The COVID-19 pandemic has hit Colombia and its economy, including the vital energy sector, particularly hard. After implementing one of the world’s longest pandemic lockdowns during 2020, which took the economy to the brink of collapse, a recent sharp spike in COVID-19 cases has forced the reintroduction of lockdown measures across the Andean country’s major cities. It is the popular tourist city of Medellin and Colombia’s all-important principal port Barranquilla which are the worst affected, with strict curfews and restrictions on movement now established. Those measures will impact many sectors of the economy including the vital petroleum industry and weigh heavily on Colombia’s desperately required recovery. During 2020, the oil price crash and COVID-19 pandemic sharply impacted the Andean country’s energy sector causing the gross domestic product to contract by almost (Spanish) 7%, Colombia’s worst economic decline on record. The strife-torn country’s dependence on crude oil becomes apparent when, even in a year where prices plunged into negative territory and Brent averaged $41.96 per barrel, it still accounted for 17% of fiscal revenue, 28% of export earnings, and 3% of GDP. Before the late-2014 oil price collapse, the economic importance of crude oil was even greater. It generated over a fifth of government revenue, more than 60% of Colombia’s exports by value, and almost 5% of GDP. While a strong economic rebound for Colombia is projected for 2021, led by a recovering petroleum industry, with the IMF and central bank both forecasting GDP growth of over 5%, there are significant headwinds ahead.
The most pressing risk is the sharp uptick in COVID-19 cases and renewed lockdowns in Colombia’s major cities, which will weigh heavily on an already fragile economy. These will cause GDP growth, business activity, and tax revenue to decline placing greater pressure on a fiscally embattled national government. Bogota’s precarious finances are highlighted by Colombia’s finance ministry, in March 2021, raising the fiscal deficit to a startling 8.6% of GDP, its highest level ever and greater than the 7.8% deficit reported for 2020 when GDP contracted by nearly 7%. A cash-strapped Bogota urgently needs to reactivate the energy sector, by attracting additional investment, if the economy is to recover.
While the Duque administration and Colombia’s peak industry body the Colombian Petroleum Association (ACP – Spanish initials) expressed considerable optimism regarding the petroleum industry’s outlook the numbers present a different picture. In January 2021, the ACP projected an annual exploration and production investment of $3.1 billion to $3.45 billion. While at the bottom end that represents a 51% increase over 2020, it is still at least $580 million shy of the $4.03 billion invested during 2019. Weaker than required hydrocarbon production highlights that the oil industry has yet to return to pre-pandemic operations. For February 2021, Colombia pumped 745,769 barrels per day, a worrying 15% decrease compared to the equivalent period for 2020, and similarly reported production volumes since the pandemic hit the Andean country. More worrying is that activity in Colombia’s oil patch, as shown by the Baker Hughes rig count, is not rising at the rate required. By the end of March 2021, there were only 14 drill rigs operating in Colombia compared to almost double that number, 25 drill rigs, for the same period a year earlier.
Those numbers indicate that despite the Duque Administration implementing strategies aimed at boosting oil company investment, including tax relief through refunding or removing value-added tax, spending is falling short of the required levels. Rising fiscal pressures, combined with the declining economic activity caused by the latest round of lockdowns, will force Bogota to ease spending and potentially even the tax breaks and other incentives extended to the petroleum industry. Recently proposed tax reform, where the Duque administration is seeking to raise taxation revenue equivalent to 1.5% of GDP not only illustrates Bogota’s desperation but that many of the corporate tax benefits introduced since 2018 could be reduced or even removed. If that occurs it will deter further investment from foreign oil companies in what is already a volatile and highly uncertain operating environment.
Another emerging headwind is the growing skepticism over claims of a new commodity supercycle. Rising COVID-19 cases and renewed lockdowns around the world along with sluggish vaccine rollouts are weighing on the global economic outlook impacting metals and crude oil. According to Bloomberg, investors are dumping commodities, notably metals, and the contagion has spread to crude oil, making proclamations from a month ago that Brent is headed to $80 or even $100 a barrel appearing doubtful. Oil prices will be volatile over the remainder of 2021, especially now that OPEC Plus countries have flagged the gradual unwinding of production cuts, including Saudi Arabia’s one million barrels per day, which triggered the January 2021 oil price rally. That will weigh on crude oil prices, particularly if major no-OPEC producers such as the U.S. and Brazil continue to bolster petroleum production. Weaker Brent pricing poses a considerable risk for Colombia because of its high onshore breakeven prices, which are estimated to be up to $45 per barrel after tax. Most of the petroleum produced in Colombia is comprised of sour medium to heavy grade crude oils, which are becoming increasingly less popular since the introduction of IMO2020 and the ongoing global push to substantially reduce the sulfur content of fuels. There are less hazardous jurisdictions with significantly lower breakeven prices in South America, which produce lighter sweeter grades of crude oil, making them superior destinations for foreign energy companies. Heightened insecurity in major cities and particularly the rural regions where much of Colombia’s oilfields are located poses a significant risk for foreign oil producers. The Andean country has been wracked by civil conflict for most of the last 70 years, and there has been a sharp uptick in violence over the last two years under the Duque administration. Since 1 January 2021, there have been 28 massacres (Spanish), more than double the number for the same period in 2020, with 102 victims. The murder of social leaders, environmental activists, and labor leaders is a growing dilemma with 46 assassinations (Spanish) during that period. Those numbers alone, indicate that the Duque administration is incapable, despite prolific promises, to provide sufficient policing and security throughout much of Colombia. Illegal armed groups are taking advantage of Bogota’s weakness, which is being amplified by renewed pandemic lockdowns, to expand control of vital terrain for coca cropping, cocaine trafficking, and illegal gold mining.
It is only a matter of time before rising violence and growing insecurity impact the energy sector. Toward the end of 2020, the ACP issued a communique condemning multiple violent oilfield invasions in eastern Colombia by indigenous communities. Those are evidence not only of domestic security breaking down but of the oil industry’s deteriorating social license in Colombia. Energy infrastructure, notably oil pipelines and wellheads, remain popular targets for the various non-state armed groups operating in the country. In 33 years of operation the 2220,000 barrels per day Cano Limon-Covenas pipeline, alone, has suffered nearly (Spanish) 1,500 attacks, the latest being roughly a month ago. Pipelines are the only cost-effective means of transporting crude oil across Colombia’s rugged terrain to crucial ports that provide access to international energy markets. When bombed, operations are shuttered forcing oil companies to use more costly road transport as well as store the crude oil produced on-site. Once storage facilities are at capacity, producers are required to cease operations until the pipelines return to service. This risk was a key reason for Occidental Petroleum’s decision to sell its mature onshore Colombian oil assets last year to Carlyle Group for $825 million.
A range of local and global headwinds are buffeting Colombia’s economically crucial oil industry. Their impact is being magnified by the Andean country’s rapidly rising COVID-19 case count and renewed pandemic lockdowns in major cities as well as growing insecurity. It is becoming increasingly clear that the Duque administration, despite guarantees, is incapable of guaranteeing the security of many communities or industries outside of the major cities. The rising violence, notably in rural regions, will impact oil industry operations further magnifying the fallout from the pandemic. For these reasons, it will be some time before Colombia’s oil industry returns to a pre-pandemic tempo of operations, significantly endangering Bogota’s plans to re-open Colombia’s economy, bolster its deteriorating finances and return the country to growth.