Major Oil Companies Exit Colombia as Chaos and Crisis Escalate

The Colombian oil industry is facing a significant downturn as major oil companies announce their departure from the country amid escalating violence, fiscal instability, and restrictive policies. Under the leadership of Colombia’s first leftist President, Gustavo Petro, who took office in August 2022, the energy sector has experienced heightened uncertainty, prompting fears of a crippling impact on its vital hydrocarbon resources.

Petro’s administration implemented various policies, including tax increases and a ban on hydraulic fracturing, which have alarmed investors. As a direct result, several global energy giants, including ExxonMobil, began exiting Colombia rather than risking further capital in a precarious environment. The ban on fracking, officially enacted by Congress in mid-2023, marked a turning point for the industry, leading Exxon to abandon its eight exploration and production contracts by April 2023.

One of the key factors influencing ExxonMobil’s withdrawal was the rising tax burden. In November 2022, the Colombian government introduced a tax structure that imposed a 5% tax when international Brent prices reached $67.30 per barrel, escalating to 15% as prices exceeded $82.20 per barrel. Although an attempt to remove the tax deductibility of royalty payments was overturned by Colombia’s Constitutional Court, the overall taxation environment contributed to the decision of major players to exit.

Colombia’s fiscal landscape is further complicated by a downgrade from S&P Global Ratings and Moody’s, which reduced the country’s credit ratings to the lowest investment grade level. The government is grappling with a growing budget deficit, which saw it impose a temporary 1% levy on crude oil sales earlier this year. Forecasts indicate that Colombia’s budget deficit will reach 7.1% of gross domestic product (GDP), a stark increase from previous targets of 5.1%%. These troubling figures reflect ongoing pressures on a government already facing significant challenges, particularly in rural regions where violence has surged.

The rise in violence and lawlessness has further exacerbated concerns for oil companies operating in Colombia. Petro’s policy of “total peace” has faltered, leading to increased confrontations between state forces and illegal armed groups, particularly in rural areas rich in petroleum. The National Liberation Army (ELN), Colombia’s second-largest armed group, has expanded its influence in oil-producing regions, resulting in frequent clashes with military forces and a growing number of displaced civilians.

Criminal organizations, such as the Gaitanist Self-Defense Forces (AGC), are capitalizing on the chaos, asserting control over rural communities and engaging in the lucrative cocaine trade. In 2023, Colombia produced a record of 2,664 metric tons of cocaine, with over 253,000 hectares under coca cultivation. This increase in illicit activity has led to significant violence in areas where oil infrastructure is present.

The impact of this unrest is becoming apparent, with oil pipelines and facilities increasingly targeted by armed groups, resulting in production outages and escalating operational costs. As a consequence, ExxonMobil has effectively withdrawn from upstream operations in Colombia, maintaining only a downstream presence focused on retail fuel assets.

Other energy companies are similarly reevaluating their investments. Shell exited three offshore natural gas blocks earlier this year, while Repsol sold its interests in onshore Block CPO-09 to Ecopetrol for $452 million. These moves highlight the growing trend of divestment in Colombia’s oil sector, which has struggled to recover from the impacts of the COVID-19 pandemic and Petro’s policies aimed at reducing reliance on fossil fuels.

The ongoing crisis poses a looming threat to Colombia’s energy stability. If the situation continues to deteriorate, the nation may face significant challenges in meeting its energy needs, with thermal power plants and households heavily dependent on fossil fuels. Failure to address these issues could further destabilize Colombia’s economy, intensifying poverty and jeopardizing internal security.

As Colombia’s oil industry grapples with this multifaceted crisis, the future of its hydrocarbon sector remains uncertain, with potential repercussions for the broader economy and the livelihoods of many Colombians.