The President of Colombia, Gustavo Petro, came to power in 2022 with great promises
of change in practically all political, social and economic sectors of the country.
You could say that the new president set out to reform Colombia from top to bottom.
One of these major changes is, precisely, its energy transition plan, which, surprising
as it may seem, involves an abrupt halt to any new oil exploration and exploitation contracts
in Colombian territory.
In other words, Colombia could become one of the main oil powers to veto this industry.
If not the first of all.
And, keep in mind we are talking about one of the most important economic sectors, the
one that contributes the most money to the public coffers and the top one in terms of
exports.
The question is, what could all this mean for Colombia to break with the oil industry?
Why are they doing it?
What are they going to sacrifice?
Does such a measure even make sense?
Well, this video will answer all these questions.
Let's get started.
With proven reserves of nearly 2 billion barrels, Colombia is among the 35 countries with the
largest reserves of black gold in the world.
Specifically, there are 23 geological zones in this country, with various basins, of which
only nine produce hydrocarbons: seven produce oil and two produce gas.
Of the seven crude oil producing basins, only three account for more than 90% of production.
These are the Eastern Plains, Middle Valley and Upper Magdalena Valley basins.
In total, of the 20 departmental units that currently extract oil, only one extracts light
oil, while the rest produce medium or heavy crude.
These would be roughly the details.
As you can see, the Colombian oil profile is not exactly that of a country like Saudi
Arabia, but it does have potential.
Although, not surprisingly, they had a hard time making the most of it.
Stay tuned because we’re going back to where this whole story begins.
(T1.
THE FIRST STEPS: AN ALLERGY TO PROFITABILITY)
The first oil well in the history of Colombia was drilled in 1918, in the Cira-Infantas
field, where barely 2,000 barrels per day were produced.
Three years later, the country's first refinery was built in Barrancabermeja and the first
oil pipeline was constructed in Mamonal, near Cartagena.
And this is how the Colombian oil industry was launched more than 100 years ago.
However, for a long time no profit was made from this industry.
In 1951, seeking to turn this situation around, the government of Laureano Gómez nationalized
and granted several oil concessions to the newly formed Empresa Colombiana de Petróleos,
Ecopetrol, a public company created so that the Colombian State could actively participate
and promote this industry.
And so, although giants of those years such as Texaco and Shell began to take an interest
in Colombian oil, the exploration and extraction conditions were totally disadvantageous for
them.
The presence of Ecopetrol was the main stumbling block.
The government only had eyes for it, and this entity was not only a company that competed
in exploration and production, but also acted as the public body that regulated this sector.
So in one way or another, all private companies were obliged to partner with their virtual
competitor on unattractive terms.
Therefore, throughout almost the entire 20th century, various legal regimes were tried
and tested, which, to tell the truth, seemed to go from bad to worse.
For example, between 1974 and 1989, a regime called "50/50 Contract" operated, which had
the mission of promoting investment.
However, under this framework, the private partner assumed the cost and risk of the exploration
investment, which had to be completed within a maximum period of three years,
However, when production began, the remaining profit was distributed as follows:
20% for the State in royalties, 40% for Ecopetrol, and 40% for the private investor.
Of course, the private investor then had to pay the corresponding profit taxes.
The result?
Between 85% and 90% of the exploitation profits went to the State.
The private investor barely received the rest, which, not surprisingly, was very unattractive.
In 1987 an attempt was made to improve this regulation, although attempt is a bit of an
overstatement: the only thing that was changed was that ECOPETROL took a higher participation
in the cost of exploration.
But it did not change the model in general terms.
Therefore, in 1989 a new regime was implemented, which would remain in force until 1994.
Then, the figure known as the "Production Sharing Contract" was created.
In this scheme, the private partner assumed the exploratory cost and risk, until the discovery
was made.
At that time Ecopetrol would participate as follows:
As you can see, the more profitable the discovered well was, the lower the proportion of profits
was left for the investor.
