The Fuse

Colombia’s Lost Opportunity

by Matt Piotrowski | December 13, 2017

Colombia has consistently been a top supplier of crude oil to the United States this decade. The South American nation typically ranks as one of the top 10 exporters to the U.S., with volumes at times having reached as high as 600,000 barrels per day (b/d). As OPEC cuts volumes to the U.S. and Venezuela’s output declines due to instability, Colombia’s exports to the U.S. carry more significance and open opportunities for the country to increase market share. However, Colombia is experiencing economic woes, ongoing security risks, local opposition to hydrocarbon exploration, limited infrastructure, and declining production. All of these factors question whether Colombia will remain a stable supplier of oil.

The depreciation of the Colombia’s currency, interest rate cuts, and the rebound in oil prices have not been enough to turn around the economy.

This week, S&P Global Ratings cut Colombia’s rating to one step above junk, a reflection of how low commodity prices and high levels of debt have weakened the economy. Like other countries overly reliant on oil export revenues, Colombia is struggling with a long list of fiscal problems. The depreciation of the country’s currency, interest rate cuts, and the rebound in oil prices have not been enough to turn around the economy. The struggling economy, expected to grow at a lackluster 1.6 percent this year, is occurring ahead of a wide-open presidential election in May (with a runoff in June) that may see an anti-establishment candidate win. “The next administration will likely face difficult trade-offs between satisfying Colombia’s fiscal rule, cutting expenditures, and raising new revenues,” S&P said in its report.

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Ecopetrol cuts exploration, reserves decline

The oil price downturn has hit Colombia and its partially state-run oil company Ecopetrol very hard. The company spent $1.2 billion in capital expenditures last year, down from $8.6 billion in 2012. Ecopetrol’s austerity measures were successful in cutting costs by 30 percent, but the drop in spending has had significant effects on production. Colombia’s crude output, after averaging 1 mbd for four straight years, has now dipped to 800,000 b/d, with about half exported to the U.S. Its total reserves were estimated at 1.67 billion barrels at the end of 2016, down from 2.3 billion barrels two years prior. There have not been any large discoveries since the early 1990s and only 15 exploration wells were drilled in 2015.

“While it is difficult to quantify the financial impact to Colombia’s oil and gas sector, terrorist activities in the country have contributed significantly to the lack of growth in the local oil and gas industry.”

Production has also been stifled by the government’s conflict with rebel groups. Despite the peace accord with the Revolutionary Armed Forces of Colombia (FARC), oil-producing infrastructure and pipelines are still targeted by aggressors. “While it is difficult to quantify the financial impact to Colombia’s oil and gas sector, terrorist activities in the country have contributed significantly to the lack of growth in the local oil and gas industry,” said Bloomberg Intelligence. Estimates show that the violence, including pipeline bombings and kidnapping of oil workers, have left 260,000 dead and nearly 7 million displaced during the conflict that has lasted for more than 50 years.

More attacks may happen ahead of the presidential election in May, increasing the number of barrels at risk in the country. The violence, along with declining reserves and operational risks, makes Colombia an unattractive investment opportunity for foreign companies. Moreover, a number of local referendums threaten upstream products. In June, residents of the Cumaral municipality in Meta province voted by a wide margin to ban exploration and production. More referendums are scheduled throughout the country, and if residents vote against the oil industry’s wishes, production and exports could fall further, undermining the economy.

Lost opportunity

Colombia produces heavy grades of crude oil, making it a good fit for a number of U.S. refiners on the Gulf Coast. Against this backdrop, Colombia had been increasing exports to the U.S. this decade even with the growth of shale. But declining production has triggered a drop in exports. So far this year, the U.S. has imported 347,000 b/d from Colombia, down 130,000 b/d, or 27 percent, versus the same time a year ago. The decline has occurred even though the U.S. has bought significantly fewer barrels from Colombia’s competitors Venezuela and Saudi Arabia.

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Even though Colombia is an exporter of crude, it has become increasingly reliant on the U.S. for refined products. Throughout the past four years, the U.S. has sent more than 100,000 b/d of refined products to Colombia as the country’s refinery expansions have not kept up with demand growth.

Even though Colombia is an exporter of crude, it has become increasingly reliant on the U.S. for refined products.

With conventional oil production declining and the economy stagnant, the country is putting its hopes in shale oil and gas. Ecopetrol’s CEO told Reuters earlier this year that his company would implement exploration in the Magdalena Medio region, where some estimates say there are 30 billion barrels of new oil. In the interview, he added that Colombia has the largest unconventional resources in the Western Hemisphere after the U.S. and Argentina. But conditions in Colombia might not allow for the country to replicate the U.S.’s success. In the U.S., an experienced industry with wide expertise, necessary supporting infrastructure, extraction-friendly property rights, and a conducive regulatory environment have enabled shale to thrive. Argentina is far ahead of Colombia in exploiting shale, but political risks, high drilling costs, above-ground constraints, and infrastructure bottlenecks have slowed investment there, all issues that Bogota will have to face.

While Colombia’s economy will need to rely on its oil industry—and market share in the U.S.—for the foreseeable future, the country will need to introduce reform measures similar to other countries that are overly reliant on oil export revenues. The volatile nature of oil prices, widespread opposition to new projects, and the uncertainty of local and national politics make it crucial for the country to diversify its economy.