Colombia’s Gamble On Oil Could End In Disaster

(Oilprice.com, 8.Jul.2020) — The latest oil price collapse coupled with the considerable economic fallout from the coronavirus pandemic has battered Colombia’s fragile economy. As the strife-torn Latin American country emerged from decades of civil conflict and narrowly avoided becoming a failed state, it pegged future development and economic growth on oil. While oil was responsible for Colombia’s considerable development and economic growth over the last decade, that dependence has left it extremely vulnerable not only to sharply weaker prices but the risk of essentially running out of crude. When that occurs, as the severe impact of the latest oil price collapse on Colombia’s economy demonstrates, it will push the Andean nation into a deep fiscal crisis.

By the peak of the last oil boom in 2013, Colombia was experiencing extraordinary rates of economic growth. In 2011, Colombia’s GDP expanded by an impressive 7% year over year followed by 3.9% in 2012 and 5.1% for 2013. This stellar growth rate was far higher than many of Colombia’s neighbors and triggering considerable optimism giving the strife-torn nation considerable hope that it could escape its violent past.

By 2013, oil production peaked at an all-time high of just over one million barrels daily, investment in Colombia’s oil patch was booming and many within the government and oil industry believed it was only a matter of time until the next major oil discovery.

According to data from Colombia’s statistical agency DANE, crude became the country’s most valuable export during 2013 accounting for 54% of export earnings and a fifth of government revenues.

As a result, Colombia’s economic fortunes, fiscal income and its currency, the peso, became closely intertwined with the price of oil. This made the Andean nation’s economy highly vulnerable to weaker oil prices.

The carnage wrought on Colombia’s economy by the latest oil price crash highlights the considerable economic vulnerability created by this overdependence on crude. By May 2020, the South American nation’s oil production had fallen to an average of 732,120 barrels daily, which was 18% lower year over year and the lowest level in over a decade.

Consequently, fiscal revenue has fallen sharply materially impacting government spending. It is estimated that every $1 decline in the price of Brent causes the Colombian government revenues to drop by $200 million. The latest oil price collapse, which sees Brent trading at around $43 per barrel, caused government revenue to deteriorate appreciably. 

Even after slashing spending, Colombia’s budget deficit is expected to balloon out to 6.1% of GDP or likely even higher, potentially creating the worst deficit on record. That will further sharply impede the Duque administration’s ability to provide basic public goods in a country where successive governments have failed to honor their social contract. The situation is so severe that Colombia’s fiscal advisory body has suspended budget deficit limits until 2022.

It is anticipated that substantially weaker oil, along with the economic fallout from the COVID-19 pandemic, will cause Colombia’s economy to contract sharply during 2020. The IMF estimates that 2020 GDP will shrink by almost 8%, the economy’s worst performance on record.

Those events underscore Colombia’s considerable economic dependence on petroleum extraction, making it particularly vulnerable to weaker oil prices. Imagine the fallout for Colombia’s economy and future development if the fourth largest oil producer in Latin America were to exhaust its already severely limited petroleum reserves. 

By the end of 2019, the Andean nation’s proved oil reserves totaled a mere two billion barrels, substantially below the volumes of other major oil producing nations. Alarmingly, Colombia’s reserves only have an estimated production life of 6.3 years, indicating that they will expire before the end of the decade. When coupled with Colombia’s considerable economic dependence on crude, this underscores the urgency with which the country needs to expand those reserves to head-off an economic catastrophe.

While Colombia’s political leadership recognizes the hazards, with President Duque in 2018 stating Colombia needs to add two billion barrels to its oil reserves, sizable oil discoveries have been non-existent in recent years. Sharply weaker oil prices and the COVID-19 pandemic forced oil producers in Colombia to slash 2020 capital budgets, suspend non-essential operations and shutter uneconomic production.

As a result, oil investment in Colombia will plunge below $4 billion, significantly less than what is required to boost oil reserves and production. Most of that capital will be directed towards maintenance and development activities rather than exploration. Subsequently, hydrocarbon exploration in Colombia essentially ground to a halt boding poorly for any much-needed oil discoveries during 2020. That is evident from Colombia’s rig count where at the end of May 2020 there was only a single operational rig, although that grew to five by the end of June.

Such circumstances augur poorly for the large oil discoveries which are required to head-off Colombia’s looming economic catastrophe. Despite many within Colombia’s government and oil industry pointing to the nation’s tremendous oil potential, there have been no major oil strikes recorded in the Latin American nation since the 1990s. President Duque pinned his hopes on unconventional oil, which catapulted the U.S. ahead of Saudi Arabia to become the world’s leading oil producing nation. Those ambitions, however, are being stymied by public dissent and concerns over whether it can be conducted safely. Doubts also remain over whether Colombia shares the hydrocarbon rich geology of its neighbors and whether fracking genuinely has the potential to provide the much-vaunted increase in oil reserves.

The dearth of major hydrocarbon discoveries in Colombia since the late 1990s indicates that the South American nation lacks the oil potential of its immediate neighbors Venezuela and Brazil. Colombia may produce oil, but it is not a petroleum producing nation. This, along with dwindling oil reserves and deteriorating production despite significant exploration efforts and government incentives, indicates that the heyday of Colombia’s oil patch is over. Bogota needs to significantly reduce the economy’s dependence on oil extraction and diversify into other industries before Colombia suffers an economic catastrophe.

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By Matthew Smith for Oilprice.com

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