The world no longer wants to give up oil; Colombia differs

The United Kingdom scrapped a ban on shale gas production, Norway searches for oil deep in the Arctic, and the United States begs drilling companies to extract more.

Many of the world’s largest countries are backtracking, or slowing down, on some of their plans to move away from fossil fuels.

But that is not the case in Colombia. Its first leftist president, Gustavo Petro, has stopped offering new licenses for oil exploration in Latin America’s third-largest producer.

He is also pushing Congress, through legislation he outlined on his first day in office, to increase taxes on energy exports and is working to implement a ban on fracking.

No other oil-producing country seeks to restrict the industry so much.

Oil executives in Bogota acknowledge the message. Ecopetrol SA, the state-controlled producer, has scrapped pilot projects for fracking, a controversial extraction technique it relied on to revive production.

And independent producers such as Gran Tierra Energy are now looking elsewhere, including neighboring Ecuador, to boost production. The Colombian Petroleum Association estimates that Petro’s plans will cause a 30% drop in investment in the industry.

“They are scaring the private sector a lot,” said John Padilla, managing director of Colombia-based energy consultancy IPD Latin America.

All this, of course, is great news for anyone concerned about global warming. The problem is that the harsh measures against oil contribute to a collapse in Colombian markets that, if left unchecked, will increase financial and political pressure on the new administration.

The peso has plunged more than 20% against the dollar since Petro was elected in June, driving up the price of imports and adding to an inflationary spiral that hits Colombians daily.

“The question,” Padilla said, “is how long that discourse can continue.”

Petro’s environmental activism stands out in a region where commodities have historically driven the economy. About 50% of Colombia’s export revenue comes from oil and mining.

If Petro succeeds, it will provide other emerging markets with a strategy for starting the energy transition.

Or it could become a cautionary tale of over-ambitious environmentalism. Undoubtedly, the anti-oil push will accelerate a drop in Colombia’s production and exports when the country needs all the revenue it can get to finance its plans for increased social spending.

The Colombian peso has lost a fifth of its value against the dollar since Gustavo Petro was elected president in June.

RISK OF A BACKLASH

The risk of a public backlash against Petro is real, especially as they go hand in hand with eliminating costly fuel subsidies.

This year, Ecuador’s president was almost impeached over fuel prices. Brazil and Mexico have sacrificed tax revenues to subsidize gasoline and diesel.

Many industry observers still expect Petro to back down under tight national budgets.

“Circumstances will prevail, and the discourse will have to align with reality sooner rather than later,” said Schreiner Parker, director for Latin America at consultancy Rystad Energy.

Petro’s economic team members disagree on how quickly the country should move away from oil and gas.

Finance Minister José Antonio Ocampo has said that there is no final decision on ending oil and gas exploration.

For her part, Mines and Energy Minister Irene Velez, an academic and environmental activist who has worked with Petro since he was mayor of Bogota, said that the ban on awarding new areas for exploration remains in place.

In response to questions, the Ministry of Mines and Energy said that Ecopetrol and other exploration companies already have enough licenses to increase Colombia’s proven oil reserves and that the government will allow existing projects to go ahead.

Even if Petro were to slow down or reverse its effort, it has already weakened Colombia’s ability to turn around an oil industry that has declined for years. The country had always been a hard sell to international oil majors.

Colombia does not offer the same kind of billion-barrel discoveries made in Guyana and Brazil and needs to provide more incentives for companies to take an exploration risk.

Chevron Corp. pulled out of Colombia in 2019; Occidental Petroleum Corp. sold its onshore fields in Colombia in 2020; even Ecopetrol, a company whose leadership is hand-picked by the government, has turned to U.S. shale for expansion opportunities.

If Petro succeeds in transitioning to renewable energy in a country with strong winds, rushing rivers, and abundant sunlight, the rough start to his tenure will be forgotten.

Colombia’s 13 gigawatts of planned renewable energy projects will help reduce dependence on hydrocarbons.

Ecopetrol has more concrete plans for renewable energy and green hydrogen than regional peers Petróleos Mexicanos (Pemex) or Petróleo Brasileiro SA (Petrobras), according to BloombergNEF.

However, the Colombian Petroleum Association believes a crisis will brew long before the country reaches that transition. “All the alarm bells are ringing,” Francisco Lloreda, head of the group, said in an interview.

With information from Bloomberg

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