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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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Not Even $100 Oil Can Rescue Colombia's Ailing Oil Industry

  • Colombia’s oil industry was hit particularly hard by the COVID-19 pandemic.
  • The country’s oil-dependent economy has taken a major beating over the past two years.
  • The outlook for Colombia’s oil industry is looking increasingly bleak.

The COVID-19 pandemic hit Latin America particularly hard. Some countries in the region, aside from experiencing high mortality rates and case counts, saw their fiscally vulnerable economies and extractive industries devastated by the fallout from the disease. Colombia’s oil-dependent economy and hydrocarbon sector were heavily hit. Not only did the strife-torn country’s gross domestic production contract by 7% during 2020 but petroleum production plunged to under 800,000 barrels per day for the first time since 2010. Colombia only pumped an average of 781,300 barrels daily for 2020, which fell to 735,378 barrels per day during 2021. There are signs that the Andean country’s petroleum industry is still struggling to recover despite the end of the pandemic and soaring crude oil prices Colombia’s petroleum output for March 2022 averaged 751,407 barrels per day. Despite this being 1.6% higher month over month and 0.90% greater than the equivalent period a year earlier, the number was still significantly less than the 857,113 barrels pumped per day for the equivalent period in 2020, which was the last month of industry operations before the pandemic. This post-pandemic decline in petroleum production is occurring despite strong economic growth, highlighted by Colombia’s first quarter 2022 GDP expanding by an impressive 8.5% (Spanish), and a surge in industry investment. 

According to the Andean country’s peak industry body, the Colombia Petroleum Association, 2022 oil industry investment will soar by 42% year over year to $4.4 billion, which, importantly, is more than double the $2.05 billion spent during 2020. A primary reason for Colombia’s crude oil output failing to grow as rapidly as expected and return to pre-pandemic levels is rising civil unrest and growing rural insecurity coupled with the oil industry’s deteriorating social license. Nationwide protests from late April 2021 to June 2021 sharply impacted exploration and development activities thereby weighing on production. That is exacerbated by heightened insecurity in many of Colombia’s oil rich regions which are hotspots for various illegal armed groups engaged in a variety of illicit activities, primarily coca cropping and cocaine trafficking.

Even Colombia’s natural gas output is struggling to grow despite the government’s focus on boosting investment and production. For March 2022, the Andean country pumped on average 1.078 million cubic feet of natural gas per day which was 0.05% less than a month earlier and 1.16% lower year over year. That production was, however, 2% higher than the 1.057 million cubic feet pf natural gas pumped per day for March 2020, indicating that Bogota’s focus on extracting greater quantities of natural gas to meet burgeoning domestic demand is having some positive effect. Blunting emerging natural gas shortages became a priority for Bogota after Colombia was forced to start importing liquified natural gas in December 2017 because of falling domestic production and rising demand, which sparked fears of an energy crisis. 

Related: Russia Sees Extra $6.4 Billion Oil Revenue In June As Prices Rally

Natural gas production remains under pressure because of a lack of major discoveries and mature offshore fields with rapidly rising decline rates. Proven natural gas reserves stand at 3.164 billion cubic feet, 7% higher than a year earlier, which is sufficient for another 8 years at the current rate of production compared to 7.7 years at the end of 2020. The situation is even worse for Colombia’s proven crude oil reserves. At the end of 2021 proven reserves, despite rising by 12% year over year to just over 2 billion barrels, were only sufficient to support 7.6 years of production at the current output. When it is considered that Colombia’s proven oil reserves will only last another 8 years, and petroleum is the Andean country’s largest export by value there is considerable pressure to boost those reserves. This is proving to be more difficult than believed a decade ago when there were a swath of minor oil discoveries and the petroleum industry had successfully expanded output to over 1 million barrels per day. 

A significant headwind facing Colombia’s hydrocarbon sector is that there have been no major oil or natural gas discoveries, either onshore or offshore, since the 1990s. That along with aging major onshore oilfields and offshore natural gas fields, where decline rates are surging, indicates that the strife-torn Andean country lacks the hydrocarbon potential of its neighbors like Venezuela and Ecuador. Even South America’s new kid on the block Guyana, which only began petroleum production in December 2019, has an estimated 11 billion barrels of recoverable oil resources. Those numbers signal that time is indeed running out for Colombia’s oil industry. At the current rate of production, which averaged 743,599 barrels daily since the start of 2022, proven oil reserves of 2.039 billion barrels are only sufficient for another 7.5 years. If Colombia’s oil output returns to pre-pandemic volumes of around 880,000 barrels per day the life expectancy of those reserves fall to a mere 6 years. Those numbers underscore the urgency with which Colombia needs to expand its proven oil reserves. 

Hydraulic fracturing has long been considered a solution in the crisis-driven South American country which the U.S. Energy Information Administration estimates has technically recoverable shale oil resources of 6.8 billion barrels. If fracking is successfully implemented in Colombia and that turns out to be correct it will resolve the country’s critical shortage of crude oil reserves. There is, however, substantial opposition to fracking in Colombia with environmental concerns driving community resistance to the introduction of the controversial hydrocarbon extraction technique. Colombia’s highest administrative tribunal the State Council placed a moratorium on fracking in 2018 which it upheld in 2019, although pilot projects using the controversial technique are allowed. It was on that basis Colombia’s national oil company Ecopetrol, along with partner ExxonMobil, started two fracking pilot projects in the Middle Magdalena Valley called Kale and Platero. In late April 2022, a judge from the First Court of Barrancabermeja suspended Kale’s environmental license as well as the licensing process for Platero. 

While Ecopetrol is pressing ahead with the projects and appealing the court’s ruling, this presents yet another barrier to allowing fracking in Colombia increasing the likelihood the controversial hydrocarbon extraction technique will not be allowed. Presidential candidate leftist senator Gustavo Petro and wildcard rightwing populist Rodolfo Hernandez, who go head-to-head in a June 2022 run-off vote for Colombia’s presidency, have both voiced opposition to fracking. Those developments do not bode well for Colombia being able to resolve the shortage of crude oil reserves and the fiscal crisis this could trigger for the country’s oil-dependent economy.

By Matthew Smith for Oilprice.com

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