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Colombia Is An Overlooked Victim Of The Oil Price War

The considerable optimism surrounding oil at the end of 2019, when Brent was trading at $68 a barrel has turned sour. The demand shock triggered by the coronavirus and subsequent Saudi-Russian price war, which threatened to substantially expand global supply, caused oil prices to crash. The International Brent price plummeted to levels not seen for over two decades.

The latest rally, which has seen Brent rise to just over $40 per barrel, has provided little relief for Colombian oil producers. That price is below the breakeven price for many Colombian drillers, impacting their profitability and forcing them to curb spending. This has instigated considerable fallout for Colombia’s oil industry and ultimately the economy.

The Latin American nation, the region’s fourth-largest oil producer, bet its economic future on oil with growing investment and production seeing petroleum provide a fifth of fiscal revenues before the 2014 oil price collapse. The latest developments have triggered an economic crisis of unprecedented proportions for Colombia. Oil’s prolonged slump is causing much needed foreign investment in the nation’s oil patch to dry-up, significantly impacting exploration and production.

In January 2020, Colombia’s peak industry body the Colombian Petroleum Association (ACP Spanish acronym) estimated annual oil investment would increase by 23% year over year to just under $5 billion. That was contingent on Brent trading at over $60 per barrel during the year. The latest oil price collapse coupled with the coronavirus pandemic saw considerable belt-tightening among upstream Colombian oil companies. It is estimated that much-needed investment in the oil industry will fall by over $1 billion from the ACP’s original estimate, triggering serious challenges for Colombia’s petro-economy.

An especially worrying development is oil companies like Frontera Energy, Colombia’s largest private oil producer, Parex Resources and Gran Tierra Energy have slashed spending. This is in response to the difficult operating environment created by the latest oil price crash which is forcing them to protect balance sheets and cash flow.

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Frontera announced it had reduced its original 2020 capital budget from $245 million to $275 million to plunge between $80 million and $100 million. Consequently, Frontera shuttered roughly 15,000 barrels of daily production causing first quarter 2020 oil output to soften by 6% year over year to a daily average of 63,572 barrels. That will substantially impact Colombia’s oil output and fiscal revenues because Frontera was responsible for around 8% of the Andean nation’s 2019 oil production.

Other private oil companies in Colombia have taken similar measures. Parex slashed its budgeted 2020 capital expenditures by over half and suspended drilling. Gran Tierra, the single largest landholder in the southern Putumayo Basin, pared-down capital spending by almost two thirds, taking 7,000 barrels daily of oil production off-line.

Colombia’s largest oil producer, government-controlled Ecopetrol has trimmed up to $2.5 billion from its original 2020 budget. That will cause oil production to plunge seeing Ecopetrol forecast 2020 average daily oil output of 660,000 to 710,000 barrels which is 5% to 12% lower than its original guidance. 

Accordingly, drilling activity in Colombia has almost skidded to a halt. According to Baker Hughes data, only one rig was operational at the end of May, compared to 25 rigs a year earlier, causing oil production to tumble. Colombia’s May 2020 average daily oil output fell a worrying 18% year over year to 732,120 barrels and was 8% lower than April’s 796,164 barrels per day.

Colombia’s government believes 2020 full-year average daily production will be somewhere between 750,000 and 850,000 barrels. Based on the numbers released by drillers operating in Colombia, annual 2020 production will likely be toward the lower end of that range. Oil production will remain constrained heading into 2021 for as long as Brent trades at below $42 to 45 per barrel, the estimated breakeven price for most drillers. That is likely with the EIA predicting that Brent will average $48 per barrel during 2021. This coupled with drillers needing to protect balance sheets and cash flows, after a disastrous 2019, will cause exploration and development spending to remain low. 

The mix of sharply weaker oil prices, the COVID-19 pandemic, and dwindling oil output is weighing heavily on Colombia’s oil-dependent economy. By April 2020, crude was responsible for 30% of Colombia’s total exports by value, underscoring its economic importance. The Colombian peso plunged against major currencies when the price of oil collapsed. 

This will have a sharp impact on Colombia’s economy. The IMF believes that 2020 GDP will contract by 2.4% but that could be as high as 7%, which would be the worst performance on record. Government tax revenues are expected to decline by 10%, or possibly more, leading to a distressing budget deficit of as high as 6.1%, even after making substantial spending cuts and receiving international loans. These events have sparked a sense of urgency in Bogota as President Duque’s administration seeks to protect the economically crucial oil industry. This sees the government considering providing relief from royalties and other taxes as well as the costs associated with utilizing oil pipelines. 

Colombia’s diminishing oil production will, nonetheless, help to alleviate the global supply glut which has existed since 2015, helping to stabilize prices. There is, however, considerable pressure on Bogota to boost oil exploration and production as fiscal revenues falter and economic growth declines.

By Matthew Smith for Oilprice.com

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