Image Source: Colombia Reports
The Colombian oil industry had many ups and downs in 2020, with the Ministry of Mines and Energy reporting that production fell by 11.6 percent in the first 11 months of the year versus the same period in 2019. The energy industry comprises approximately four percent of Colombia’s GDP, and the country’s reliance on this sector made it especially vulnerable to the unforeseen headwinds of 2020.
Vice-Minister of Energy Miguel Lotero has set his sights on returning the country to 2019’s oil production levels—when it was producing 886,000 barrels per day (bpd)—in 2021. In order for his prediction to come true, however, the stars will need to align, which according to some experts is a long shot.
2020’s one-two punch
In January 2020, Colombia’s oil production started with a bang. The country was producing close to 900,000 barrels of oil per day. Robust production was being fueled in part by rising investments in the hydrocarbon sector, which were projected to rise almost 25 percent YoY to nearly USD $5 billion in 2020, as per the Colombian Petroleum Association (ACP).
All bets were off, however, once the global oil industry was hit by a one-two punch between COVID-19 and disagreements among OPEC+ producers in March of last year, which sent oil prices spiraling. Colombia’s energy sector was a bullseye, and investment into oil and gas projects took a hit as investment obligations were eased.
When all was said and done, Colombia’s oil and gas sector suffered nearly a 50 percent drop in investments in 2020 to USD $2.05 billion—levels last seen in 2016; investments that are greatly needed to modernize Colombia’s ailing oil fields.
In Colombia, however, oil production did not come to a screeching halt even at the height of the lockdown measures, and facilities continued to operate at lower capacities. Nonetheless, roughly 50 fields were closed last spring and companies pulled back from their exploration and production commitments made to the country’s National Hydrocarbons Agency, which resulted in curtailed production. This continues to threaten Colombia’s oil production today. Meanwhile, a number of projects are not deemed profitable with the oil trading below USD $40-45 per barrel, according to Brigard Urrutia director Marianna Boza. The average oil price in 2020 was USD $37.
In late 2020, oil prices began to strengthen and production started regaining momentum, reaching 750,000 bpd by December 2020. But, that is still more than 100,000 bpd below the energy minister’s lofty output goal for 2021.
Colombia is sitting on “2 billion barrels of oil reserves,” according to Reuters, which it is looking to bolster by tapping into unconventional oil and gas exploration. The country’s future in oil and coal production must extend beyond traditional drilling, as its hydrocarbon reserves are depleting. In fact, Colombia runs the risk of running into a natural gas deficit in the next three years.
The government is looking to “unconventional deposits associated with shale and coal” reserves that are located near the northern Magdalena River. These deposits are vast and estimated to amount to 7 billion barrels, second only to Argentina in Latin America.
Colombia has faced hurdles in its efforts to attract major energy players like ExxonMobil and coal miner Drummond to participate in pilot projects involving these exploratory reserves. There has also been social and environmental pushback, which weighed on production in 2020.
2021 Outlook: Mixed signals
Some forecasts are better than others. The ACP and S&P Global Platts Analytics are predicting that for 2021, Colombia’s crude oil production will be either unchanged or slightly improved from 2020’s average production (775,000 bpd).
Meanwhile, Colombia’s National Hydrocarbons Agency (ANH) president, Armando Zamora, remains skeptical that oil production in the country could return to January 2020 levels this year, according to The Dialogue’s weekly publication Energy Advisor. ANH’s outlook is not too shabby, however, with production pegged at 850,000 bpd by year-end 2021. Zamora attributes his forecast to a more favorable environment for oil prices, a hopeful outlook for the pandemic, improved relations among OPEC+ producers, and investments poised to return to the country.
The Ministry of Mines and Energy has outlined a strategy for returning Colombia’s oil production to 2019 levels, which involves tapping into the country’s offshore exploration and production as well as onshore reservoirs. They are also focused on technology innovation for oil recovery as well as pilot projects for unconventional deposits.
José Vicente Zapata, a partner at law firm Holland & Knight, believes that these steps, combined with efforts by the ANH to ease the allocation of onshore and offshore blocks in order to attract investment to the industry, will help the country rebound from its 2020 doldrums.
Leopoldo Olavarría, international partner at Norton Rose Fulbright, described how Colombia’s crude oil production in December 2020 was 15 percent below early 2020 levels, which was a function of weakened prices and the pandemic. As of the first week of January 2021, oil production hovered at 740,500 bdp. He says the “recovery of production to pre-pandemic levels will no doubt take time.”
There are a few global tailwinds that could help Colombia’s oil industry. For one, there has been a drop in oil inventories thanks to rising demand that has reduced crude oil stockpiles. OPEC has gotten its act together, with Russia leading the charge, and agreed to slash production in an attempt to strengthen prices. Additionally, countries like China and India have begun to see a recovery in oil consumption, demand that could spill over to developed countries and strengthen the global outlook.
Meanwhile, oil prices are more bullish year-to-date compared to 2020 and are projected to remain on an upward trajectory. While the price of oil hovered at an average of USD $37 in 2020, it has climbed close to the USD $60 threshold, which it has not revisited since before the pandemic broke out.
Wall Street firms have also been lifting their 2021 oil price predictions, including the likes of Barclays and UBS. These positive oil price forecasts are expected to help bolster Colombia’s production.
Gerelyn Terzo is an editorial researcher for Sharemoney, an international money transfer company.