Colombia: Energy insecurity on the horizon

 

Petro is about to plunge Colombia into a scenario of energy insecurity and the impact on the economy will be terrible. They already have disinvestment problems upstream and downstream, but what Petro is proposing as an energy policy, especially in hydrocarbons, will leave Colombia and its economy at the mercy of a high energy dependence from abroad.

The Situation

Colombia's economy is heavily dependent on hydrocarbon revenues. Oil and gas exports now account for about 10% of the country's GDP and 20% of its exports. If Petro takes on these numbers, he should leave his sustainability theme for speeches and let Colombia keep exploring (as long as the guerrillas allow, of course). Colombia's next presidential election is scheduled for May 31, 2026. Much could change in the intervening two years. It is possible that economic pressures and waning public support could force a rethink of energy policy or even cause damage, given the speed with which reserves could be depleted or a sudden spike in oil prices.

Colombia's hydrocarbons agency, the ANH, estimates national oil reserves at only 7.5 years and gas self-sufficiency at another 7.2 years. Oil reserves are stagnating, and proven gas reserves have fallen from 3.2 trillion cubic feet to 2.8 trillion cubic feet.

What is happening?

The Petro administration's decision to close the door on new exploration contracts will affect domestic oil and gas production in 2024, testing the country's long-term energy security and its ability to make up for lost tax revenues.

Ending Colombia's dependence on hydrocarbon exports has been at the heart of Petro's policy since he took office, reflecting a strategic shift toward energy transition influenced by global trends and environmental concerns. In this sense, he is positioning himself to keep a young constituency inside and outside the country politically connected, while at the same time trying to capture U.S. resources for his government. Old Colombian tactic of adapting the agenda to ask for money from the United States (drug trafficking, guerrillas, terrorists, Venezuelan immigration and now the climate challenge).

There is also fiscal greed behind this. When Lula tries to promote exploration and development hand in hand with Petrobras, Petro goes for the jugular of Ecopetrol. His government introduced fiscal measures to discourage extractive industries, such as a windfall profits tax and a policy of non-deductibility of royalties. The latter was ultimately declared unconstitutional by Colombia's Constitutional Court last year. As in other countries around the world, climate change is being used to camouflage fiscal pressures in other ways.

To allay fears of energy insecurity, the president of Ecopetrol usually says that existing contracts are enough and will not be enough. He even counts on Venezuela as a supplier. A terrible mistake. Venezuela will not be able to be a reliable supplier for a long time.

The factor of recovering Colombia's reserves is very important if they do not want to become importers of crude oil and gas again. Especially in times of energy crisis. The current contracts will not be enough for this recovery and the official discourse, no different from the global one, essentially points out that what has already been discovered will be enough to reach the final phase of the energy transition. The bad news is that it will not be enough. On the contrary, and worse. If Colombia does not strengthen its oil reserves through exploration and development, not only will it become an importer, but when prices rise to $150 per barrel in a few years due to supply disruptions, its balance of payments will be shattered, and it will lose the opportunity to charge a large amount of money for ceasing to be an exporter. In short, Petro's policy is 100% negative for the country.

The Future

Projections for 2024 already point to a decline in domestic production. The decision not to award new exploration contracts could see oil production fall from an average of 790,000 b/d in 2023 to 770,000 b/d at best. Service companies are seeing a reduction in activity in the coming months, which could lead to lower production levels in 2024. Ecopetrol has pledged to maintain investment levels of up to $6.5 billion in 2024, aiming for stable production of up to 731,000 b/d, but some estimates point to a 45% reduction in exploration and production investment. In the medium term, the lack of new exploration licenses has led the government to become more flexible on gas exploration in the Caribbean, with the offshore sector being the focus of upstream activity. However, apart from offshore, it may be difficult to see a significant increase in reserves from the small or mature assets that currently exist in the country. Ecopetrol is involved in 10 exploration contracts in the offshore Caribbean, which are crucial for the evaluation of discoveries that could increase Colombia's gas reserves.

Petro's government will slow down this process, leaving Colombia in a situation of energy insecurity and a severe economic crisis. Since he is secure in his policies, it is possible that his impact will be greater if he manages to maintain his influence over the national government through intermediary leaderships. If he loses the elections, we can at least expect a return to exploratory activity and with it, albeit with a delay, the struggle to regain energy security, while at the same time moving towards energy transition from the point of view of global energy technological innovation and its economic profitability.