Colombia’s Oil Industry Calls on Government to Accelerate Energy, Fiscal Transition

Amid the uncertainty surrounding the country’s oil industry as the government plans to review E&P contracts, sector insiders are calling for the energy and fiscal transition to take place “in the short term”

Ecopetrol's refinery in Barrancabermeja, Colombia.
November 18, 2022 | 01:37 PM

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Bogotá — Colombia needs to advance in its fiscal transition before it opts to cut oil exploration to avoid an impact on its balance of payments, at a time when “markets are analyzing and making their decisions,” Nelson Castañeda, president of the Colombian Chamber of Oil, Gas and Energy Goods and Services sector (Campetrol), said in an interview with Bloomberg Línea.

The executive stated that, although the Colombian government’s plan to analyze the future of new oil exploration contracts based on the balance of public finances is “good news,” he said it is important that “the decision be made in the short term, so that this industry continues to remain dynamic in parallel with the energy transition”.

Amid the uncertainty aroused by the government’s plans to stall oil exploration, the Colombian peso has reached historic lows against the US dollar, depreciating 18.27% so far this year, the second-worst performance among Latin American currencies after the Argentine peso, which has depreciated 36.89%.

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Castañeda said the uncertainty about the future of oil exploration contracts are indeed impacting the peso’s exchange rate, but he clarified that the current depreciation of the Colombian peso depends on many variables, including, of course, external ones.

He said it is therefore important that President Gustavo Petro’s administration carry out its analysis regarding these contracts with “truthful and scientific information” to review the variables that will determine its decision.

According to the Ministry of Mines and Energy, Colombia has more than 147 contracts in the exploitation phase, produces around 750,000 barrels of oil per day, and 1.1 billion cubic feet of gas per day, and has proven reserves for 7.6 and 8 years of oil and gas respectively.

Nelson Castañeda, president of Campetroldfd

“So, we have to give them [the government] time to carry out their analysis, and hopefully we will continue to have an industry that contributes 23% of the foreign direct investment to the country, 9% of the national budget, and which generates 100,000 direct jobs and 550,000 indirect jobs,” he said.

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Questioned about the possibility of a capital flight in the industry, he said that, “at this moment, Colombia has the highest peak of activity [in the oil and gas sector],” even compared to the pre-pandemic period.

He said the industry’s value chain will have invested more than $5.2 billion by the end of the year.

Even so, he warned that the “goods and services companies are always visualizing the portfolio of the countries in the region, and where it is more competitive they move their capital”.

“We consider that it is going to be a very good year, and logically the companies will make decisions at the right time so that they have contracts to carry out their activity,” he said.

Fiscal transition

He also referred to the need for the country to be able to generate the fiscal transition that will allow it to take firmer steps in its process of moving away from oil production, through the diversification of its exports.

“Before slowing down or slowing down the pace of hydrocarbon production, we must in parallel generate a fiscal transition, as well as entrepreneurship and retraining,” he said.

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This step, he said, to avoid shocks in the economies of the country’s regions, “if we take into account that regions such as Meta, the largest crude oil producer at the moment, depends on 79% of the royalties generated by oil, while in the case of Casanare, it is calculated at 37% and Santander at 28%.

“We must not stop exporting [oil], and logically continue growing in renewables to have more export capacities and bring in foreign currency for the country, which we need so much to bridge that social gap of Colombians who are currently living in poverty,” he said.

In a recent interview with Bloomberg Línea, the director of the Colombian Petroleum Association, Francisco José Lloreda, stated that “the objective of diversifying exports so as not to depend so much on oil makes sense. But this takes time and resources, unless it is decided to shrink the industry and thus reduce its percentage in the trade balance”.

“Replacing the resources that the industry contributes through income tax, Ecopetrol dividends and economic rights, requires an increase in the contributions of other economic sectors, which is not easy to foresee in the short term. And a third of the investment resources of the regions depend on [oil and gas] royalties, and replacing these is not easy either,” Lloreda said.

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“The challenge is to expand the participation of electricity in the energy matrix in order to gradually replace liquid fuels. But this will only happen once Colombia advances in the transformation of its vehicle fleet, which will not happen completely before 30 or 40 years, unless there is a technological disruption. Therefore, when thinking about the energy transition, we must be realistic and take into account that Colombia will continue - like the rest of the world - to demand liquid fuels for many years,” he said.

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Campetrol’s Castañeda is also concerned about the possible effects of the tax reform, which has been approved by Congress and President Petro.

It is estimated that between 30% and 50% of the new income from the tax reform, which seeks to raise $20 billion as from 2023, will come from the oil and mining sector. This also denies the deductibility of royalties to extractive industries in income tax.

“Our concern is that if we take away the investment capacity of the operating companies, the domino effect will be seen in the goods and services companies, and finally in the regions where we execute the projects”, Castañeda said.