 45 protestors. 

In response to the heavy-handed measures taken by authorities, road blockades sprung up around Colombia preventing the movement of goods. Those eventually forced onshore drillers to shutter production at several oilfields causing Colombia’s petroleum output to fall to its lowest point in over a decade. The mass demonstrations characterized a deep national crisis in Colombia where rising violence, poverty, and socioeconomic inequality is causing considerable turmoil. Those events coupled with Duque’s awkward attempts to reactivate the economy saw the hardline right-wing president’s popularity plummet with polls ranking him as the least popular Colombian president on record. These events have done considerable harm to the electoral fortunes of Duque’s Democratic Center party, founded by his mentor and former president Alvaro Uribe. While Duque is prevented from running for the presidency a second time, the prospective presidential candidates fielded by the Democratic Center are substantially trailing behind (Spanish) other presidential hopefuls in the polls.

The security crisis that emerged during Duque’s term is severely impacting Colombia’s economically crucial petroleum industry. Average June 2021 crude oil output fell to its lowest level in over a decade to average 694,151 barrels per day. That was primarily caused by onshore drillers being forced to shutter production at various oilfields because of the nationwide road blockades that occurred because of the anti-government marches. The surge in violence, civil dissent, and political turmoil does not bode well for Colombia’s economically crucial oil industry. Not only is it deterring foreign investment, adversely affecting operations, and preventing much-needed hydrocarbon exploration it will be a key determinant of which candidate wins the 2022 presidential election.

The collapse of Duque’s political capital is sharply impacting the popularity of his controversial Democratic Center party, which has been rocked by a range of scandals in recent years including allegations of witness tampering and vote buying.

This along with Duque’s mishandling of the economy and violent suppression of the protests as well as poorly timed tax hikes are all acting as a powerful electoral tailwind for other presidential hopefuls. Senator and former Marxist guerilla Gustavo Petro, who ran as a candidate against Duque in the 2018 presidential election, is benefiting tremendously from these events. Polls in Colombia show that Petro is the best-positioned candidate (Spanish) to win the 2022 presidential election because the former guerilla is expected to gain 30% of the intended vote. Petro’s closest rival is a centrist and former mayor of Colombia’s second largest city, Medellin, Sergio Fajardo who is precited to gain nearly 15% of intended votes. This means the controversial senator, who joined the M-19 socialist urban guerillas as a teenager, could ascend to Colombia’s top office in 2022. That could potentially be the final blow for Colombia’s beaten-down petroleum industry.

During the 2018 election, Petro campaigned on a platform opposed to Colombia’s reliance on the extraction of coal and hydrocarbons. He went as far as to blame the Andean country’s growing economic malaise caused by the dependence on commodity prices to drive economic growth and government revenues. Softer oil prices, since the August 2014 price collapse, have been a key reason for Bogota’s widening fiscal gap and slower economic growth. Petro also expressed his opposition (Spanish) to the introduction of hydraulic fracturing, known as fracking, to Colombia. It is this controversial method of unconventional crude oil and natural gas production that is the only means of reviving Colombia’s flagging petroleum industry.

A lack of major conventional oil and natural gas discoveries for over a decade has left Colombia with meager proven reserves of 1.8 billion barrels which is sufficient to only support oil production for another six years. That is a threat to the Andean country’s economy because crude oil is the largest export responsible for a third of all exports by value, generates over 3% of GDP, and earns nearly a fifth of fiscal revenue. Colombia is believed to hold considerable unconventional oil and natural gas potential. The La Luna geological formation, which is being targeted by fracking pilots in the Middle Magdalena Valley, is estimated to hold up to 4.6 billion barrels of recoverable oil resources and 14 trillion cubic feet of natural gas. Those numbers highlight that the exploitation of Colombia’s unconventional hydrocarbon resources would be a game-changer for its petroleum industry and oil-dependent economy.

Earlier this year Petro described (Spanish) extractive economic models, such as the one which exists in Colombia today for the exploitation of crude oil and coal, that rely on producing commodities suicide. He called for a transition from Colombia’s current focus on extracting crude oil to a different economic model focused on agribusiness, boosting the productivity of existing land and industrializing the crisis-riven nation. As part of that transition, coal mining contracts will not be renewed and the favorable terms established by Bogota for the oil industry, including taxes, royalties, and regulation, will eventually be wound down. Those factors underscore that a Petro victory will sharply impact Colombia’s economically crucial petroleum industry, ultimately leading to declining crude oil production and reserves.

By Matthew Smith for Oilprice.com

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