As 2019 kicks off, Colombia finds itself broadly stuck in limbo. During the first six months of last year, investment was put on hold pending the outcome of a highly contested presidential election between economically conservative Ivan Duque and left-wing Gustavo Petro. But despite Duque’s right-wing victory, new investment has not poured in since he took office last August 7th, reflecting an absence of definitive policies and strategies within the new administration.
President Duque’s honeymoon period came and went with little to show for his first 100 days. His “Ley de Financiamiento” (tax reform) was approved on December 19, 2018 with significant changes and still faces potential setbacks. Campaign promises of eliminating political “marmalade” (political alliances of convenience that grant government posts to individuals from different political parties) fell flat on its face, as Duque assumed office with no clear strategy and unable to generate any political momentum out of the gate. Although backed by former President Álvaro Uribe, Duque lacks sufficient political backing nationally or regionally, and he has little of the determined persistence and charisma his mentor was able to leverage. As such, most political, social and economic initiatives have stalled to date.
The energy sector appeared ready to fall victim to this malaise during the President’s first few months in office, as a battle over priorities took center stage. But a series of decisions announced just before the holiday season are very encouraging and start to form what look to be a clear foundation for the entire energy sector in 2019.
- New ANH Area Map: On December 17th, 2018, and after almost two years, the National Hydrocarbons Agency (ANH) finally launched the updated Area Map. The ANH also announced the reactivation of the Permanent Competitive Area Allocation Process for February 2019, as well as the cancelation of the Sinu-San Jacinto bid round, which had been postponed several times. The newly released map shows 20 available areas with abundant geological, social and geographical information available (also known as areas of the Procedimiento de Coordinación y Concurrencia as per the Constitutional Court’s mandate). Thirteen of the 20 areas are located in the Llanos, two in the Upper Magdalena (Mag) Valley, two in the Middle Mag, and one in the Lower Mag. Most of these blocks are located in areas with gas, light crude and heavy crude potential, and relatively close to production and infrastructure. The remaining two areas are offshore: GUA OFF 10 and SIN OFF 9. The objective of the announcement is clear: reactivate what has been on hold the last few years and offer new attractive areas to stimulate E&P activity in 2019. ANH expects to start signing contracts in June 2019.
Although national production has continued its uptick in recent months and hit 883,000 b/d in November 2018, it is still far below the 1 MMBD levels reached in 2015. But as no new areas have been allocated over the last four years, the country’s options to meaningfully increase reserves have been limited. With Colombia’s reserves/ production ratio at an alarming 5.7 years, the ANH’s announcement is hopefully an acknowledgment of the country’s economic dependence on the sector and of the need to stimulate activity and reverse the step-child status the sector held over the past eight years under former President Santos. Two of Duque’s key focus areas are foreign investment and regional development, both of which can be achieved through this process if undertaken properly.
The December 17th announcement is a tribute to the new ANH President Luis Miguel Morelli, who was appointed in September 2018. His background in politics, planning and the oil and gas sector appear to have given him a clear vision of how to move the ANH forward, an agency that has become a political monster in recent years. Continuing to effectively maneuver the ANH itself will be one of Morelli’s biggest challenges in 2019 and will likely influence just how successful the Permanent Competitive Area Allocation Process will be.
- Nuevo Horizonte Strategy: On December 5th, just two weeks before the release of the new map, Morelli announced the Nuevo Horizonte The strategy represents the macro picture objectives for the oil & gas industry and focuses on four areas: 1) make exploratory activity viable; 2) promote projects with high potential, including enhanced recovery; 3) improve overall information management (includes both technical and non-technical data including community issues, indigenous population-related info, and other social data); and 4) improve the country’s competitiveness. The launch of the ANH Area Map and the Permanent Competitive Area Allocation Process are part of the Nuevo Horizonte strategy.
All sounds good from the macro level, but beyond attempting to improve information management, Nuevo Horizonte does not specifically address how the government is going to reverse the negative trends inherited from the Santos’ administration that are heavily impacting the sector: increased social unrest, permitting delays (highly political), weaker national government control and judicial instability. Other than an announcement to increase royalties paid to the regions, there is little solid indication as to what regional strategy the central government is going to pursue to improve the situation and realize the objectives Duque has laid out with respect to foreign investment and regional development. This is all the more critical as oil prices have fallen back to the sub-$50/ barrel range and Colombia’s break-even oil and gas costs are high in large part due to high evacuation costs (transport). Although major efforts have been undertaken over the last couple years to lower transport costs, Colombia’s non-technical E&P success will depend on resolving the issues highlighted above.
