Fuel for Thought: Leftist front-runner presents challenges to Colombia's oil and gas sector in 2022

Colombia's presidential elections in 2022 may shift the country's direction in oil and gas development, as leftist front-runner Gustavo Petro has been running on a platform that includes curtailing extractive projects.

Senator Petro, ex-mayor of the capital Bogotá, leads the polls strongly ahead of the May 29 election, while the current right-wing administration is facing record low approval ratings after a bloody crackdown on protests in 2021 and a stagnating economy resulting from the COVID-19 crisis.

Petro is looking to raise taxes on the wealthy, implement the 2017 peace deal with Colombia's main rebel group, and has spoken of increased public sector participation in the economy and replacing oil profits with tourism.

His sharpest critics claim he will send Colombia into an economic tailspin by implementing socialist policies similar to those that failed in Venezuela. His supporters say the changes are necessary.

Current policy has led to record unemployment and inequality, and inflation is rising, as is insecurity in regions controlled by a host of criminal armed groups where the peace deal was never implemented.

The reality of how a Petro presidency would affect foreign oil companies and global investors is likely much more complicated than the hyperbolic claims from either camp.

Petro claims that oil revenues, which currently account for more than government budgets, could be replaced with tourism dollars, higher taxes on the wealthy and investments in green energy

Petro would enter office with his hands tied by political structures in Colombia as well as economic realities.

Centro Democratico, the right wing party of current president Iván Duque, forms part of the largest voting coalitions in both the Senate and Congress, and are likely to strike down any proposals they view as radical.

Government budgets also depend highly upon both oil extraction and foreign investment — changing that overnight is highly unlikely.

Petro has campaigned in opposition to hydrocarbon investment and opposes fracking. He has even suggested that Venezuela's economic collapse was due to their overdependence on an extraction-based economy. He claims that oil revenues, which currently account for more than government budgets, could be replaced with tourism dollars, higher taxes on the wealthy and investments in green energy as well as implementation of Colombia's peace, an issue the current administration has been opposed to.

"Colombia doesn't need socialism. It needs democracy and peace," he said in an interview with Colombian press in September. "Foreign exchange can be replaced with tourism, but tourism will not grow if we are killing one another."

But he has not provided details on exactly how his plan to replace oil and gas revenues with tourism money would work, nor accounted for the impact of direct foreign investment in the oil and gas private sectors.

"Going from concept to execution depends on a lot of factors beyond the presidency," said Sergio Gúzman, director of Colombia Risk Analysis, a research and consultancy firm in Bogotá. "Trying to replace that revenue stream depends also on tourism infrastructure that Colombia currently lacks."

Crude remains biggest export

The core of the Colombian economy is unlikely to change. Crude oil is the nation's biggest export, accounting for 3% of GDP, and hydrocarbons account for nearly a fifth of total fiscal revenue.

Exploration for new oil and gas fields, including offshore projects, have shown considerable potential, and though softer oil prices were a blow to the hydrocarbon industry in 2020 and 2021, the sector is still a powerful economic engine.

S&P Global Platts Analytics expects Colombian crude production to edge slightly higher in 2022 to around 750,000 b/d, but with an overall downtrend remaining in place, putting output below 600,000 b/d by 2030.

"Are investors' fears of a Petro presidency warranted? Yes and no," said Gúzman. "For those that don't have an appetite for risk, perhaps. Mutual funds and more conservative investors might pull back. But that could also leave a lot of money on the table for less risk-averse investors who understand how Colombia really works."

Ecopetrol, the state-owned oil company, exceeded expectations in 2020, reporting strong earnings. The company is an integral part of hydrocarbon capability in Colombia and operates in regions international companies consider too risky, such as Catatumbo, a region racked by violence on the Colombian-Venezuelan border.

"That is one area where Petro could affect change immediately," said Gúzman. "We might see something similar to [President Lopez Obrador] in Mexico with Pemex. He could appoint a board of advisers that agree with his positions, but whether they would be able to effectively run an oil company remains to be seen."

Investment in Colombia, however, will still be a crucial part of the domestic economy, as will hydrocarbon technology. When the smoke and rhetoric from the election season clears, the challenge of actually governing Colombia will be much different for the victor than the campaigning lectern.

If Petro wins, as currently seems probable, he will be facing an intransient opposition coalition in the legislative branch, a powerful Colombian business class, and the economic realities of day-to-day life.

"In some areas, this offers investment opportunities as well," said Gúzman. "If you understand Colombia at a sub-national level, you also understand that investing in the capital is very different from investing in riskier areas."

"The private sector isn't going anywhere," he said.