If this model attracted a flood of investment, it must have done so far from Colombian oil.
Because, in fact, a field with barely 60 million barrels was already scarcely profitable.
Of course, this model did not work, so in 1995 a new formula was launched, called the
"R FACTOR".
In this case, production distribution was based on the profitability of the oil field
without taking into account the magnitude of the reserves.
However, it was not at all easy to calculate the expected revenues and profits, which produced
a lot of uncertainty.
An uncertainty that, not surprisingly, scared off investors.
So now I'm sure you understand why Colombia's oil wealth was barely exploited during practically
the entire 20th century.
And the main interested party in the growth of production was the State itself, which
took most of the benefits in terms of taxes and royalties.
So I'm sure, I'm certain many of you have the solution in your head, it seems pretty
obvious.
However, it took a long time arriving.
Listen up.
TAKE-OFF)
All was not lost.
During Andrés Pastrana's presidency, ECOPETROL made a very important move.
During what is known as the Round 2000 call, the State made a series of tenders to explore
and produce in projects in which the state-owned company would only have a 30% share.
Of course, this caught the attention of the world's oil majors.
To give you an idea, this initiative culminated in the awarding of 13 projects, with an initial
investment of more than US$600 million.
However, the big change for the Colombian oil sector was yet to come: In 2003, then
President Alvaro Uribe Velez ordered the restructuring of the sector, going straight to the root
of the problem.
The Colombian government of the time created the National Hydrocarbons Agency, so that
Ecopetrol lost its regulatory powers.
And so, the public company would be completely focused on exploration, production, transportation,
refining and commercialization of hydrocarbons.
In other words, it became an oil company in the usual sense.
At the same time, the government implemented a new royalty, tax and fee contract.
The new model mimicked international standards and limited the State's total share to a range
of 50-60% of extracted profits.
And do you know what happened?
From that moment on, production skyrocketed, and with it, so did exports.
Suddenly, the Colombian oil sector came to life.
Take a look.
And so, while Venezuelan production was falling, Colombia was gaining more and more presence
in Latin America's oil sector.
The production levels reached would have been completely unimaginable just a few years earlier.
Of course, there were also problems.
The drop in oil prices in 2015 reduced investment in this sector by about 30% and the drilling
of new wells by more than 80%.
The government of Juan Manuel Santos then needed to propose a tax reform to contain
the drop in tax revenues generated by oil.
Let's just say that the Colombian treasury had become very dependent on the new public
revenues brought in by the black gold.
But, let's not get sidetracked.
In spite of everything, the sector consolidated and hydrocarbon exports continued to gain
strength among Colombian exports.
Today this industry is responsible for slightly more than one third of all Colombian exports.
In a way, we are talking about a kind of oil miracle that contributed to changing the country.
In just a decade, between 2003 and 2013, the country went from almost having to import
crude oil to becoming a major supplier to countries such as the United States.
And do you know what?
Right now, with the lack of investment that for years has been happening in the international
oil industry and the Russian invasion of Ukraine have brought forth the possibility of Colombia
experiencing a new golden era of hydrocarbons.
However, the new president has said no way.
That oil exploitation has no place in Colombia.
Listen up.
PETRO YES, "LEO" NO)
At the end of 2021, in the midst of Colombia's presidential election campaign, the future
of the oil industry was a relevant topic on the candidates' economic agenda.
The most forceful position was that of Gustavo Petro, who promised nothing less than the
cessation of oil concessions.
Check it out.
Well, this candidate ultimately became the president-elect of the Republic of Colombia
on 19 June 2022.
And in November of 2022, just one year after his promise, he launched into an even more
daring speech at the UN Climate Change Conference.
Check it out.
But wait, because the real bombshell came on 19 January 2023, when Irene Velez, Minister
of Mines and Energy, confirmed that Bogota will no longer sign new oil exploration contracts:
Naturally, this has generated a lot of fear, not only in the oil sector, but in the entire
industry and practically the entire Colombian economy: will this country lose one of its
most important sources of dollars and public income?
