Can Colombia Capitalize On Climbing Crude Prices?

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Home Energy Energy-General 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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Share Facebook Twitter Linkedin Reddit Premium Content Can Colombia Capitalize On Climbing Crude Prices? By Matthew Smith – Oct 16, 2021, 4:00 PM CDT Colombia had a tough year in 2020, with investment in its vital crude oil industry falling to 2016 lows The country is now struggling to achieve the rebound many had hoped for, with a slow recovery for both its oil and gas industry While its rig count is slowly climbing, violence and a lack of foreign investment are both major problems for the country Join Our Community Last year was extremely painful for Colombia’s economically crucial oil industry with Investment plunging to $2.05 billion, its lowest level since 2016, while petroleum production reached lows not seen for over a decade. That coupled with the fallout from the pandemic sharply impacted Colombia’s economy causing its gross domestic product to shrink nearly 7%, the worst performance of modern times. Despite the national government’s focus on reactivating the oil industry which is an essential element for returning the economy to growth, with it responsible for a third of exports and more than 3% of GDP, there are signs that operations are faltering. August 2021 crude oil production of 747,772 barrels per day (Spanish) was 2.3% higher than a month prior and 0.8% greater year over year but still less than the 882,831 barrels per day pumped during August 2019.

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

That output is well below the one million barrels of crude oil per day targeted by Bogota during the last oil boom, which was seen as the optimal output required to drive the desired level of economic growth. 

Crucial natural gas production for August 2021 also fell compared to a month prior dropping 5% to 1.061 million cubic feet per day, although it was 4% higher than a year earlier and 4% lower than the 1.1 million cubic feet per pumped during August 2019.

Source: Colombia Ministry of Mines and Energy.

For the eight months ending August 31, 2021, Colombia pumped an average of 732,234 barrels of oil per day, 1.1 million cubic feet of natural gas, and total hydrocarbon output of 915,145 barrels of oil equivalent. In the case of crude oil and total hydrocarbon output, those numbers are 6% and 5% lower than 2020 respectively, which is of considerable concern because last year was abnormal due to the impact of the pandemic.

Related: Is America Doomed To Replicate Europe’s Energy Crisis? Those numbers indicate that Colombia’s economically crucial petroleum industry is struggling to reactivate and reach pre-pandemic production levels. That is further evident when examining Colombia’s rig count, which is a credible proxy measure of activity in the Andean country’s oil industry. The latest numbers from Baker Hughes show that there were 21 active drill rigs in Colombia at the end of September 2021, which was one greater than a month prior and nine more than the equivalent period a year earlier but eight less than September 2019.

Source: Baker Hughes and U.S. EIA.

While the volume of active drill rigs is steadily growing, it is still significantly less than the number prior to the pandemic, indicating that the oil industry’s reactivation is not occurring as rapidly as desired.

A key reason for the industry’s muted recovery is the escalation in rural violence that has occurred since President Ivan Duque won the country’s top job in 2018 combined with three-month-long anti-government demonstrations earlier this year. Massacres, many of which occur in remote rural regions where there is little government presence, totaled 72 for the first nine months of 2021, six more than the 66 incidents reported for 2020 and double the 36 massacres recorded during 2019. Three-month-long anti-government protests, triggered by a clumsy attempt to hike taxes, saw blockades of major roads causing crude oil output to plunge to a multi-year low of 655,068 barrels (Spanish) per day.

Violence remains a persistent problem in many rural regions where Colombia’s oilfields are located, driven by conflict between illegal non-state armed groups seeking to control the lucrative cocaine trade. Some of Colombia’s most productive oilfields and a large portion of the strife-torn country’s prospective petroleum resources are in regions that are hotspots for coca cropping, drug trafficking, and violence between criminal groups. That is being amplified by the political, economic, and humanitarian crisis in Venezuela , which with the state rapidly unraveling has created ideal conditions for various guerilla and criminal groups to expand their operations. There are signs that Colombia’s petroleum industry’s social license is deteriorating. Aside from the nationwide anti-government demonstrations earlier this year, there has been a spate of incidents where local communities have blockaded and even invaded oilfields, forcing operations to be shut-in. Heightened conflict along with rising security and geopolitical risk is a significant deterrent to investment by foreign energy companies. Those risks are being exacerbated by the uncertainty created by the growing possibility leftist senator Gustavo Petro could win the 2022 presidential election. The senator has made it clear that he is opposed to exploiting commodities to sustain Colombia’s economic growth and will move to shut down coal mining while gradually winding down the oil industry.

Related: Biden Consults U.S. Oil Industry About Soaring Gasoline Prices

Diminished investment in onshore exploration and production activities is weighing on Colombia’s ability to boost its proven crude oil reserves, which at 1.8 billion barrels will only last six years at the current rate of production. A similar crisis is building concerning Colombia’s proven natural gas reserves which at 2.9 trillion cubic feet will only last just under eight years. When it is considered that petroleum is Colombia’s largest export, accounting for nearly a third of all exports by value for the first eight months of 2021 and a key source of fiscal revenue, proven oil reserves need to be urgently expanded. This will only occur if there is a significant increase in investment from foreign energy companies in Colombia’s beleaguered but economically crucial hydrocarbon sector.

The energy ministry is promoting foreign energy investment in offshore Colombia, where there are believed to be significant oil and natural gas resources waiting to be discovered without the risks faced by onshore operations. Anadarko Colombia, a subsidiary of Occidental Petroleum, earlier this month signed exploration and production contracts for four offshore blocks totaling 3.9 million acres in the Sinu and Guajira offshore basins. The blocks, composed of COL-1, COL-2, COL-6 and COL-7, were previously being assessed under technical evaluation agreements. It is anticipated that Occidental, which in October 2020 sold its onshore Colombian oil assets , will invest $1.4 billion exploring and developing the blocks. Colombia chose to postpone its latest oil and natural gas bidding round, pushing back the deadline for expressions of interest to 15 October from 30 September 2021. Bogota made this decision with an eye to drumming up additional interest because of higher crude oil prices with the international Brent benchmark selling for $84 per barrel, representing a notable 67% gain since the start of 2021.

By Matthew Smith for Oilprice.com

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