SCRAPING THE BARREL

Colombia 2015 | ECONOMY | FOCUS: PETROLCRISIS

With oil prices at record lows, the fallout could last well into the future. Current cash shortages are holding back exploration, which is critical to the long-term viability of the sector.

The term "crisis" should not be used lightly in Colombia. However, at the start of 2015, its national institutions, ministries, and public stakeholders began to contemplate the consequences of the fall in oil prices, the withering effects this would have on state-owned EcoPetrol's revenues, and the subsequent gaping hole in public finance. By March 2015, the price of petrol in Colombia had fallen by 50% over a period of eight months.

This decline, in turn, hit the Colombian Bolsa de Valores (BVC). On 29th January 2015 The Superintendencia Financiera requested that Pacific Rubiales outline the factors behind the group's 30% decline in share price in the month of January. Indeed, the behavior of the market lends as much to geopolitical restructuring as it does to domestic speculation. The geopolitical reasons behind the fall in international petrol prices are complex at best, but low oil prices in Colombia an other emerging markets are having real, and apparent consequences.
The reverberations on the bourse were not confined to companies in the hydrocarbons sector. The Colcap indices in particular saw heavy losses. The canasta index aggregates Colombia's 20 largest companies in terms of share capitalization, for which EcoPetrol is the weather vane, and historically serves as indicator for the Colombian stock exchange at large. The 43% decrease in the price of petrol by the end of the year led to losses across the stock market from the country's largest fast moving consumer goods company, Grupo Nutresa, to financial and construction conglomerates such as AVAL and Argos.
Colombia's two largest publically listed hydrocarbons giants EcoPetrol and Pacific Rubiales, announced adjusted investment plans that amounted to $2 billion dollars, amounting to a reduction of at least 50% of total industry investment.

Such prudence is only exacerbated by Colombia's tributary reforms. Revisions have been made across the petrol and gas industry, mainly in exploration. Speaking to TBY in February 2015, the president of the Asociación Colombiana del Petroleo, Fransisco José Lloreda, commented that, “Onshore seismic activities have been reduced from 20,000km in 2010, to 8000 in 2014, and in 2015 they are forecast at just 6000km.” Indeed such a drop in exploration is likely to have a dampening effect on the local economies of petroleum dependent regions such as Casanare, Meta, and Arauca. According to a statement by the President of CamPetrol, Rubén Darío Lizarralde in February 2015, 35% of the country's drilling facilities have become obsolete.
The first to feel the pinch was Colombia's petroleum services industries, a segment that has been crucial to the growth of the industry, accounting for a significant fraction of the 70% of total FDI in Colombia that the hydrocarbons industries represent. According to CamPetrol, the entire industry has 120,000 employees, of which 20% are looking at possible redundancies.

Perhaps the most worrying issue for the Colombian state is the immense hole in public finance that the fall in petrol prices means. While the medium term structural adjustments of Colombia's hydrocarbons sector remain unclear, the short-term effects on Colombia's fiscal viability are heavy and immediate. The drop from $98 a barrel to $48 effectively means that the state loses approximately $150 million for every dollar decline in the price of petrol. The latest projected loss in public revenues is $15 billion for 2015.
The rate at which oil prices will recover is difficult to forecast, largely due to the scale of structural changes currently occurring on the global petroleum markets. Meanwhile, the US Energy information Administration (EIA) forecasts that the price would stabilize at $54 by the end of 2015, before rising back to $71 in 2016.