Last year was a tough one for Colombia’s burgeoning oil industry. A combination of weaker oil, the latest price collapse, deteriorating security and a lack of investment have hit the Andean nation’s single largest export earner hard. The latest price collapse which sees the international benchmark Brent trading at around $57 a barrel even after the latest rally, is exacerbating the poor outlook for Colombia’s all-important petroleum sector.
While November 2018 oil production shot-up by 3.8 percent year over year to 883,000 barrels daily, its highest level since June 2016, it is still roughly 15 percent lower than the million plus barrels daily being produced before oil prices collapsed in August 2014.
Bogota is focused on bolstering national oil output to one million plus barrels daily, achieving it briefly between 2013 to 2015, and it is easy to understand why. Prior to the oil price collapse according to data from Dane, the national statistical agency, Colombia’s petroleum industry was responsible for generating a fifth of government fiscal revenues, 5 percent of gross domestic product (GDP) and well over half of all export income.
The steady deterioration in oil production has precipitated considerable financial pressures for the government while causing the petroleum industry’s contribution to GDP to decline to around 4 percent. This has also caused GDP growth to plunge, falling to 1.8 percent in 2017 its lowest level since the fallout from the global financial crisis peaked in 2009. For 2018 it is estimated that GDP will expand by 2.7 percent and then by an ambitious estimate of 3.5 percent for 2019 which appears unachievable because of oil’s latest weakness.
Sharply weaker prices and lower production have also strained fiscal revenues, triggering a 2018 budget deficit of 3.1 percent of GDP placing considerable financial pressure on Bogota. The government anticipates that because of firmer oil prices and austerity measures the deficit will shrink to around 2.4 percent of GDP. To achieve this reduction a massive budget blackhole including an $8 billion shortfall in spending on critical social programs has emerged. This is forcing Bogota to slash up to 10 percent of spending on general items to prevent the deficit from worsening in an already fiscally challenging economic environment. More alarming, after considering oil’s latest weakness is that those forecasts are reliant on Brent averaging around $70 a barrel which is well above the current spot price of $59 per barrel.
The sharp decline in oil output and the ensuing economic fallout can be firmly blamed on a lack of investment in the economically crucial industry. During 2018 energy companies invested $4.3 billion, significantly less than at the peak of the last oil boom in 2013. Most of that capital was directed to production related activities with only a fifth going to exploration in a country which is heavily underexplored for the presence of hydrocarbons and has had no major oil or natural gas discoveries since the early 1990s.
For 2019, the Colombian Petroleum Association anticipates investment of around $5 billion representing a 16 percent year over year increase. Most of that capital will be directed to production rather than desperately needed exploration in a country where proven oil reserves have plummeted to a mere 1.8 billion barrels, representing 36 percent decline compared to a decade earlier.
The lack of exploration and development activity caused by the lack of investment is illustrated by the low number of active rigs in Colombia. For November 2018 there were 26 operational rigs, three less than a month earlier and 15 less than November 2013 when Brent averaged over $100 per barrel.
The impact of weaker oil prices on Colombia’s petroleum industry is worsened by a deteriorating internal security situation. Despite the ground breaking 2016 peace deal, with the largest group in the nation’s long running civil war the FARC demobilizing, attacks on critical energy infrastructure continue. The last remaining major leftist guerilla group the ELN has stepped up its assaults on oil pipelines since peace talks with the government came to an abrupt halt in September 2018. The latest was a bombing of the Cano Limon-Covenas pipeline earlier this month.
The volume of FARC dissidents who refused to demobilize has caught the government and security forces by surprise. There has also been influx of armed groups into the void left by the FARC in many remote communities which has led to a notable uptick in violence, particularly in areas where oil companies are operating. That is acting as a further deterrent to foreign investment in Colombia’s crucial oil industry.
That lack of investment is impacting Colombia’s oil reserves which can only sustain around another five-years of production at the current level of output. Any moves to bolster production, especially to compensate for sharply weaker oil prices and boost fiscal revenues, will reduce the lifespan of Colombia’s upstream oil industry illustrating the dire economic conundrum facing its oil dependent economy.
Each of these risks has triggered a sense of urgency in Bogota because of an already fragile economy’s critical dependence on oil. It has triggered a range of legislative reforms aimed at attracting investment, notably in exploration activities, in an urgent attempt to boost oil reserves and production. Key among the changes being considered is the introduction of fracking with the Middle Magdalena Valley being the initial region targeted. It is here where the La Luna formation is located, which some analysts have likened to the prolific Eagle Ford shale. The local petroleum association and state controlled integrated oil company Ecopetrol believe that this could alleviate Colombia’s woes by adding up to 7 billion barrels of oil reserves.
Business friendly president Duque plans to introduce corporate tax reforms, clamp down on corruption and reduce oil production and transportation costs will boost the attractiveness of investing in Colombia’s petroleum sector. Furthermore, an October 2018 ruling by Colombia’s Constitutional Court, which effectively prevents local referendums from banning energy projects, has further bolstered certainty for foreign oil companies seeking to invest in Colombia.
By Matthew Smith for Oilprice.com
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