Colombia onshore production seems stuck in a decline spiral

Colombia onshore production seems stuck in a decline spiral

It has been more than one year since Gustavo Petro assumed the presidency of Colombia in August 2022 and presented in the Congress its ambitious tax reform, tightening the fiscal regime for E&P contracts. Four months later, the reform was approved, although with some changes and came into effect in January 2023. Among the industry players, expectations were that the new fiscal model, added to a green political agenda which wind down oil exploration, would reduce revenue from current and new projects. As we pointed out in the end of 2022 in the special report about Gorgon asset named "Tax reform impact on the most promising gas asset of Colombia"[1], the reduced returns could lead to operators turning their investments to the neighboring Latin America countries, affecting Colombia hydrocarbon production in the near term.

However, the Colombian oil and gas market recently received some positive news with a new resolution from the Constitutional Court. The Colombia's Constitutional Court dropped a paragraph of the tax reform that prohibited extractive companies from deducting royalties paid to the government from their taxable income. According to the court, the entire censored paragraph was declared "unenforceable". The law was expected to raise more than 3 trillion pesos to the government's account this year according to the Financial Ministry.

In this scenario, it is still too soon to evaluate the impact of the tax reform in the upstream sector. Some relief may come with the new resolution, but signs of reduced drilling activities have started appearing in 2023. According to Campetrol (the Colombian chamber of oil, gas and energy goods), drilling activity has diminished constantly since November 2022. Until September this year, total rigs in activity in the country, among rigs for operation and workover, reduced more than 35% compared with the same month from last year. The drilling activity is the first indicator on how production could behave in years to come. According to S&P Global Edin®, total wells drilled reduced more than 80% year-on-year, while exploratory wells reduced more than 60% during the same timeframe.

When looking at total production, the future appears grim, especially for the onshore fields. Onshore total oil equivalent production has been diminishing since 2019 and, with few investments directing exploration, the onshore activity seems deemed to a constant decline. In addition to the new tax reform outcomes, the rising social unrest in the country has also impacted production with lots of suspended contracts. According to the mines and energy ministry data, there were nearly 30 suspended contracts due to social conflicts and permitting issues as of June 2023.

To revert this trend, or at least diminish annual decline rate, the state-owned Ecopetrol has approved at the end of September 2023 its 2024 investment plan with about $19.3 trillion pesos destinated to keep production at 725.000 to 730.000 barrels of total oil equivalent per day, increasing production goal by 0.6% compared with 2023 goals. The NOC is focused on maximizing its oil extraction from existing assets through EOR techniques. Most onshore production growth is expected to come from the Castilla and Chichimene fields with the use of water injection. Along with increased recovery factors, Ecopetrol's exploration focus will be on the offshore Caribbean blocks with its expected high gas reserves.

However, even counting the new exploratory area, total production would not achieve previous heights. This leads total revenue to a steady decline, considering current oil prices, reaching an average annual decreasing rate of 8% in the next four years, and falling to just about approximately 14 MM USD as of 2027. The declining rate is softer from 2028 to 2031 when offshore assets are expected to start production. If new reserves are not added to the portfolio, then revenue will begin decreasing at a larger rate after 2032.

Petro's government is unlikely to resume bidding for new E&P contracts. However, the possibility of a drop in hydrocarbon production affecting public finances and energy supply in the medium term has already led his government to implement some measures to encourage exploration and maintain production in blocks under contract. Reviewing suspended contracts is an attempt to reverse declining production, but the initiative must overcome lots of security and community issues to turn execution viable.

[1] Find the full report in Tax reform impact on the most promising gas asset of Colombia. Also a short version available in Colombia tax reform impact on Gorgon gas asset.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.