- First Renewables Auction: A major positive for potential foreign investment and regional development, as well as electricity source diversification, Duque’s decision to move forward with the country’s first renewables auction initiated by the outgoing Santos administration has garnered significant attention. The Ministry of Mines and Energy expects to hold the new long-term renewable energy auction at the end of February/ early March. The terms of this first auction, including the 10-year PPA and non-indexed payment in Colombian pesos, have frustrated many foreign investors. However, they are indicative of the current structure of Colombia’s electricity system (for one, the country’s utilities have to agree to purchase auctioned electricity; they are not forced to purchase any volumes). Results of the first auction will be important to watch and will certainly influence the second auction the government is intent on holding before year-end 2019, which may prove more commercially attractive for foreign investors and could attract the world-class prices we have seen in the region.
Other Key Energy Policy Areas to Watch
- Unconventionals: Energy policy under the new administration got off to a rocky start when Minister of Mines and Energy (MinMinas) Maria Fernanda Suarez immediately started promoting unconventionals. This was a direct contradiction to President Duque’s campaign statements that such activity would not be pursued on his watch. It wholly consumed much of the macro policy discussions of the administration during the first couple of months and continues to be a major topic. At issue are the Minister’s arguments that Colombia holds world-class unconventional resources, a major source of potential reserves, and that this represents a tangible way of securing the country’s energy self-sufficiency. This contrasts with Duque’s concern and interest not to spend his political capital trying to secure support at the regional level to allow full-scale fracking activity to be initiated.
The schizophrenic nature of the situation is on full display. On one hand, Ecopetrol has proposed a pilot project in 2019 in the Middle Mag with permanent government supervision. The government has not approved the pilot project, as the political debate (including in Congress) continues in full swing. The ANH has also established a panel of independent experts to evaluate the potential impacts of fracking in Colombia, and thus determine its viability.
On the other hand, in November, the National Authority of Environmental Licenses (ANLA), rejected a request from ConocoPhilips for environmental licenses for its unconventional blocks, VMM-3 and VMM-2. The ANLA’s rejection, apparently due to contradictions in the environmental impact assessment, coincides with the State Council’s (Consejo de Estado) November announcement to apply the “precaution principle” to unconventional projects and suspend them. The ANLA decision signals that unconventionals will continue to be in moratoria at least in the short-term. Meanwhile, coal-fired plants are being built that will not pay carbon emission taxes and that stand to jeopardize the same environment that is supposedly being protected.
- Deepwater: Offshore Colombia was shaping up to be the hot new area. It culminated in former President Santos tweeting that the Gorgon discovery made by Anadarko and Ecopetrol in May 2017 was the largest offshore Colombia discovery made in 30 years and would assure gas production until 2027. One and a half years later, geology, market dynamics and contractual impasses have all taken their toll in preventing the offshore market from moving forward. On the geological front, the absence of discovering meaningful liquids alongside the gas found, combined with the significant depths (greater than 3,000 meters of water depth) have not helped. But not all of Colombia’s offshore is the same and there is optimism that meaningful oil exists in certain blocks and plays. Market dynamics have also taken their toll, as publicly traded companies have been under much more scrutiny and largely have not been rewarded by the market for their exploratory efforts. But perhaps the most debilitating factor has been the lack of a clear and concerted government push to incentivize deepwater activity. The new terms of reference for offshore E&P contracts have been under discussion between the government and companies for several months now, which has delayed contract conversions. Also, the lack of technical personnel in the ANH with offshore expertise has not helped contract conversion. Symptomatic of such problems is the still pending approval of new and meaningful offshore partners in certain blocks (and a perverse lack of incentives for ANH officials to do so). As a result, no deepwater wells were drilled in 2018 and no firm commitments are in place at this stage for 2019.
2019 Wish List
Recent energy sector announcements are very positive and have breathed a bit of fresh air into a local industry that has been the subject of substantial uncertainty. That said, the programs and policies outlined are chock full of challenges and will require a dedicated effort not just from the MinMinas and the ANH, but from both the national government and the regions as well. Competitive terms of reference, a truly effective royalty reform and an institutional alignment to expedite licenses are only a few of the changes that will be important to see in 2019. But with President Duque’s popularity ratings hovering around 27%, the lowest levels a sitting Colombian president has had this early in his administration, the need for decisive action and vision this year will be imperative. For private sector investors, new engagement strategies such as “reverse engineering” need to be considered. New ideas and approaches may make the difference between meaningful progress and success versus lamenting stagnant progress by the time 2019 rolls to an end.
IPD Latin America is a regionally focused energy consultancy that has had a local permanent presence in Colombia for 10 years and throughout the region for nearly two decades. It specializes in both strategic and project-specific consulting, with a track record of helping its clients successfully understand and translate local minutia into effective and sustainable business efforts. We encourage you to visit us at: www.ipdlatam.com and contact us to see how we can add value to either your new or ongoing efforts in Colombia or in other parts of Latin America.