Oil and the two "Colombias"

Oil and the two "Colombias"

Nicola Bilotta | Junior Fellow, IAI
With the second ballot fast approaching on 17 June, the two candidates have a different view for the oil sector as well: Duque claims Colombia has not fully exploited its resources and could have the potential to increase oil production, while Petro supports diversification and renewable energy

On Sunday 17 June, Colombians will be called to choose their country’s next President. At the second round of the presidential elections, the challenge between Duque, leader of the conservative Centro Democratico party, and Petro, supported by a coalition of left wing parties, is not just about politics, but rather about polar opposite visions about the future of Colombia. These elections will have strong repercussions on the difficult transition the country is going through, after the historical peace agreement with the Fuerzas Armadas de Colombia – Ejército del Pueblo (FARC-EP). After fifty-two years of war, Colombia will be able to exploit its political stability to provide new impulse to the industries driving the country’s growth.

Oil and the FARC

Oil is a key industry for the Colombian economy, accounting for 50% of its exports and 7% of its GDP. After the oil boom experienced between 2007 and 2015, when production increased by 52%, Colombia is currently stagnating. The plunge in oil prices on the international markets has hit the Colombian economy hard, knocking down investments and therefore the number of new explorations. Between 2015 and 2016, production fell by 12 per cent and oil reserves by 16.8 per cent. According to some official estimates, Colombia will lose its energy independence in 2021.

The disarmament of the FARC could be a positive factor to incentivize greater investment in the oil sector. Foreign multinationals and Colombian oil companies have long been a strategic target for FARC terror attacks. Since 1980, nearly 4.1 billion oil barrels have been lost to FARC terror attacks. Between 1986 and 2014, attacks from FARC and other revolutionary forces have caused pipelines to shut for 3,701 days, with huge economic losses: $355 million in repairs and $276 million in oil spillage. Enhanced security in 2018 has already resulted in greater foreign investments, which are forecast to grow by 30%-40% compared to 2017.

Security remains uncertain

The revolutionary Marxist group Ejército de Liberaciòn Nacional (ELN), is still active and continues to threaten the oil pipelines. ELN attacked oil networks 29 times in 2015 and 42 in 2016. The attacks were heavy. Cano Lémon, one of the country’s key pipelines, was closed for six weeks because of the damage.

Peace negotiations between the outgoing president and the ELN were not successful, leaving the incoming president with the hard task of finding a final agreement with the rebel group. Even though the spokesperson for the ELN stated that they are ready to negotiate with either candidate, there is no doubt that Petro and Duque have different positions. While Petro openly talks about the need to consolidate the peace process, following for ELN the same model used for FARC, Duque made no mystery of his desire to change some of the clauses of the Havana Treaty, imposing harsher conditions on both rebel groups.

Santos' heritage

The Santos government tried to stimulate growth in the oil industry by making it simpler to apply for exploration licences and offering tax incentives for offshore drilling in several special zones in the Caribbean Sea. Santos’ most hotly contested reform, however, was the centralization of oil royalties, which was meant to mitigate corruption and resource wastage happening at the local level.

Before the new rules, a significant part of the royalties used to go to the regions directly involved in the oil production chain. The reform drastically reduced the regional share, and imposed stricter criteria on how to invest the royalty money at the local level. This had huge economic consequences for Colombia’s regions. For example, the region of Aruca had received $300 million in royalties in 2011, but in 2012, under the new rules, it only collected $120 million.

The new law also increased the distance between the oil companies and the Colombian farming population. In 2017, the municipality of Cumaral held the first referendum to forbid new explorations and drilling in its territory, and more than forty other municipalities held similar referendums in the following months. The hostility of the local communities should not be read as an ideological opposition; rather, it should be viewed within the framework of a socio-economic structure, where farmers are worried about losing access to water, while the oil industry offers very little in terms of jobs.

Duque and Petro, two visions for two "Colombias"

Oil, the symbol of the Colombian economy, stands between the two candidates. For Duque, Colombia is yet to fully exploit its resources, and has the potential to exponentially increase oil production. Central government should invest in oil infrastructure to reduce oil transport costs and provide incentives for offshore drilling. To rebalance the relation between oil companies and local communities, Duque proposes a 50%-50% split of royalties between the State and the regions of Colombia.

Petro believes, instead, that the country’s economic model should change. Colombia should reduce its dependency on fossil fuel exports and diversify its local industry, with a gradual evolution towards and exporting agri-food industry. At the same time, Colombia should embark on an energy transition, investing heavily in the development of renewable energy. During his campaign, Petro also stated that Ecopetrol, the Colombian oil giant 88% controlled by the state, should be converted into a company for research and development of technologies to exploit renewable energy, at the end of the transition.

Petro and Duque reflect two contrasting visions for Colombia. The country’s future will be decided on Sunday, when the election results could truly change the face of Colombia.