Is security of supply at risk?
You see, Colombia currently holds 330 exploration and exploitation contracts, which will continue
to produce hydrocarbons for both the domestic market and for export for approximately ten
years.
The question is, what happens after that?
Well, this is what President Petro says:
C1("According to International Energy Agency projections, we have five years of coal exports
and 10 years of oil exports (...) The transition has to do with two aspects.
One, to ensure that the foreign currency we lose from coal and oil exports is replaced
to the same extent by exports of clean energy and tourism, mainly.
Two, (getting) our own internal consumption of coal and oil to be replaced by electrifying
transportation, changing our energy matrix and decarbonizing production."
– Gustavo Petro, 21 January 2023)
C2("There will be a strict energy transition, but maintaining oil exports, at levels that
will allow us to have the foreign currency the country needs (...) I would say that the
oil transition will last about 15 years".
– José Antonio Ocampo, Minister of Finance and Public Credit of Colombia)
In other words, he seems to have more or less a plan: to force the energy transition.
The question is, will it be achieved in ten years?
Is it worth losing billions of dollars of potential revenue in a country that is still
very poor and has so many shortcomings in fundamental areas such as infrastructure?
At the end of the day, the data are very clear.
They are compelling.
C3("The hydrocarbon industry is fundamental for the country's economic stability, national
financing and that of the departments and municipalities.
Nearly 40% of exports depend on this sector, 20% of the Nation's fiscal income and 76%
of royalties.
Diversifying the export basket must be an objective, but not at the cost of withering
the industry."
Communiqué of the Colombian Oil and Gas Association, 20 January 2023)
It seems VisualPolitik viewers, the controversy and the fear of losing billions of dollars
in foreign investment and public revenues was such that Petro himself seems to have
backtracked.
At least, partially.
Yes, he does continue to target the hydrocarbon industry and possibly the granting of new
exploration and production licenses will plummet, but at least the energy transition plan presented
includes new concessions.
Be that as it may, the future of this industry in Colombia does not look particularly bright.
And the question is, is the backtracking by President Petro enough?
What impact could it have for Colombia if this president fulfills his plans?
Well...
Stay tuned.
(T4.
FROM OIL MIRACLE TO OIL DEBACLE?)
It seems that words always count, but a president's statements usually count much more.
With his rhetoric, Petro has burned the confidence of a sector that was going full steam ahead.
In fact, in 2022, investment in exploration reached its best record since 2014.
It is now expected that in 2023 the trend will turn around and investment will fall
again.
And we are talking about concessions that have already been signed.
And of course, if Petro's plans are consolidated, then the problems could go far beyond the
oil companies, the inflow of foreign currency into the country and even the government's
own revenues.
We are talking about thousands and thousands of jobs, we are talking about the fact that
fuel prices could become more expensive, which would harm the income of millions of families.
And that's not even the end of it.
The cessation of oil production in 10 to 15 years could also bring with it another major
problem: the questioning of the security of energy supply.
Why?
Because the Colombian electricity system is highly dependent on hydroelectric generation.
To give you an idea, during normal hydrological periods, hydroelectric generation can supply
more than three quarters of all demand.
However, when phenomena such as El Niño and the resulting drought periods occur, then
the country has a problem.
So far, hydrocarbons have solved the problem, but if they run out, things could become very
complicated.
Be that as it may, as you can see, Colombia seems willing to sacrifice tens of billions
of dollars and thousands of jobs to fight global warming.
And guess what?
Now it’s your turn for some questions:
What do you think of Colombia's plan and do you agree with it?
Leave us your thoughts in the comments and let's open a debate.
And as always, if you found this video interesting, don't forget to like and subscribe to VisualPolitik
if you haven't already done so.
Thank you very much for watching,
All the best and see you next time.