• 3 minutes e-car sales collapse
  • 6 minutes America Is Exceptional in Its Political Divide
  • 11 minutes Perovskites, a ‘dirt cheap’ alternative to silicon, just got a lot more efficient
  • 3 hours How Far Have We Really Gotten With Alternative Energy
  • 7 hours Bad news for e-cars keeps coming
  • 12 days What fool thought this was a good idea...
  • 10 days A question...
  • 9 hours The U.S. Is Determined to Revolutionize Its Microchip Industry
  • 15 days Why does this keep coming up? (The Renewable Energy Land Rush Could Threaten Food Security)
  • 15 days They pay YOU to TAKE Natural Gas
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…

More Info

Premium Content

Can Colombia’s Oil Industry Survive Petro’s Revolutionary Reforms?

  • Colombia's economically crucial oil industry faces an uncertain future under President Gustavo Petro, who plans to stop awarding new contracts for hydrocarbon exploration and ban hydraulic fracturing.
  • The industry's primary challenge is the lack of substantial oil and natural gas reserves, with existing ones only predicted to last another 7.5 years for oil and just over seven years for gas.
  • While oil extraction is a significant contributor to Colombia's economy, its reliance on this industry makes it vulnerable to financial turmoil.

The outlook for Colombia’s economically crucial oil industry is bleak. Not only has it failed to recover from the pandemic and return to a pre-2020 tempo of operations, but the July 2022 presidential electoral victory of former leftist guerilla Gustavo Petro sparked considerable concern over the oil industry’s future. Colombia’s first-ever left-wing president, who took office on August 7, 2023, plans to end awarding new contracts for hydrocarbon exploration and ban hydraulic fracturing. Those propositions form an important part of Petro’s energy transition and ending Colombia’s overreliance on hydrocarbons. While this policy is attracting substantial negative attention from various industry participants and financial markets, there are many credible reasons to decrease Colombia’s dependence on oil extraction.

The primary headwind impacting Colombia’s hydrocarbon sector is a chronic lack of oil and natural gas reserves. Indeed, despite the considerable hype surrounding the Andean country’s hydrocarbon potential, there are signs Colombia does not share the oil resources of its regional neighbors like Brazil, Ecuador and Venezuela. At the end of 2022, it was determined that Colombia has meager proven hydrocarbon reserves (Spanish) of 2 billion barrels of oil and 2.8 trillion cubic feet of natural gas. Those proven oil reserves are only sufficient to last another 7.5 years at the current rate of production, while the gas reserves will sustain just over seven years of production. 

Of considerable concern is that Colombia’s reserve growth over the last two decades has come from minor oil discoveries and the adoption of improved recovery techniques at mature oilfields rather than world-class finds. A range of methods is being employed to improve oil recovery from Colombia’s aging mature onshore oil fields. The most common technique is waterflood or injection, which occurs after the primary recovery phase has ended. Waterflood is used to boost reservoir pressure making it more efficient and cost-effective to lift the crude oil contained within.

Once secondary recovery no longer proves effective, then enhanced or tertiary recovery is employed. This typically consists of natural gas, nitrogen, carbon dioxide or chemical injection to bolster reservoir pressure and the oil’s viscosity, making it easier to extract. A popular tertiary recovery technique employed in Colombia is natural gas injection. The gas associated with oil production is captured by drillers and then reinjected in wells to bolster reservoir pressure and enhance recovery. This is one of the reasons for the Andean country’s constrained natural gas supply. Tertiary recovery is costly with their widespread deployment, as is occurring in Colombia, leading to high breakeven costs for each barrel of oil produced. It is estimated that Colombia’s average breakeven price is around $45. That was before Petro’s November 2022 tax hikes added a scalable levy that increases taxes payable as Brent prices rise and removed royalties as an income tax deduction, causing breakeven prices to increase.

Improved recovery techniques are widely used in Colombia, where 80% of the Andean country’s oil output is sourced from aging mature oilfields with high decline rates and have passed their peak production. According to Energy Minister Irene Velez (Spanish), those oilfields, which are between 30 years to 100 years old, are still pumping significant commercial volumes of crude despite their age because of the use of improved recovery methods. It is the prolific Rubiales field, which commenced operations in 1988 and hit peak production a decade ago, that is Colombia’s most important oilfield pumping around 100,000 barrels per day. A range of improved recovery techniques is employed at the Rubiales field, which is operated by the national oil company Ecopetrol, to counter rising decline rates and bolster economically crucial oil production.

Reserve growth through the employment of enhanced recovery techniques is unreliable and unsustainable, with a limited lifespan. This means for Colombia’s petroleum industry to have a sustainable long-term future then, hydrocarbon reserves must be boosted through major hydrocarbon discoveries. It is Colombia’s lack of exploration success since the 1990s when the country saw its last world-class oil discovery, which is responsible for the lack of hydrocarbon reserves and weighing heavily on the petroleum industry's outlook.

For these reasons, Colombia’s considerable economic dependence on oil production despite lacking significant oil reserves, like Venezuela’s 303.5 billion barrels or Brazil’s nearly 13 billion barrels, leaves the country vulnerable to considerable turmoil. Data from Colombia’s government statistics agency DANE shows (Spanish) for the first four months of 2023, petroleum generated $4.8 billion of export income, making it the largest export by value and around 3% of gross domestic product (Spanish). Petroleum production is an important source of taxation income for a financially strained Bogota. In 2022, the oil industry contributed (Spanish) $4.5 billion in taxes or around 8% of the total tax revenue received by Colombia’s Tax and Customs National Authority (DIAN – Spanish initials) for that year. It is estimated that oil industry tax revenue combined with dividends received from state-controlled Ecopetrol is responsible for nearly a fifth of Bogota’s fiscal income.

Taxes paid by Colombia’s oil industry for 2023 are expected to soar because of the oil industry tax hikes introduced by Petro, which were approved by Congress in November 2022. Colombia’s Autonomous Committee of the Fiscal Rule (CARF – Spanish initials) estimates that 2023 taxation revenue from the petroleum industry will rise by a whopping 72.5%, compared to a year earlier, to $7.7 billion. That will give government coffers a crucial boost at a time when the Petro administration is seeking to significantly increase spending on social programs in an effort to alleviate the sharp spike in poverty since 2022, with 39% of Colombians living below the poverty line.

While those numbers emphasize how important oil extraction is to Colombia’s economy and government revenue, they also underscore the Andean country’s vulnerability to financial turmoil when oil reserves are no longer sufficient to support production. That highlights why Bogota must wean Colombia off its economic dependence on fossil fuels. If changes to the economic mix are not made soon, Colombia’s economy and its currency, the peso, which is closely correlated to the value of oil, are at risk as reserves and production decline. For that reason, Petro’s controversial plan to cease awarding new contracts for hydrocarbon exploration may be the solution if other economic sectors can fill the gap left by a shrinking oil industry. 

By Matthew Smith for Oilprice.com


More Top Reads From Oilprice.com:

Download The Free Oilprice App Today

Back to homepage

Leave a comment
  • George Doolittle on June 22 2023 said:
    Columbia is a huge coal producer which de facto makes Columbia a huge oil producer as well. All of these leftist clowns have now annihilated Argentina (yet again) so hard to be bullish on any of Latin America excepting Guyana at the moment #space_launch

Leave a comment

EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
Oilprice - The No. 1 Source for Oil & Energy News